Current accounting standards, including IFRS 7 and IAS 7, require disclosure of those programs, but disclosures remain inconsistent, difficult to check between firms and sometimes buried in footnotes. As a result, it could be difficult for investors and lenders to evaluate the true extent of leverage and liquidity risk.
Most financial evaluation tools – automated screening systems, trading algorithms, credit scoring models, broker platforms and standard dashboard summaries – rely totally on headline data relatively than the detailed disclosures hidden within the notes. As a result, supplier financing liabilities are sometimes not captured within the metrics that investors and lenders use to evaluate risk.
In many cases, firms willingly accept financing costs that exceed those of traditional bank loans because these arrangements provide financing without increasing reported debt or weakening leverage-based performance metrics. The incentive is commonly not cheaper financing, but relatively cheaper financial reporting.
Given the central role of metrics equivalent to debt/equity, net debt/EBITDA and OCF in financial evaluation, these metrics have to be based on transparent, clearly stated classifications. They shouldn’t require a forensic examination of footnote disclosures to grasp the extent to which operating metrics are affected by hidden financial liabilities.
If a buyer expressly extends payment terms because a financing program allows such an extension, the economic substance of the transaction is a borrowing and never an operational trade credit. The classification of those obligations as trade payables doesn’t reflect their underlying nature and undermines the usefulness and integrity of the reported financial measures.
