Supplier Finance and Accounting Issues – True Sale or Not?

When talking about trade finance, IFRS is a key concern or motivation for companies.   I have done a number of posts about the potential classification of payables financing as a financial debt for the buyer.  The issue from the buyer’s perspective comes down to do they need to reclassify the payables as debt.  The recent paper from Moodys about Abengoa’s program brought this issue back front and center.

But what accounting standards impact how the supplier must classify their receivable as a funding provider steps into the existing rights of the supplier?  If the Buyer doesn't pay the lender, then the lender will have the same right as the supplier, which is an unsecured trade creditor.

Ultimately, suppliers must know if this is truly a receivable they can move off their books to reduce Days Sales Outstanding.  For suppliers, the major complexity around participating in these reverse factoring programs is signing the Receivable Purchase Agreements and paying the costs and dealing with a variety of legal, accounting and technical issues (such as compliance with accounting requirements under IAS 39, FAS 140/FAS 166 and, also, various restrictions and covenants in lending agreements).

In these reverse factoring programs, even if suppliers are attracted to cheap Libor priced money, they still should get an outside auditor opinion to ensure the receivable is “true-sale” and complies with the FAS-140 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

According to FAS 140, three conditions must be met to confirm a transfer of financial assets has been met:

  1. The transferred assets have been isolated from the transferor—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership.
  2. Each transferee (or, if the transferee is a qualifying special-purpose entity (SPE), each holder of its beneficial interests) has the right to pledge or exchange the assets (or beneficial interests) it received, and no condition both constrains the transferee (or holder) from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the
  3. The transferor does not maintain effective control over the transferred assets through either:

(1) an agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity or

(2) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.

Besides outright Receivable Purchase Agreements, there are various other methods where a supplier can get funding via these programs, including Paper Drafts, Electronic Drafts (PrimeRevenue), and promissory notes to name a few other options.  In all cases, it is wise to consult your auditor.

Happy to have a chat, feel free to reach out to me dgustin at

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