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Figure FSP 11-1 includes the items that are required by S-X 5-02(19)(a) to be stated separately on the balance sheet or disclosed in the footnotes. It also references the section in this guide where each item is discussed in more detail.
Figure FSP 11-1
S-X 5-02(19)(a) required balance sheet disclosures
Amounts payable to
Section
Trade creditors
Banks for borrowings
Holders of commercial paper
Factors or other financial institutions for borrowings
Related parties
Underwriters, promoters, and employees
Others

11.3.1 Trade creditors

This caption typically represents amounts owed to suppliers of goods and services that a reporting entity consumes through operations. There are numerous considerations that a reporting entity should evaluate related to these payables, the most common of which are discussed in the following subtopics.

11.3.1.1 Bank and book overdrafts

Book overdrafts—representing outstanding checks in excess of funds on deposit—should be classified as liabilities at the balance sheet date. Bank overdrafts—representing the total of checks honored by the bank that exceed the amount of cash available in the reporting entity’s account—result in the creation of a short-term loan.
See FSP 6.5.1.2 and FSP 6.5.1.1 for presentation and disclosure considerations related to book and bank overdrafts.

11.3.1.2 Classification of outstanding checks

Non-authoritative guidance included in AICPA Q&A Section 1100.08 indicates that outstanding checks should be presented as a reduction of cash. As a result, in practice, most preparers present a liability on the balance sheet equal to only the amount of outstanding checks in excess of available cash and disclose that such liability is a reinstatement of liabilities cleared in the bookkeeping process.
Example FSP 11-1 illustrates the classification of outstanding checks covered by funds on deposit.
EXAMPLE FSP 11-1
Offset outstanding checks against cash deposits
FSP Corp has three separate bank accounts with the same bank: a deposit account, a main account, and a disbursement account. The deposit account is used by the reporting entity to accumulate deposits from customers. At the end of each business day, any amounts in the deposit account are automatically swept into the main account. FSP Corp uses the disbursement account to write checks. Each day, the bank accumulates the total amount of the checks presented for payment and, pursuant to its account agreement with FSP Corp, sweeps an equal amount out of the main account into the disbursement account to cover the balance. According to the account agreement, the bank has a right to draw any amount from an account with a positive balance to cover an account with a negative balance. As of year-end, FSP Corp has a negative balance in its general ledger account for the disbursement account of $9 million (representing outstanding checks), a positive balance in its general ledger account for the main account of $8 million, and a zero balance in the deposit account.
How should FSP Corp present its cash accounts on its balance sheet?
Analysis
Because the bank has the ability to draw any amount from an account with a positive balance to cover an account with a negative balance, FSP Corp should offset the $8 million positive balance in the main account against the $9 million in outstanding checks (negative balance in the disbursement account). The net amount of $1 million should be reported as a current liability on FSP Corp’s balance sheet.

11.3.1.3 Checks written but not released

Checks that have not been released by the end of the accounting period (i.e., not mailed or otherwise transmitted to the payee) should not be deducted from the cash balance (i.e., the related balances should still be reflected as cash and the related account payable or other liability).

11.3.1.4 Drafts payable

A draft is an order to pay a certain sum of money. It is signed by the drawer (e.g., an insurance company for a claim payment) and payable to order or bearer (e.g., an insurance policyholder). When the draft is presented to the drawee (i.e., the bank), it is paid only upon the approval of the drawer.
Drafts and checks have different legal characteristics. A check is payable on demand, whereas a draft must be approved for payment by the drawer before it is honored by the bank.
Drafts payable should be netted against the cash balance, similar to the treatment for outstanding checks. It is acceptable, however, for a reporting entity to present drafts payable gross as a liability if the total amount is disclosed either on the balance sheet or in a footnote. This approach recognizes that there is a legal distinction between a check and a draft. The policy election must be consistently applied.

11.3.1.5 Structured payables

Structured payable programs (also referred to as supplier finance programs) are arrangements involving a reporting entity, its vendors, and a bank or other financial institution. These arrangements may involve an administrative paying agent service contract, a financing agreement, or a factoring arrangement, with or without the reporting entity being a direct party to the contracts.
A traditional factoring arrangement in its simplest form is one in which a reporting entity has no involvement in the transaction between a vendor and a financial institution and the entity pays in the ordinary course its obligations on the original invoice. The other end of the involvement spectrum is the reporting entity financing its payment of the obligation under the invoice, in some instances taking advantage of early pay discounts or extending the terms from the original invoice.
Depending on the reporting entity’s level of involvement and whether or not the structured payable program represents a financing of the original obligation, the terms of the structured payable program could cause the substance of the liability to change from trade payables to debt. This change in classification could affect a reporting entity’s leverage ratios, and possibly, its covenants.
The accounting for structured payable programs is not addressed directly in authoritative literature. When entering into structured payable programs, a reporting entity should weigh the evidence to determine whether the obligation is more akin to a trade payable or debt. Program terms differ, and even similar programs in different markets or jurisdictions may be accounted for differently because of variations in industry norms and laws by jurisdiction.
When evaluating whether an obligation is more akin to a trade payable or debt, a company should consider:
  • Are the terms of the payable typical for the specific company and industry? Said differently, would a supplier offer those terms to the company absent any other considerations?
  • As a result of the structured payable program, was the payable modified so significantly such that it should be considered a new arrangement?

