When Receivables and Payables Financing Meets Bean Counting

- August 4, 2014 10:24 AM
Categories: Commentary, Trade Financing | Tags:

My Trade Financing Matters colleague David Gustin has spent quite a bit of time over the years investing the accounting treatments of various trade financing schemes (from dynamic discounting to approved trade payables financing). Yet what’s most curious about this area is that we shouldn’t accept the current state of various accounting treatments (e.g., rebates vs. non-rebates and balance sheet impact) as gospel. Regulators and the Big 5 alike are still exploring the area in more detail.

David recently noted in a post on Trade Financing Matters, Accounting Issues With Dynamic Discounting programs: “With the explosion of early payment solutions to assist a buyer’s supplier group (e.g., dynamic discounting, reverse factoring) and the start of receivable auction markets, the issue of rebates and retiring payables early has become serious.”

As an example, “for reverse factoring programs, the trade payable vs. bank debt issue has no clear guidance from the IFRS in regards to reclassification of trade payables to bank debt.” And “for dynamic discounting programs … most of these programs are generally small and still self-funded by the corporate themselves. But, and here is the big issue, what happens when non-banks become more significant and touch on more spend besides indirect?”

We’ve heard from some on the “financing” side of the equation, especially coming from non-bank backgrounds, who are almost preachy in terms of their belief in certain treatments today that will remain tomorrow. But not every corporation should take advice from a financing (PE or other) or software provider in this market. Your accounting firm is the best (and only) place to start.

As David wrote, the exact approach “could have a material impact on the corporation’s balance sheet” and “it gets real tricky when a third party pays [a company’s] suppliers early.” Take the case of when “a funding provider pays a supplier $9.8 million and then gives [the corporate] $40k as a rebate and the funding provider makes $160K on the deal when the buyer pays them the $10 million on value date. The funder is loaning Mr. MNC money generating the transaction by extinguishing the payable moving it to debt.  When the funder pays off the prepays the supplier, they are generating a loan to Mr. MNC that should show on their balance sheet.”

Stay tuned as we continue to explore this topic on Trade Financing Matters and Spend Matters PRO. We’re also in the process of starting some research in collaboration with KPMG on the topic and look forward to sharing the results later this year.

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