Supplier financing plans, often referred to as reverse factoring arrangements, are used to manage working capital. It typically involves the organisation, its supplier and a bank.
The arrangement allows the buyer to defer payment terms to its supplier by getting the bank to pay its supplier on the expected payment date with an agreement that the organisation will repay the bank.
This way, the organisation manages its working capital by deferring payment for goods or services received, while the supplier gets payments early as well through the bank.
As part of these arrangements, the trade receivable held by the supplier is usually assigned to the bank in return for the bank’s early payment to the supplier. These arrangements take various forms. However, the organisation would need to assess whether it retains the original trade payable (liability) to the supplier or a bank borrowing (liability) on its balance sheet following the supplier financing arrangement.
If the assessment results in a derecognition of the trade payable and recognition of the bank borrowing, it could adversely impact the organisation’s debt covenants and ratios.
Therefore, organisations should pay close attention to the terms of their supplier financing to avoid unintended consequences in their financial statements that could impact their business.
Key considerations that impact this assessment include whether there has been an assignment or novation of the invoice to the bank, the rights provided to the bank, such as an ability to draw from the organisation’s bank account in the event of a default, and determining the purpose of the arrangement, which party negotiated and benefits from the deal, including whether a tripartite agreement is in place involving the organisation (buyer).
Others are the extent to which the arrangement affects the timing of cash flows of the organisation (buyer) from settling the bank later plus interest compared to paying the supplier earlier.
Organisations must apply judgment while performing the assessment and consider the disclosure requirements for these arrangements, including any impact on the cash flow statements.
Awodumila is a Partner at Deloitte East Africa. He is an author who writes and speaks widely on corporate reporting topics