The collapse of UK construction and services group Carillion has exposed shortcomings in the accounting for reverse factoring arrangements, a form of supply-chain finance, according to a report from Moody's Investors Service
The corporate analytics agency says reverse factoring - a popular way of providing finance linked to the supply of goods - is increasingly widespread. 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.
Trevor Pijper, a Moody's vice president, senior credit officer and author of the report, said: ‘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.’
According to the analysis, Carillion's 2016 balance sheet failed to give a clear picture of the full scale of its liability to banks. While the balance sheet said the group's bank loans and overdrafts amounted to £148m, an additional amount, possibly as much as £498m, 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.
Carillion reported group operating profit (excluding disposal gains) totalling £501m for the period from 2013 to 2016, an outcome seemingly corroborated by the cash flow statement, which showed cash generated from operations (before pension deficit recovery payments) of £509m over the same period.
However, there was no disclosure that the cash inflow included bridging finance supplied by Carillion's banks under the reverse factoring arrangement. This would have contributed £498m (98%) of the £509m cash inflow if the facility had been fully utilised at the end of 2016.
In the interim accounts to 30 June 2017, Carillion announced the write-down of contract receivables totalling £600m, more than wiping out the group operating profit of £501m reported for 2013-16.
Moody’s report, Non-financial companies — EMEA: Carillion's collapse highlights shortcomings in the accounting for reverse factoring, is here.
Report by Pat Sweet
