In September of 2022, the FASB announced its Accounting Standards Update (ASU) 2022-04 subtopic 405-50, Disclosure of Supplier Finance Program Obligations. The amendments in the Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
Supplier finance programs (also known as reverse factoring, supply chain finance) allow buyers to offer their suppliers the option for access to payment in advance of an invoice due date. The invoice is paid by a third-party finance provider or intermediary. The seller receives payment directly from the intermediary much sooner than its original invoice terms allow. In return, the intermediary receives a fee from the seller and interest charges from the buyer. Companies might utilize this type of supply chain finance for a variety of reasons but most are typically trying to extend days payable outstanding (DPO).
Supply chain financing (reverse factoring) is growing significantly in the US, increasing from USD 400bn in 2018 to USD 995bn in 2021, for example. According to S&P Global ratings, reverse factoring is transforming the way companies are funding their working capital. It has the potential to diversify a company’s funding sources and improve its balance sheet efficiency, they say. However, prior to the FASB ASU this September, there were no explicit disclosure requirements in US GAAP specific to those programs. As to why specific standards are necessary, “poor accounting disclosures help keep reverse factoring arrangements hidden and can obscure a company’s underlying health and frustrate like-for-like comparisons,” the rating agency cautions. The consequences can be significant, they add, if it results in mispricing of risk or misallocation of capital. Further, they note, reverse factoring is subject to refinancing and liquidity risks.
The amendments in the Update intend to solve this transparency issue by requiring that a buyer in a supplier finance program discloses “sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. To achieve that objective, the buyer should disclose qualitative and quantitative information about its supplier finance programs.”
The ASU now require companies using reverse factoring intermediaries to disclose the following for each annual reporting period.
- The key terms of the program, including a description of the payment terms (including payment timing and basis for its determination) and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary.
- For the obligations that the buyer has confirmed as valid:
- The amount outstanding that remains unpaid by the buyer as of the end of the annual period (the outstanding confirmed amount)
- A description of where those obligations are presented in the balance sheet
- A rollforward of those obligations during the annual period, including the amount of obligations confirmed and the amount of obligations subsequently paid.
According to FASB, the amendments improve financial reporting by allowing financial statement users to better consider the effect of the programs on an entity’s working capital, liquidity, and cash flows over time.
However, not all are convinced that certain requirements of the Update will be useful for investors, while only serving to add further costs for the preparer. More specifically, with respect to rollovers, in their comment letter to the FASB The Financial Reporting Committee (FRC or Committee) of the Institute of Management Accountants (IMA) say, “we struggle to see the value this information will provide to users,” and therefore “does not support the proposed requirement for the rollforward of outstanding obligations.” Existing disclosure requirements in the Codification, they note, generally do not require the roll forward of other current asset and liability accounts. “We are not aware of any unique aspects of these supplier obligations that would justify additional disclosure beyond period end balances,” they say. Further, they conclude that any information conveyed in a rollforward of this subset of a company’s cost and accounts payable activity will lack the broader context of the activity in the company’s total cost structure. Finally, when it comes to cost, “there is upfront investment involved to both develop the reports necessary to generate the rollforward and implement the necessary processes and controls,” they note.
S&P Global Ratings disagrees and asks the FASB to take the disclosures one step further. “We believe all the disclosures in the Proposed ASU, including the rollforward of outstanding obligations, will go a long way to increasing our ability to analyze and adjust for these programs,” they comment, but encourage the FASB to consider requiring additional disclosure of the payment terms /payable days for obligations outstanding that are part of a supply-chain finance program. However, a more viable option, they add, would be to have companies disclosure of the cost of sales, general and administrative expenses related to their supply-chain finance program. This, the rating agency notes, “would provide investors and users more consistent information to calculate the payable days for supply-chain finance programs and compare them with normal trade payable days – which is important to understanding the true benefit of these programs.”
As to whether or not investors will be satisfied with the new disclosure requirements, perhaps not completely. The Investor Advocate at the U.S. Securities and Exchange Commission, asked for even greater clarity and consistency around Key terms than what the FASB agreed to, commenting “we prefer to see more structure around what key terms, at a minimum, must be included. What didn’t make it into the Update, that they asked for – disclosures like the identity of the financial providers, the maximum amount to be provided at one time by provider, the original term of the invoice with the supplier by provider, incentives for suppliers, and the revised term of the invoice with the finance provider.
Neil Brown is Executive Director of the Controllers Council, author and a professional association manager. Neil is CEO of the Chief Executives Council, COO of the Operations Council, VP Partnerships for IT Executives Council, and Chief Marketing Officer of Modern Marketing Partners. Neil started his career as a Brand Manager, then promoted to CMO. Brown has provided marketing services to leading Fortune 500 and start-ups, along with board and volunteer roles with non-profits. Neil is a frequent speaker, author and contributor to Advertising Age, Marketing News, Adweek magazine and many others. He is author of two books including “Breakthrough Branding: Brand Naming Tips & Trade Secrets”, and “Tools of the Trade: Modern Marketing for Construction Brands”. Brown earned an MBA from Northern Illinois University, and a BS-Marketing Cum Laude from Southern Illinois University.