ASC

ASC 470-40

Product Financing Arrangements

470 Debt

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In brief

IntermediateRecognitionDebt and equityInventory and PP&ERevenue

ASC 470-40 governs product financing arrangements — transactions in which a "sponsor" arranges for another entity to buy and hold inventory on its behalf (or controls the disposition of such product) with a related commitment to buy it back at specified prices covering the other entity's financing and holding costs. Because the sponsor is in substance the owner of the product, the arrangement is accounted for as a borrowing rather than a sale: the sponsor records the inventory as an asset and a corresponding liability when the other entity buys the product (470-40-25-1 through 25-2). After ASU 2014-09, sale-and-repurchase legs are handled under Topic 606, leaving this Subtopic focused on purchases made by another entity on the sponsor's behalf.

Key points (7)
  • A product financing arrangement within scope is accounted for as a borrowing, not a sale; the sponsor reports the product as an asset and the related obligation as a liability (470-40-25-1).
  • Scope requires both: (a) the sponsor must purchase the product (or substantially identical product or processed goods containing it) at specified prices not subject to change except for finance and holding cost fluctuations, and (b) payments to the other entity are set to cover substantially all fluctuations in its purchasing and holding costs, including interest (470-40-15-2).
  • The 'specified price' condition is also met by resale price guarantees, a sponsor purchase option whose economic effect (e.g., a significant penalty) compels exercise, or a put option held by the other entity (470-40-15-2(a)(1) through (3)).
  • The sponsor records the asset and related liability when the product is purchased by the other entity, not when the sponsor takes physical delivery (470-40-25-2).
  • Costs in excess of the other entity's purchase cost (excluding processing costs) are financing and holding costs accounted for under the sponsor's own policies as incurred by the other entity; interest costs are separately identified and accounted for under Topic 835 (470-40-25-3 through 25-4).
  • Excluded from scope: ordinary purchase commitments where the seller retains control, typical contractor-subcontractor relationships, long-term unconditional purchase obligations such as take-or-pay contracts under Subtopic 440-10, unmined/unharvested natural resources and financial instruments, and contracts within Topic 606 including sale-with-repurchase arrangements (470-40-15-3).
  • Unlike an unconditional purchase obligation, in a product financing arrangement the product already exists and the other entity's purchase cost is known (470-40-05-6).

For students. This is the classic "substance over form" inventory-parking rule: a sale that comes with a buyback obligation at a price covering the buyer's carrying costs is really a secured loan, so no revenue is recognized and the inventory never leaves the sponsor's balance sheet. The common mistake is applying 470-40 to a sponsor's outright sale-and-repurchase — ASU 2014-09 moved those to Topic 606 (606-10-55-66 through 55-78), leaving 470-40 for purchases made by another entity on the sponsor's behalf.

product financing arrangementsponsorin-substance borrowingrepurchase agreementspecified pricesfinancing and holding costsresale price guaranteeunconditional purchase obligation

Machine-generated study aid for ASC 470-40. Check the source paragraphs below.

470-40-00Status

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470-40-05Overview and Background

