Supply Chain Finance and the issue of the $ 1 trillion balance sheet


Spend Matters welcomes this guest post from our regular contributor David Gustin, President, Global business intelligence.

The argument “is this commercial debt or bank debt for supply chain finance?” Has been going on for over a decade. Most “opinions” you hear expressed as “facts” usually comment without having a clue of actual accounting rules – whether those of the FASB (Financial Accounting Standards Board) or IFRS (Financial Accounting). Standards Board) – or the underlying legal contracts executed. by and between parties, including debtors (or debtors), suppliers, bankers and others, including platforms and asset arrangers.

I started writing about this topic on Spend Matters:

The crux of the debt versus debt issue

The crux of the matter is, what is the vendor financing agreement – trade debt or debt? And the “what” is important. Financial analysts generally treat the two differently: Trade debts are generally considered to be working capital grouped together with cash and investments and trade receivables, while debt is treated as leverage.

Although all of them are balance sheet accounts, the classifications in accounting rules, debt and debt have a lot in common. These are both money that debtors owe creditors. And this similarity is important and not trivial because both are governed by contracts that have terms and provisions. One of the reasons that trade payables and debt are viewed differently is that the contractual terms regarding trade payables provided so much flexibility (examples include volume discounts, drawdown agreements, contractual chargebacks) whereas with the terms of the debt contracts offer much less variability and little flexibility. Under the SCF, variability and flexibility are changed from the terms of the original contract, as the financial agent – the banker or fintech – intervenes in these contracts. And whether or not it is currently classified as trade payables or debt, under current FASB or IFRS accounting rules, there is no requirement to disclose the PERIOD of the agreements. Well, that’s about to change.

What is changing?

Both IFRS and FASB have public plans to change financial statement disclosure requirements, governing the types of transactions commonly referred to as SCFs. In November 2021, the IFRS proposed an amendment to IAS7 and IFRS 7 for supplier financing arrangements, with comments to be received by March 28, 2022. In the 24-page exposure draft, they presented a case for increased disclosure around supply chain finance. And those opinions are about to become much less relevant, as the primary providers of opinion – auditors of a company’s financial statements, rating agencies on a company’s ability to repay debt, and analysts the stocks and fixed income that follow these companies – are about to start to weigh in.

For those who have worked in trade finance for 25 years, this will be the biggest event since the Basel 2 capital rules implemented in June 2004 shook bank profitability with significant capital increases for banks. higher risk credits. Banks have never been able to restructure these companies to regain this profitability.

IFRS has made public its proposal for the disclosures that each company should provide. As he stated in his draft:

“The proposals contained in this Exposure Draft are intended to supplement the requirements of IFRS that apply to reverse factoring and similar arrangements (as explained in the decision on the agenda). The proposed changes to IAS 7 Statement of Cash Flows and to IFRS 7 Financial Instruments: Disclosures would require entities to provide additional information in the notes to these agreements. The Exposure Draft uses the term “supplier financing arrangement” to refer to reverse factoring or other similar arrangement. “

The FASB is expected to release its document to the public on December 20, 2021.

The IFRS Exposure Draft proposes to require an entity to provide:

  • The terms and conditions of each arrangement
  • For each agreement, at the start and end of the reporting period:
    • the carrying amount of financial liabilities recognized in the entity’s statement of financial position that are part of the arrangement and the item (s) in which these financial liabilities are presented
    • the carrying amount of financial liabilities indicated under (i) for which suppliers have already received payment from donors
    • the range of due dates for payment of financial liabilities disclosed under (i)
  • At the start and end of the reporting period, the range of due dates for payment of accounts payable that are not part of a supplier financing agreement

In accordance with IFRS and the soon-to-be-released FASB recommendations, two major issues impact supply chain finance. First, prior to today, companies weren’t required to disclose anything about these types of arrangements. Soon everyone will have to do it. And, what exactly are these arrangements? Do acquisition card programs need to be disclosed? For example, with Pcards, you get a line of credit so your staff can make purchases to defer payment for up to 55 days. Do the various inventory finance programs need to be disclosed? What exactly is disclosed? This is important, as it could impact cash-out based business products, not just supply chain or payable financing, but commercial cards, inventory financing, etc. It depends on how these programs are structured contractually.

The document described a vendor finance arrangement that “is characterized by one or more finance providers offering to pay the amounts an entity owes its suppliers and the entity committing to pay the finance providers on the same date. or at a later date when suppliers are paid. . “

How does a company interpret these regulations? They will certainly trust their auditors. Will listeners want to see the commercial contract? Under the IFRS proposal, there is an obligation to disclose the business terms of the agreement in addition to its size. Accounting is fundamental to understanding a business, and auditors are of the opinion, and the community of analysts then do their analysis on cash flow, leverage, growth rates, etc. It is extremely important.

At some point in the second half of 2022, companies will need to disclose how they use various programs and produce an appropriate footnote for analysts and others to incorporate into their business analysis.

This could impact hundreds of billions of exposures through various products. In BCR Publishing’s Global Supply Chain Finance 2021 report, figures released for supply chain finance showed a significant increase in volumes in 2020 compared to 2019, with global volume up 35% to $ 1.311 billion and funds used up 42% to $ 505 billion. Many supply chain finance providers say their growth has been substantial during the pandemic. And that’s only payable funding.

Houston, do we have a problem? I don’t know, but it’s definitely time to let companies know about their upcoming reporting requirements for disclosures. No more guesswork by rating agencies about the scope of these programs or the distortions they bring to the assessment of a company’s true payable position. As we know, the months go by quickly, and soon these accounting proposals will be imperative.

To see the IFRS Exposure Draft here.

Review the current state of FASB on supplier financing here.

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