Q. Calculation of the change in finance costs?
Past ACCA examiners have occupied inconsistent approaches regarding the calculation of the change in finance costs due to settlement discounts or debt factoring. A few examiners have computed receivables net of bad debts discounts and factoring fees and others have worked gross. The present examiner has stated his policy as follows:
- Receivables must be calculated gross of bad debts
- Receivables must be calculated gross of factoring fees
- Receivables must technically be calculated net of settlement discounts (although the examiner would accept calculations gross of settlement discounts.)
This approach is follows in the answers below
(a) Working capital and bad debt changes
(i) Using untimely settlement discounts
(ii) utilizing debt collection service
Conclusion The debt collection service will raise profit by $0.444m + $1m - $0.665m = $0.779m and must be accepted.