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470-40-05-1
This Subtopic establishes guidance for determining whether an arrangement involving the sale of inventory is in substance a financing arrangement.
470-40-05-2
Product financing arrangements include agreements in which a sponsor (the entity seeking to finance product pending its future use or resale) does any of the following:
  1. a
    Sells the product to another entity (the entity through which the financing flows), and in a related transaction agrees to repurchase the product (or a substantially identical product)
  2. b
    Arranges for another entity to purchase the product on the sponsor's behalf and, in a related transaction, agrees to purchase the product from the other entity
  3. c
    Controls the disposition of the product that has been purchased by another entity in accordance with the arrangements described in either (a) or (b).
470-40-05-3
In all of the foregoing cases, the sponsor agrees to purchase the product, or processed goods of which the product is a component, from the other entity at specified prices over specified periods or, to the extent that it does not do so, guarantees resale prices to third parties (see paragraph 470-40-15-2(a)(1)). The Implementation Guidance in Section 470-40-55 illustrates the arrangement described in (b) of the preceding paragraph. For an arrangement described in (a), see Topic 606 on revenue from contracts with customers for guidance on repurchase agreements in paragraphs
606-10-55-66 through 55-78
and an illustration on repurchase agreements in Example 62, Case A, paragraphs
606-10-55-401 through 55-404
.
470-40-05-4
Other characteristics that commonly exist in product financing arrangements but that are not necessarily present in all such arrangements include the following:
  1. a
    The entity that purchases the product from the sponsor or purchases it directly from a third party on behalf of the sponsor was established expressly for that purpose or is an existing trust, nonbusiness entity, or credit grantor.
  2. b
    The product covered by the financing arrangement is to be used or sold by the sponsor, although a portion may be sold by the other entity directly to third parties.
  3. c
    The product covered by the financing arrangement is stored on the sponsor's premises.
  4. d
    The debt of the entity that purchases the product being financed is guaranteed by the sponsor.
470-40-05-5
The following are similarities between a sponsor's rights and obligations under a product financing arrangement and a purchaser's rights and obligations under an unconditional purchase obligation (see Topic 440):
  1. a
    Both the sponsor and the purchaser obtain probable future economic benefits from the assured source of product.
  2. b
    Both are obligated to make future cash payments to the other party to the agreement.
470-40-05-6
Beyond those similarities, however, there is a substantial difference in the related accounting issues. Under a product financing arrangement, the product already exists and the other entity's purchase cost is known.

470-40-15Scope and Scope Exceptions

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Entities

470-40-15-1
The guidance in this Subtopic applies to all entities.

Transactions

470-40-15-2
The guidance in this Subtopic applies to product financing arrangements for products that have been purchased by another entity on behalf of the sponsor and have both of the following characteristics:
  1. a
    The financing arrangement requires the sponsor to purchase the product, a substantially identical product, or processed goods of which the product is a component at specified prices. The specified prices are not subject to change except for fluctuations due to finance and holding costs. This characteristic of predetermined prices also is present if any of the following circumstances exist:
    1. 1
      The specified prices in the financing arrangement are in the form of resale price guarantees under which the sponsor agrees to make up any difference between the specified price and the resale price for products sold to third parties.
    2. 2
      The sponsor is not required to purchase the product but has an option to purchase the product, the economic effect of which compels the sponsor to purchase the product; for example, an option arrangement that provides for a significant penalty if the sponsor does not exercise the option to purchase.
    3. 3
      The sponsor is not required by the agreement to purchase the product but the other entity has an option whereby it can require the sponsor to purchase the product.
  2. b
    The payments that the other entity will receive on the transaction are established by the financing arrangement, and the amounts to be paid by the sponsor will be adjusted, as necessary, to cover substantially all fluctuations in costs incurred by the other entity in purchasing and holding the product (including interest). This characteristic ordinarily is not present in purchase commitments or contractor-subcontractor relationships.
470-40-15-3
The guidance in this Subtopic does not apply to the following transactions and activities:
  1. a
    Ordinary purchase commitments in which control of the good or service is retained by the seller (for example, a manufacturer or other supplier) until the good or service is transferred to a purchaser.
  2. b
    Typical contractor-subcontractor relationships in which the contractor is not in substance the owner of product held by the subcontractor and the obligation of the contractor is contingent on substantial performance on the part of the subcontractor.
  3. c
    Long-term unconditional purchase obligations (for example, take-or-pay contracts) specified by Subtopic 440-10 on commitments. At the time a take-or-pay contract is entered into, which is an unconditional purchase obligation, either the product does not yet exist (for example, electricity) or the product exists in a form unsuitable to the purchaser (for example, unmined coal); the purchaser has a right to receive future product but is not the substantive owner of existing product.
  4. d
    Unmined or unharvested natural resources and financial instruments.
  5. e
    Contracts within the scope of Topic 606 on revenue from contracts with customers. For example, contracts that are subject to a right of return as described in paragraph 606-10-32-10 and paragraphs
    606-10-55-22 through 55-29
    and contracts in which a sponsor (the entity seeking to finance product pending its future use or resale) sells the product to another entity (the entity through which the financing flows) and in a related transaction agrees to repurchase the product (or a substantially identical product). Such contracts are within the scope of Topic 606; see paragraphs
    606-10-55-66 through 55-78
    on repurchase agreements and paragraphs
    606-10-55-36 through 55-40
    on principal versus agent considerations.
  6. f
    Typical purchases by a subcontractor on behalf of a contractor. In a typical contractor-subcontractor relationship, the purchase of product by a subcontractor on behalf of a contractor ordinarily leaves a significant portion of the subcontractor's obligation unfulfilled. The subcontractor has the risks of ownership of the product until it has met all the terms of a contract. Accordingly, the typical contractor-subcontractor relationship shall not be considered a product financing arrangement.

