You are an audits senior in firm of Chartered Accountants, Paterson and Co. It is February 20X6 and you are currently reviewing the draft financial statements of XYZ Ltd which is client of your firm. A Number of Accounting Issues have risen in respect of the audit of the XYZ Ltd for the year ended Dec 31, 20X5.

Issue: Financial Arrangements The trade receivables of Euro 10.3 million were factored by XYZ Ltd in December 20X5. The factor provided an immediate advance of Euro 8 million. The funds were advanced by the factor on the following basis: Euro 7 million was advanced on a non recourse basis, and Euro 1 million on a with recourse basis All of the funds advance by the factor were included as a current liability in the Financial Statements of XYZ Ltd at 31 December 20X5. A Bad debt provision of 5% of gross debtors should be provided for at 31 December 20X5. A provisions of Euro 250,000 was included in the Statement of financial position at December 31, 20X4. The trade receivables figure of Euro 10.3 million, included in the SOFP at 31 December 20X5, is stated net of this provisions of Euro 250,000. In January 20X6 one of the companys best costumers unexpectedly went into liquidation. The Balance on the debtors account at December 31, 20X5 amounted to Euro 500,000. No adjustment has been made to the financial statements in respect of the costumers liquidation.

Based on the case of XYZ Ltd, make an analysis of whether XYZ Ltd's accounting treatment of transactions Is the factoring and accounts receivable valuation as of December 31, 20X5 correct? If not recommend the appropriate accounting treatment.