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Structured payable 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 6.7.2.5 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 6.7.2.5 for discussion of the statement of cash flows classification of structured payables.
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