470-40-25Recognition

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470-40-25-1
This Subtopic requires that a product financing arrangement within the scope of this Subtopic be accounted for as a borrowing rather than as a sale. The sponsor is in substance the owner of the product and the sponsor shall, therefore, report the product as an asset and the related obligation as a liability.
470-40-25-2
If the sponsor is a party to an arrangement whereby another entity purchases a product on the sponsor's behalf and, in a related transaction, the sponsor agrees to purchase the product or processed goods of which the product is a component from the entity, the sponsor shall record the asset and the related liability when the product is purchased by the other entity.
470-40-25-3
Costs of the product, excluding processing costs, in excess of the other entity's purchase costs represent financing and holding costs. The sponsor shall account for such costs in accordance with the sponsor's accounting policies applicable to financing and holding costs as those costs are incurred by the other entity. For example, if insurance costs ordinarily are accounted for as period costs by the sponsor, similar costs associated with the product covered by financing arrangements shall be expensed by the sponsor as those costs are incurred by the other entity.
470-40-25-4
Interest costs associated with the product covered by financing arrangements shall be identified separately and accounted for by the sponsor in accordance with Topic 835 as those costs are incurred by the other entity.

470-40-55Implementation Guidance and Illustrations

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Illustrations

470-40-55-1
This Example illustrates how the guidance in paragraphs
470-40-25-1 through 25-4
applies to product financing arrangements in which a sponsor arranges for another entity to purchase the product on the sponsor's behalf and, in a related transaction, agrees to purchase the product from the other entity.
  1. a
    Subparagraph superseded by Accounting Standards Update No. 2014-09.
  2. b
    Subparagraph superseded by Accounting Standards Update No. 2014-09.
470-40-55-2
The facts assumed in this Example are illustrative only and are not intended to modify or limit in any way the provisions of this Subtopic. The facts assumed in the Example could vary in one or more respects without altering the application of the provisions of this Subtopic.
470-40-55-6
A sponsor arranges for another entity to buy product on the sponsor's behalf with a related agreement to purchase the product from the other entity.
470-40-55-7
The sponsor arranges for the other entity to purchase on its behalf an existing supply of fuel. In a related agreement, the sponsor agrees to purchase the fuel from the other entity over a specified period and at specified prices. The prices established are adequate to cover all financing and holding costs of the other entity. The other entity finances the purchase of fuel using the fuel and the agreement as collateral.
470-40-55-8
In this product financing arrangement, both of the characteristics in paragraphs
470-40-15-2 through 15-3
are present; accordingly, the sponsor reports the asset (fuel) and the related liability on its balance sheet when the fuel is acquired by the other entity. Financing and holding costs are accrued by the sponsor as incurred by the other entity and accounted for in accordance with the sponsor's accounting policies for financing and holding costs. Interest costs are separately identified and accounted for in accordance with Topic 835.

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