Implementing a structured vendor payable program? Be wary - changes to the terms of the trade payable could affect balance sheet classification and debt covenant ratios.
When implementing a structured vendor payable program, companies should be mindful that changes to the terms of the trade payable could impact its balance sheet classification. The introduction of “specialized” financing terms may change the economic substance of a company’s liability, thus requiring reclassification of the trade payable as debt. Given the significance of most companies’ accounts payable balances, reclassification of trade payables as debt could significantly impact a company’s leverage and covenant ratios.