• TRADE FINANCE

    Reporting payables finance in financial statements

19 July 2021

Deutsche Bank’s Christian Hausherr and Anil Walia explain why the latest financial reporting recommendation from the International Account Standards Board on supply chain finance disclosure is good for the industry

In June 2021, the International Account Standards Board (IASB) published its recommendation that standards are set for new accounting disclosure requirements in annual statements for supply chain finance (SCF) arrangements.1

Additional disclosure for SCF users

The standard setting comes in response to investor and ratings agency concerns about the lack of transparency and disclosure for companies that use these arrangements. We believe these decisions are consistent with the positions for which we have advocated. While this does not directly place a burden on banks, it will require additional disclosure from those using SCF arrangements.

However, the IASB has chosen NOT to undertake a standard setting exercise for the balance sheet treatment of payables finance as debt vs. trade payables.

Over the past 18 months, associations representing the industry met regularly with IASB and the Financial Accounting Standards Board (FASB). Both accounting standards bodies have acknowledged these numerous sessions were helpful to them in understanding the transactions and in particular, the atypical nature of the deals in the Greensill case.2

In the same context, a paper entitled Supply Chain Finance: How To Remedy Flawed Financial Reporting published by Standard & Poor’s on 7 June to the agency’s registered readers has raised particular attention in the industry and on the client side.3 With regards to the recent IASB decision and the S&P document there are two important aspects to be kept in mind:

1. Reporting is not accounting
It should be noted that the recommendations made by the accounting bodies FASB and IASB are related to the question how to report a payables finance programme, and not how to account for it. Generally, both accounting bodies advocate and recommend transparency on the usage of a payables finance programme – this is fully supported by the industry.

2. No prescription on classification
Standard & Poor’s expresses the view that 90 days is a “reasonable cut-off point for a ‘typical’ transaction” to conceptually segregate trade payables from a form of borrowing. This “rule of thumb” is introduced to “break the deadlock of never-ending debates about what constitutes customary terms”. At the same time, it is recognised that payables finance “can be a useful tool that allows suppliers and customers to improve their working capital management”. In the same paper, S&P also allude to the “difficulty (…) that there is a great deal of judgment inherent in what represents a company's "normal operating cycle”.

The key question in this context is what is “typical”: an increase of payment terms from 60 to 120 or more days that is related to the introduction of a payables finance programme may be an indication for inappropriate usage of the programme – particularly if there is no reasonable argument stemming from the cash conversion cycle of the buyer. What if the payment term extension is done as part of the buyer’s working capital strategy without providing a payables finance programme? A similar, more obvious indication for borrowing may be that the buyer does not settle at the original maturity date of the underlying transaction but at a later point in time and into a separate vehicle provided by the servicing bank.

Balance sheet clarity

In summary, we do not see the recommendations on the reporting of payables finance from an accounting point of view being classified as bank debt, but rather advocacy for more transparency, allowing investors to better understand a buyer’s balance sheet. With regards to “typicality” of how to appropriately use a financing programme there is ample public information available – in particular the GSCFF Payables Finance Guidance and the BAFT/GTIC Payables Finance Principles.

Discussions between the industry associations, accounting bodies and rating firms on the matter continue.


Sources

1 See https://bit.ly/2VJ92rD at ifrs.org
2 See https://bit.ly/3riAAzR at tradefinancetv.net
3 See https://bit.ly/2Tgjw11 at spglobal.com

Christian Hausherr

Product Manager, Supply Chain Finance EMEA, Deutsche Bank Chair, Global Supply Chain Finance Forum

Anil Walia

EMEA Head of Supply Chain Finance – Payables at Deutsche Bank

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