Collections come from you. You create them by some method and put the books into them. The creation can be manual on the device, using calibre or an automatic method posted here.
Once the collections created, they are synced to the Kobo server. With the names of the purchased books that are in them. No details of sideloaded books are synced to the server.
All that means is that after a factory reset, the collections will be synced back to the device. But, the only books in them will be ones you have purchased from Kobo and synced.
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