How to Account For Self Funded Early Payment via Dynamic Discounting David Gustin - March 2, 2016 7:05 AM | Categories: Accounting Treatment, Dynamic Discounting | As more companies adopt early pay programs, including self-funded and third-party supply chain finance (“SCF”) programs, it’s important to understand the accounting implications of all that money moving around. With the explosion of early payment solutions to assist a buyer’s supplier group (e.g., dynamic discounting, reverse factoring, pcards), the issue of rebates and retiring payables early is a serious matter. Self-Funded Early Pay Dynamic Discounting (DDM) means the supplier gets paid earlier than the due date on the invoice and money comes from the balance sheet of the buyer. This implies two things. First, the DPO metrics of the buyer will change as the Buyer extinguishes a payable earlier. Second, the buyer earns a discount in return. Essentially, DDM is an online request for a change to payment and pricing terms. Generally speaking, most dynamic discounting programs are generally small and still self-funded by the corporate themselves. The accounting issue with self-funded early pay is largely limited to one thing – what do you do in a VAT regime? Depending on the country, it can be calculated on the amount of the invoice and other times it can be calculated on the amount paid. This is not a Securities and Exchange issue as there is no funding occurring. Vendors operating in different tax jurisdictions, whether it be sales tax, VAT, or some VAT equivalent, should be able to adopt their platform whether you adjust net or gross price. For example, in the U.K., if an invoice is for £120 gross, £100 plus VAT and the buyer has a 2% rebate program, payment made to a supplier is £98 + VAT, so the supplier gets £117.60. With technology or manually, the vendor can provide an adjustment to the account system of the buyer to show that they paid less to the supplier – and the fact VAT is less. In addition, the system can supply a debit note to supplier so they can reconcile new price for the goods and new VAT for the goods. Recording the Discount As to how companies record discounts, most corporations account for the discount the same way they account for traditional discounting (i.e., in most cases there is a discount account and that gets split back across cost centers where the original invoice – or buying decision – is credited to the buying department. Accounting for DDM should not be any different than what’s been done for decades with 2% net 10 term accounting. Perhaps most important, every company should have a policy on how they handle traditional discounts that has been vetted by their external auditor. Start Here But where should an organization begin? For any company considering programs, a good first step is to consult your internal auditors. Then, as noted, get an external, professional opinion just to play it safe. A word from our attorneys: always get a professional opinion. Do not rely on our advice! p.s. for more information on the subject, visit here Related Articles 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.