Monday, June 30, 2014


Supply Chain Finance Payable Reclassification issue – dead or alive?

Every so often, you hear about the threat to reclassify payables on a buyers balance sheet due to supply chain finance programs.
Most readers will be bored by this stuff, yea, like, accounting who cares, but accounting matters. Since 2003, when the SEC first commented on these programs, the debate around threatening re-classification of the payables on the buyers balance sheet is real. Why this matters is that if a corporate is required to reclassify $500 million of trade payable debt to bank debt, it impacts their loan covenants, their leverage, and their access to additional credit.
The crux of the issue is if the Buyer is confirming to the financial institution that it will pay at maturity of the invoice regardless of trade disputes or other rights of offset it may have against the supplier, then it is giving a higher commitment to pay to the financial institution than it owes to the supplier and this may be construed as a bank financing and not a trade payable on its books.
Most corporates have been educated (by other corpoates, accountants, and banks and vendors pitching them programs) of some of the criteria that are important in keeping these programs as trade debt. For example:
  • Keep the initiatives of separating extended payment terms and the discounted early payment as two separate events.  Therefore, if the supplier declines joining a program he is still stuck with the extended payment terms!
  • Do not have tri-party agreements – It is very important to keep these programs with independent agreements – ie, no tri-party agreements between buyer, seller and funder.
  • Always pay on the maturity date stated on the invoice i.e. no early payments with discounts shared with the bank and no prolonged payment terms with interest payments to the bank.
  • No kick backs from the bank – and I know this is becoming increasingly popular on the market with different kind of fees to the Buyers for services provided.
  • Buyers cannot dictate who funds the program – keep hands off.
Some will argue that independent platform providers (ie, not banks) provide a good way to ensure no reclassification, but I do not believe that is the case. There are many programs run by banks. Banks/platform providers make all their profit on financed volumes and not platform fees.
There are many other considerations besides the above, but this is a good start.
Unfortunately, there is no clear guidance from the IFRS in regards to reclassification of trade payables to debt. This is something of paramount importance, as large corporates will continue to be conservative. While not a show stopper, this issue does slow down these programs and make the set up costs more expensive by enriching accounting firms. In fact, I’ve had people tell me auditors in the same office can disagree on the bank debt versus trade payable issue.
No wonder confusion reigns.
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