Big Four Seek Guidance On Trade Finance

Top accountancy firms are asking the Financial Accounting Standards Board (FASB) to clarify how corporates should report on supplier finance programs that are in place, according to Compliance Week reports on Friday (Oct. 25).

The Big Four accounting firms – Deloitte, PwC, KPMG and EY – submitted a joint letter earlier in the month to the FASB asking how corporates should present cash flows related to supplier financing programs known as reverse factoring, supply chain financing, structured trade payables and vendor payable programs.

As the letter notes, U.S. GAAP guidance does not clarify how to classify these programs as trade payables or debt, which has been a source of debate for several years. Fitch Ratings and Moody’s Investors Service have issued multiple warnings about the ramifications of not classifying such programs as debt, a position that was met with significant backlash.

“Trade payables classification tends to be treated more favorably than borrowings (i.e., financings) in the calculation of financial ratios and for purposes of determining compliance with financial covenants,” the Big Four firms said in the letter, per the report. “Accordingly, we believe greater transparency and consistency in disclosures in the financial statements of entities that utilize structured trade payable arrangements … is warranted.”

Compliance Week highlighted a recent initiative from the Securities and Exchange Commission (SEC) that reflect growing interest in understanding whether reverse factoring arrangements should be classified as debt, particularly in the wake of high-profile corporate collapses among companies like Carillion that relied heavily on such financing programs as payments to vendors lengthened.

The Big Four have requested that the FASB “perform outreach of a cross-section of users such as lenders and rating agencies to understand their needs regarding differentiation between different categories of short-term payables,” though they acknowledged the difficulty in doing so, considering the variety of “nature and substance of these programs.”

“However, we believe that with proper disclosure and explicit statement of cash flow classification guidance, users of the financial statements will have a better basis for making informed decisions with respect to the entity’s financial position, liquidity and cash flows,” the firms stated.