The Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer (IDW)) is reported to have drafted a paper that helps clarify how supply chain finance arrangements affect the classification of trade payables in the buyer’s balance sheet. A report in Spend Matters says the proposal is due for final approval later this year.
The paper clarifies that supply chain finance transactions would be assessed under the requirements of International Accounting Standards (IAS) 39, which sets out the requirements for the recognition and measurement of financial assets and financial liabilities.
IDW says that the key considerations for determining if it is necessary to reclassify a trade payable as debt are:
- Does the reverse factoring transaction create a new commitment of the customer to the bank? If the finance provider has the same rights as the supplier had, then there is no new obligation to the bank.
- 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?
- As a result of a reverse factoring transaction, is there a substantial modification of terms? Extension of payment terms to just that supplier, or an agreement between buyer and seller as to interest payments could constitute a material change in the terms.
IDW’s paper is said to note that dynamic discounting as the buyer pays less for shorter payment terms, there is no actual sale of the receivables to the bank, the issue of liability is no longer an issue.
See our feature, Keeping SCF trade payables from being moved into debt