German Body Rules on Accounting Treatment for Supply Chain Finance

Recently the IDW, the privately organized supervisory authority of all accounting and audit firms in Germany, produced a ruling around supply chain finance and accounting treatment. The paper is in final draft version and  is supposed to gain final approval later this year

According to the IDW, Supply Chain Finance and Dynamic Discounting programs are widespread financing solutions that are currently already actively used by more than 30% of S & P 500 companies. With Dynamic Discounting, because the buyer pays the supplier less, it reduces the accounts payable quicker.   According to the IDW, since no sale of receivables from goods and services is to a bank, it eliminates the issue of reclassification of liabilities under IFRS. 39

I penned a piece awhile back titled Is Supply Chain Finance Constricted by Accounting Rules

Supply Chain Finance is a different story. SCF allows the buyer to extend its payment terms while providing the supplier early payment through a financial donor. From the IDW’s standpoint, to clarify the question of the classification of liabilities in supply chain finance transactions, the specific requirements of IAS 39 are to be used and to consider the following questions.

IDW’s assessment of how the liability for goods and services at the customer must be booked follows three steps:

Step 1: Does the reverse factoring transaction create a new commitment of the customer to the bank? ( for example, due to an admission of debt )

If, by the Supply Chain Finance transaction, the supplier waives his claim to the buyer, the buyer shall derecognise the original liability for goods and services. Simultaneously, a new financial liability to the bank is reserved. In a standard supply chain finance program the original liability of the purchaser will not be changed or erased. If a financial institution accepts the payment obligation of the supplier, it has the same rights as the supplier with respect to the payment obligation of the buyer. Therefore, no new obligation is incurred to the Bank.

Step 2: Does the reverse factoring transaction create a new commitment of the customer to the bank alongside the continuing obligation of the customer to the supplier? 

If a new obligation of the customer to the bank arises without the supplier waiving its claim to the customer, there are now two liabilities of the customer: the original trade payables to the supplier and the new financial liability to the Bank or funder.

Step 3: If, as a result of reverse factoring transaction, is there a substantial modification of terms?

IDW provides the following guidance in the assessment of whether there is a substantial change in contractual terms:

  • waiver, the customer
  • extending the payment (including an assessment of whether the new agreed payment based on the specific debtor or a suitable comparison group is considered to be common)
  • agreement of interest payments between the Parties
  • change in the prices of supplies or services underlying
  • Purchase duty fixed volume

Source: The above three steps were taken from the IDW website

Be prepared to practice your German!

For a whitepaper on supply chain finance accounting treatment, visit To Reclassify Trade Payables or Not?

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