Are accounting requirements hindering funding for SCF?

1 February 2011

In July 2010 the ACT published a report on the Supply Chain Finance Market and in particular on whether there was scope for funding initiated by buyers (we refer to this as a "Buyer Driven Receivables Programme" (BDRP)) to grow and ease funding issues for suppliers to larger / well known / investment grade buyers.

The report is available at www.treasurers.org/scf

One of the challenges flagged to us last year by buyers was the imperative that trade creditors continue to be treated as such despite the funding mechanics – so when does a trade creditor become debt?

Within our report we summarised the criteria that enabled trade creditors to be treated as such and flagged that stepping out of this safe harbour risked re classification as debt.

Over the past six months we have continued to monitor developments in the funding market

We are aware of a number of BDRPs that have failed to "on-board" suppliers – this is a shame because a BDRP offers one source of funding that could and should be helping the recovery after the financial crisis. So we asked around to find out what the problem was.

The answer indicates that accounting requirements might be playing a part here.

We asked ourselves why this should be the case – why should accounting treatment deter perfectly rational funding decisions – well it seems that:

Suppliers are nervous that the funding bank or the buyer may withdraw the funding for a BDRP at short notice – thus leaving the supplier in a pickle. If the buyer guarantees that the BDRP will be available for a minimum period it seems that this risks re-classification of trade creditors as debt
If buyers actively promote the value of a BDRP to suppliers and / or extract benefit from the programme the trade creditor risks re classification as debt
The buyer cannot be a party to the arrangements between the investor and the supplier without risk of reclassification of trade creditors as debt.

However, should these "transgressions" change the trade creditor into debt?

I can understand that if a buyer takes liberties and uses a BDRP to increase creditor days from 60 to 150 days that the trade creditor is likely to morph into debt. Indeed any accounting rules need to protect against abuse.

Recently the ASB has published proposals for hedging under for IFRS 9 – this seems to deal with, inter alia, the strict requirements of IAS39 – although some detailed issues remain to be resolved. Bravo! Can we do the same for the funding markets?

ACT continues to reach treasury practitioners across the world

In January, we were pleased to see our first ACT Middle East event in Oman. Chaired by Peter Matza, Head of Publishing, ACT, and sponsored by National Bank of Oman, the breakfast briefing in Muscat attracted over 40 attendees and discussed key treasury issues for the region with a speaker panel including senior representatives from the Ministry of Finance – Government of Oman, Omantel and Oman Shipping. Visit the press room to see the resulting press coverage. A great start to a new country for the ACT in the Middle East.

We hosted two ACT events in Hong Kong attended by a wide range of treasury practitioners and accountants. These events were supported by JP Morgan Asset Management, the key accountancy bodies and the International Association of CFOs and Corporate Treasurers (China). We also spoke at the Hong Kong Institute of Certified Public Accountants’ CPD event.

What was clear is that whilst the emphasis on issues exercising the treasurers in the region varies, their list is pretty similar to the topics that occupy us in Europe. It would be fair to say that the major topic that all the treasurers were talking about was the internationalization of the Renminbi. The expected medium term appreciation of the Renminbi was causing problems for some. It was clear that the development of this market was unstoppable although there was still a long way to go and arbitrage between onshore / offshore Renminbi seemed common place. One treasurer put the position very succinctly: