Invoice factoring has been the dominant means for supplier to access faster payment of their receivables. The complexity of factoring on the accounts of customers and suppliers deters many from using factoring. Either all invoices are committed to factoring, which may not be a supplier's preference or selected invoices are financed, leaving a complexity for AP departments to manage. However, there is a better way through Crossflow advance payments, which doesn't have the complexity of factoring and enables simpler balancing of accounts for both the customer and the supplier.
Advanced payments through Crossflow is a financial arrangement where a supplier assigns the right to its accounts receivable (i.e., outstanding customer invoices) to a third-party financial institution, with Crossflow acting as intermediary, in return for advance payment for that receivable. Crossflow provides immediate cash to the supplier at a discount, and the right to that payment is assigned from the supplier to Crossflow acting on behalf of its institutional funders. Crossflow takes over the responsibility of collecting the outstanding payments from the customers on behalf of the funders.
When auditing a company's accounts that involve advance payment such as Crossflow, several key considerations should be taken into account:
SUPPLIERS
- Disclosure in Financial Statements: The company's financial statements should provide appropriate disclosure regarding the advance funding arrangement. This includes describing the nature of the arrangement, its impact on the company's financial position, and any significant terms and conditions.
- Recognition of Cash Received: The cash received from Crossflow should be appropriately recorded in the suppliers accounts as extinguishing that debt from the customer. It is typically recognized as a cash inflow from financing activities in the statement of cash flows.
- Transfer of Receivables: The auditor needs to ensure that the transfer of receivables to Crossflow has been appropriately accounted for. This includes verifying the completeness and accuracy of the accounts receivable transferred to Crossflow, ensuring proper documentation exists to support the transfer, and evaluating any potential restrictions on the transferred receivables. Crossflow’s service agreement prohibits double financing of transactions.
- Valuation and Discounting: The auditor should assess the valuation of the receivables transferred to Crossflow. This involves verifying that any discounts or fees associated with the finance arrangement are properly calculated and accounted for.
- Recognition of Financing Costs: Any costs associated with the finance arrangement, such as fees or interest charges, should be appropriately recognized in the company's accounts. These costs are typically classified as interest expense or finance charges.
- Disclosure of Risks and Obligations: The auditor should review the company's disclosures to ensure that any risks and obligations arising from the financing arrangement are appropriately disclosed. This includes assessing the impact of potential recourse provisions, where the company may be required to repay the financed amount in case of customer non-payment.
- Subsequent Collections: The auditor should examine the subsequent collections of the financed receivables to ensure they are appropriately recorded and accounted for. This involves confirming that the collections are recognized as cash inflows and verifying the accuracy of the accounts receivable balance after the financing arrangement.
BUYER
- Disclosure in Financial Statements: The company's financial statements should provide appropriate disclosure regarding the advance funding arrangement. This includes describing the nature of the arrangement, its impact on the company's financial position, and any significant terms and conditions.
- Recognition of Payments: Payments made via Crossflow, where Crossflow is acting as intermediary for the Buyer, should be appropriately recorded in the buyers accounts as extinguishing that debt to the supplier at point of payment via Crossflow acting as intermediary for the Buyer whether financed or unfinanced.
- Payments: The auditor needs to ensure that the transfer of payments to Crossflow has been appropriately accounted for. This includes verifying the completeness and accuracy of the payments to Crossflow, ensuring proper documentation exists to support the transfer.
- Bank accounts: The auditor needs to ensure that funds transferred to Crossflow are in a segregated bank account protected by a trust deed ensuring that these funds are bankrupt remote from Crossflow.
- Disclosure of Risks and Obligations: The auditor should review the company's disclosures to ensure that any risks and obligations arising from the financing arrangement are appropriately disclosed. This includes ensuring that bank accounts operated by Crossflow for the service are bankrupt remote, and that funds transfers to suppliers are made by Crossflow by close of business on receipt of day of receipt of funds from the buyer.
In summary, as an auditor, it is important to thoroughly review and assess the company's treatment of financing in its accounts, ensuring compliance with relevant accounting standards and proper disclosure of the arrangement's impact on the financial statements.
Magda Rozczka is CEO at Crossflow. After completing her postgraduate MBA, Magda led product development within the insurance sector at ING and Zurich. Magda represents Crossflow on the Bank of England Decision Maker Panel, which influences UK interest rates, and has represented Crossflow as part of HM Treasury’s Women in Finance initiative.
