Due Diligence: Why CFOs Should Pay Attention to Accounting for Reverse Factoring Arrangements

CFOs doing due diligence on potential acquisitions, partners or suppliers should pay special attention to the accounting for supply chain arrangements. In a research report, Moody's Investors Service says the collapsed UK construction and services group Carillion failed to give a full picture of its liability to banks because of shortcomings in its accounting for reverse factoring arrangements.  

"Carillion's approach to its reverse factoring arrangement had two key shortcomings: the scale of the liability to banks was not evident from the balance sheet, and a key source of the cash generated by the business was not clear from the cash flow statement," says Trevor Pijper, a Moody's Vice President who wrote the report. While the balance sheet said the group's bank loans and overdrafts amounted to £148 million, an additional amount -- possibly as much as £498 million - was owed to banks under the reverse factoring arrangement that started in 2013.

This higher figure appears to have been reported within "other creditors" and was consequently excluded from borrowings.

Reverse factoring - a popular way of providing finance linked to the supply of goods - is increasingly widespread, says Moody's. However, in the absence of a specific accounting requirement, few companies make explicit disclosure of agreements with suppliers and banks. 

The possible existence of these arrangements can often only be uncovered by scrutiny of the amounts reported as trade payables and other creditors, something that CFOs in Asia and elsewhere who are vetting the financials of other companies should pay attention to.


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