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

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