Figure FSP 11-2 details factors a company should consider to determine whether a structured payable program should be accounted for as a trade payable or financing.
Figure FSP 11-2
Structured payables—classification considerations
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.

Notwithstanding these considerations, the presence of certain terms may suggest that the obligation is, in substance, debt. These include:
  • An incremental increase in the price of the goods to compensate vendors who provide extended payment terms
  • The original liability being extinguished
  • Interest accruing on the balance prior to the due date (although penalties for non-payment may be imposed after that)
  • The financial institution having the right to draw on the reporting entity’s other accounts without its permission if the designated payment account has insufficient funds, if not part of the reporting entity’s normal banking arrangement
  • Altering the trade payable’s seniority in the reporting entity’s capital structure
  • Requiring the reporting entity to post collateral on the trade payable
  • Default on invoice payment under the arrangement triggering a cross-default (other than a general debt obligation cross-default)
Balance sheet classification of the liability also impacts the statement of cash flows. See FSP 6.9.11 for discussion of the statement of cash flows classification.
Example FSP 11-2 illustrates the application of the accounts payable versus debt classification considerations.
EXAMPLE FSP 11-2
Structured payables — accounts payable versus debt classification
FSP Corp and its financial institution ask certain of FSP Corp’s vendors to enter into a new payment program. Under the payment program, the financial institution pays the vendors directly and participates in an early pay discount that the vendors offer for invoices paid within 15 days. FSP Corp is then obligated to pay the financial institution the agreed-upon amount at the invoice due date. The amount FSP Corp pays the financial institution at the due date is less than the full amount of the invoice because the financial institution has offered FSP Corp a portion of the early pay discount it receives from the vendor.
Should FSP Corp classify the payable to the financial institution as accounts payable?
Analysis
No. The arrangement between the financial institution and FSP Corp results in FSP Corp securing financing at a lower cost of funds than in the vendor's original invoice. FSP Corp received an early-pay discount for which it was not otherwise eligible. As such, FSP Corp should derecognize its trade account payable and record a new liability classified on its balance sheet as a borrowing from the lender.
Further, FSP Corp's statement of cash flows should reflect an operating cash outflow and financing cash inflow related to the affected trade payable balances, and a financing cash outflow upon payment to the financial institution and settlement of the obligation. See FSP 6.9.11 for discussion of the statement of cash flows classification of structured payables.

Note about ongoing standard setting
In December 2021, the FASB issued an exposure draft that proposes required disclosures for supplier finance programs. As of the publication date of this guide, the proposed amendments have not yet been issued. Reporting entities should continue to monitor the status of these proposed amendments and, if finalized, the implications on disclosure.

11.3.1.6 Liabilities settled through paying agents

In some circumstances, a reporting entity may engage a financial institution to operate solely as a paying agent by entering into arrangements that allow for the financial institution to make payments on its behalf. In some instances, these arrangements may allow the reporting entity to participate in rebates or “rewards” programs based on transaction volume. Generally, a reporting entity settles the outstanding obligations to the paying agent within the same time period that the reporting entity would have settled the vendor payable, absent a paying agent.
Transaction types vary, and include:
  • P-cards

    Employees of the reporting entity make small-dollar purchases, and the reporting entity owes the financial institution issuing the credit card directly. Generally, payment terms are 30–60 days from closure of the billing period, though in some cases, a higher volume of purchases may drive a shorter payment period.
  • e-payables

    A reporting entity charges its trade payables to virtual credit cards, thus settling the obligations to the vendors and creating new obligations to financial institutions. Generally, e-payables allow for larger dollar purchases than p-cards, and are also generally payable 30 days after billing period closure, similar to standard credit card arrangements.
  • Clearing accounts

    Vendors (often of health care companies) have access to a bank account in the reporting entity’s name and can post charges directly to that account.

    In some circumstances, the use of these payment mechanisms may result in a change in the legal form of a reporting entity's liability because it pays a paying agent who had paid off and extinguished the reporting entity's obligation to a third-party vendor.

    Although the reporting entity may now be legally obligated to make payment to the financial institution, this arrangement may still be classified as a trade payable since the payable arose from normal operating purchases and no financing costs are involved. Trade payable designation may still be acceptable if (1) payment is made quickly (within the month) and (2) the arrangement is more for convenience than financing. This may be true even if rebates are received from the card issuer based on the volume of use.

    See FSP 6.9.1.3 for discussion of classification in the statement of cash flows when a paying agent is used.

11.3.2 Underwriters, promoters, and employees

S-X 5-02 requires reporting entities to separately present in the financial statements amounts payable to the following classes of individuals:
  • Underwriters — Section 2(a)(11) of the 1933 Securities Act broadly defines the term “underwriter” as:

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.

  • Promoters — Rule 405 of the 1933 Securities Act defines a “promoter” as:

Excerpt from Securities Act of 1933, Rule 405

(i) Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer; or
(ii) Any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services and property, 10 percent or more of any class of securities of the issuer or 10 percent or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise.

  • Employees — The ASC Master Glossary defines an employee as an individual over whom a reporting entity can either exercise, or has the right to exercise, sufficient control to establish an employer-employee relationship

11.3.3 Accounts or notes payable to other parties

A reporting entity should report accounts or notes payable to other parties in addition to those discussed in FSP 11.3.1 through FSP 11.3.2. Others can include, but are not limited to, repurchase agreements. See FSP 22 for presentation and disclosure considerations related to repurchase agreements.
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