Accounting issues with Dynamic Discounting programs David Gustin - July 21, 2014 1:15 AM | Categories: Accounting Treatment | Tags: rebates With the explosion of early payment solutions to assist a buyer’s supplier group (egs. dynamic discounting, reverse factoring) and the start of receivable auction markets, the issue of rebates and retiring payables early has become serious. 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. I’ve touched on this in a prior post – see Supply Chain Finance Payable Reclassification issue – dead or alive? For dynamic discounting programs, the focus of this blog, 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? This could have a material impact on the corporation’s balance sheet. There are a few vendors out there leading with the pitch about how their rebates are GAAP compliant. While smart vendors work with the various accountants to understand the accounting issues around their programs, a sales pitch should avoid straying on murky ground. When a company pays suppliers early and takes a discount with their own money, they need to figure out where that discount revenue goes. For example, if Mr. Multinationalpays a large component supplier early, Mr. Multinational will take a 2% early payment discount on a $10MM payment (and let's assume it is a gross discount and not tenor based). Mr. MNC pays $9.8MM to the supplier and has $200K in discount revenue. Mr. MNC would have the general ledger entry of a credit for accounts payable and debit to cash. Since they got $10MM in inventory they have an offsetting $200K journal entry – do they reduce cost of goods sold, have a discount revenue account, reduce interest expense, or other? It gets real tricky when a third party pays Mr. MNC’s suppliers early.A funding provider pays the supplier $9.8 million and then gives Mr. MNC $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. Since we are still early days with third party funding, the dollars financed are not enormous. But we know funders are chomping at the bit to get at these assets, and when the amounts get larger, this is where the fun begins and the accountants will be making some money advising their clients. Related Articles Supply Chain Finance Payable Reclassification issue – dead or alive? The Accounting behind Receivables – What you need to know Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of new posts by email.