Factoring Companies Guidebook

Where the debtor has a contractual right to receive monies relating to the volume of sales with a Client and/or a monetary sum relating to shared market costs. Any discount which is given (or offered) subsequent to the raising of the invoices, or invoice, to which it relates. There are two main types:-

Settlement Discount - offered for prompt payment

Volume Discount - given once certain turnover, or volume has been achieved.

Alternative terms:-

• Retrospective Rebates
• Volume Discounts
• Volume Rebates
• Overrider Discount

Concerns

Any discount which is not already reflected in the net invoiced value will result in dilution of the collectable value of that invoice and therefore in our security. Volume Discounts are often accumulated to be paid (or credited) to the customer on a monthly, quarterly, half-yearly or annual basis. These represent a far higher potential dilution at certain times of the year i.e. just before payment and may potentially even exceed the outstanding debt.

Identification

Volume Discounts will be contained in special agreements with the largest customers and are generally negotiated once a year. The values can be calculated on that basis; settlement can be identified through the cash book (if paid by cheque), by viewing the credit notes or customer remittance advices in the event of settlement by the customer raising debit notes.

Review customer's terms and conditions of purchase.

Review credit notes and debit notes for any reference to Retrospective Discounts. Review Client's Management Accounts/Trial Balance for any accruals relating to outstanding discounts awaiting settlement.

Treatment

The value of accumulated Volume Discounts should be reserved in full, as it builds, until either payment is made or a credit note is issued. A sudden surge of seasonal sales may trigger the discounts resulting in a payment liability.

A copy of the Client's agreement with their customers should be obtained for review. The agreements should be viewed in full, as they are likely to contain details not just of the rebates for turnover volumes, but also marketing support, new store openings, etc. They should also specify the means of settlement i.e. cash payment or credit note and the timing of settlement. Settlement by way of credit note should be monitored through the sales ledger and by repayment through the purchase ledger, it is therefore essential that the method of settlement is identified.