Infrastructure & Business Finance – Accounting Layer Key Motivator

Last week, as part of the Infrastructure Layer, we looked at Regulatory and Legal issues that support trade credit.

There are other important infrastructure issues that need to be understood when it comes to business credit, including accounting standards.

Click here to download your copy of the 2016 State of Supply Chain Finance Industry

Accounting Standards Layer

The Financial Accounting Standards Board or “FASB” is a private, non-profit organization whose primary purpose is to establish and improve accounting principles within the United States in the public's interest. The International Financial Reporting Standards (IFRS) began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. They are progressively replacing the many different national accounting standards.

When talking about trade finance, FASB and IFRS are a key concern or motivation for companies.   Accounting standards govern how companies must value assets and liabilities on their balance sheets. There are many FASB rules that provide accounting standards and guidance on credit transactions. A few of the more important ones include:

  • FASB Statement No. 166, Accounting for Transfers of Financial Assets and No. 167, Amendments to FASB Interpretation No. 46, which change the way entities account for securitizations and special-purpose vehicles.
  • FASB Accounting Standards Codification Topic 470-40 provides guidelines for determining whether a transaction involving the sale of inventory is in substance a financing arrangement.
  • FASB 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, governs whether receivable sales are recourse or non recourse, in essence governing whether they are true sale and can be taken off the books as a receivable.

Where the Accounting issue has come to the forefront is the debt versus trade payable argument with reverse factorings programs. We have talked about this issue many times, see here and here and here, but this is only one of many issues of accounting treatment and finance.

The other accounting area is True Sale. If the transaction is a secured loan, the borrower will show cash as an asset, debt as a liability and the collateral on its balance sheet. If it is a true sale, the seller will have the cash as an asset, but no debt or collateral on the balance sheet.

There are other issues related to loan vs tax, including tax and bankruptcy issues, but the balance sheet or accounting one is the main driver.

We will continue looking at Infrastructure issues next week.

Click here to download your copy of the 2016 State of Supply Chain Finance Industry

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