Presentation of Amounts Received Under Channel Financing Facility as per Schedule III to the Companies Act, 2013

A company dealing in consumer durables has provided an optional channel financing facility to all its dealers and distributors (D&D) for sanction of working capital limits. The limits sanctioned have the following hypothecations/security-

• Primary: Against all stocks, receivables and current assets of the D&D
• Collateral: First loss default guarantee (FLDG) by the Company
• Guarantee: of D&D

The FLDG and channel financing facility are two separate arrangements. In this FLDG arrangement, D&D is not a party to the same. The accountant believes the following will be the probable accounting treatment in the following two events-

(a) In case of no default done by D&D during the credit period: Sums received from Bank can be construed as financial guarantee liability and can be presented and disclosed as other current financial liabilities at the reporting date.

(b) In case of default done by D&D on due date: Such sums not paid by D&D on due date and remaining not paid at the reporting date can be interpreted for presentation and disclosure as borrowings, as these can be termed as loans payable on demand.

The company approached the Expert Advisory Committee (EAC) to affirms its accounting treatment in the above two events. This story covers the major pointers of the channel financing facility and presentation of amounts received from bank under channel financing facility by the company in case of default by dealers on due date or in case of no default during the credit period.

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