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Amounts payable to |
Section |
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Program terms |
Indicates obligation is trade payable |
Indicates obligation is debt |
What are each party’s roles and responsibilities in the negotiations of the structured payable program? |
If the reporting entity simply introduces the vendor and the bank, this level of involvement would generally not be inconsistent with a typical vendor/customer arrangement. This indicates that the obligation retains the characteristics of a trade payable. |
It would be hard to assert that a payable's terms have not changed from the reporting entity's perspective if it is significantly involved in the negotiation of terms between its vendors and a financial institution. Similarly, if the reporting entity is a party to the arrangement, the nature of the obligation may have changed from trade payable to debt. |
Are credits still negotiated between the reporting entity and the vendor? |
If the reporting entity retains its right to negotiate with the vendor and the ability to realize negotiated credit memos, the economic substance of the obligation may remain that of a trade payable. |
If the reporting entity does not retain its right to negotiate with the vendor and the ability to realize negotiated credit memos, the economic substance and legal form of the obligation may have changed to debt. |
Is the program offered to a wide range of companies or by a wide range of vendors? Is vendor participation in the program voluntary? |
We do not believe that the arrangement needs to be offered to all buyers or by all suppliers for the obligations to retain the characteristics of trade payables. |
When there are a limited group of buyers/suppliers or a mandatory program, the arrangement may not reflect a customary trade payable. |
Has the financial institution obtained any new rights, such as deciding which vendor invoices get paid? |
If the financial institution has not obtained any rights that the vendor did not have before the start of the program, the obligation may be a trade payable. |
If the arrangement results in the financial institution receiving new rights that the vendor did not have before the structured payable program, the obligation may have the characteristics of debt. |
How are fees calculated when the reporting entity uses a paying agent's accounts payable platform? |
A servicing fee does not in and of itself change the nature of the transactions being serviced. |
Some fee arrangements may indicate more than a typical paying arrangement. Variable fees based on vendor participation may indicate that the transaction is debt. |
Are the terms of the payables consistent with peers? |
Terms similar to other vendor factoring arrangements may indicate the obligation remains a trade payable. |
Extending payment terms beyond industry norms may suggest a change to the economic substance of the obligation. |
Is the purpose of the transaction in substance an effort by the reporting entity to finance trade payables by extending terms beyond industry norms? |
If the program is not limited to a single vendor and does not significantly change the payment terms such that they go beyond industry norms, a due date extension may not be determinative that a trade payable is more akin to debt. |
Terms that are designed to allow the reporting entity to finance the payment may make the transaction in-substance debt. |
Is the reporting entity’s parent jointly and severally liable for the obligation? |
Parent guarantees are not typical of trade payables. However, if the obligation was already implicitly guaranteed, making it explicit via the structured payable program, this may not, in and of itself, make the obligation debt if the guarantee is the only “debt-like” characteristic. Determination of whether an obligation was already implicitly guaranteed requires judgment. |
If the obligation was not already implicitly guaranteed, making it explicit via the structured payable program, may mean the obligation is debt-like. |
Has the legal character of the obligations changed? |
If there are no changes in legal character, the obligation may be trade payable. |
Changes to the obligations such that they are no longer consistent with UCC-compliant trade payables could be an indicator that the obligation is debt. |
Excerpt from Section 2(a)(11) of 1933 Securities Act
The term ‘‘underwriter’’ means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission.
Excerpt from Securities Act of 1933, Rule 405
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