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FASB Proposes New Disclosures for Buyers in Supplier Finance Programs

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

Buyers that use supplier finance programs to pay for goods or services will need to cough up new details about how that payment structure impacts their working capital, according to a December 20, 2021, FASB proposal.

Supplier finance programs have grown in popularity over the past few years, offering both buyers and suppliers the benefits of lower cost and greater financial flexibility—a win-win amid today’s economic uncertainty.

Currently, there are no explicit GAAP disclosure requirements that provide transparency about a buyer’s use of the programs over time though they are widely used in certain industries. As a result, buyers do not disclose much about them in notes to financial statements, leaving investors with little clarity about the effects of those programs on working capital, liquidity, and cash flows.

In general, the objective of the proposal is to enable investors to understand the nature of the supplier finance program, activity during the period, changes from period to period, and potential magnitude, the proposal says.

The guidance was issued as proposed Accounting Standards Update (ASU) No. 2021-007Liabilities—Supplier Finance Programs (Subtopic 405-50) Disclosure of Supplier Finance Program Obligations, to solicit comment from the accounting profession on whether the package would produce the right measure and quality of information for investors, the allocators of capital in the U.S. capital marketplace.

Companies have until March 21, 2022, to submit comments.

Supplier finance programs – also called reverse factoring, payables finance, or structured payables arrangements – can vary.

One way a program may operate is that a buyer will set up the program with a finance provider. This allows the supplier to be paid by the finance provider for invoices that the buyer has approved before the invoice due date in an amount less than the stated invoice amount.

First, the buyer purchases goods or services from the supplier on credit, and then the supplier issues an invoice to the buyer, which the buyer will review and if acceptable, inform the finance provider that the invoice is approved. The finance provider then offers early payment to the supplier at a discount.

The supplier is incentivized to use this arrangement because the discount is based upon the credit rating of the buyer as opposed to a normal factoring arrangement where the discount would consider the credit rating of the supplier.

If the supplier elects to be paid early, the finance provider will collect payment from the buyer on the invoice due date. If the supplier does not elect to be paid early, the finance provider will just act as a paying agent and pass the buyer’s payment of the invoice amount to the supplier.

The FASB’s proposal specifically wants buyers to disclose:

  • the key terms of the program;
  • the obligation amount that the buyer has confirmed as valid to the third party that is outstanding at the end of the reporting period;
  • a rollforward of that amount;
  • a description of where that amount is presented in the balance sheet;
  • changes in that amount during the period, including the amount of obligations confirmed and the amount subsequently paid.

 

This article originally appeared in the December 21, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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