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New Accounting Disclosure Rules for Supplier Finance Programs Will Take Effect Next Year

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

Companies that use supplier finance programs to buy goods and services will need to start disclosing the key terms of those programs, including payment terms, starting Jan. 1, 2023, the nation’s accounting rulemaker said.

The disclosures will reveal the timing of each payment and the basis for it, according to FASB decisions on July 20, 2022. Companies will be required to also disclose assets pledged as security or other forms of guarantees provided for the committed payment to a finance provider or intermediary.

“I think by clarifying payment terms including payment timing, we really are telling preparers ‘if it’s 90 days, we need it for 90 days; if it’s 180 days, we need 180 days’ – and that’s critical information because that’s the information, in my view, that users are going to track over time,” FASB member Fred Cannon said. “I also believe that the assets pledged as securities is an important indicator especially for debt investors to understand if there’s been added support for these programs,” he said.

A new standard will be issued in the fall.

Supplier finance programs, also referred to as reverse factoring, structured payables, payable finance, and vendor payable programs, have increased in popularity but carry hidden risks.

Programs vary, but operate between three parties, each of which benefit. A typical program enables a company to work with a finance provider, i.e. an intermediary, to buy goods or services from multiple suppliers. The buyer arranges with the intermediary to pay the suppliers on its behalf. The buyer settles with the intermediary and pays a fee, which can also be delayed. This enables the buyer to have more cash on hand, which in turn improves its working capital. Suppliers can also benefit if the intermediary pays early.

Investors and other financial statement users have said that because there are no specific disclosure requirements in U.S. GAAP for such programs, companies provide skimpy disclosures, if any.

In voting to issue the new rules, FASB members said they believe it will significantly improve the information investors get at no major cost for companies. However, the guidance will not be converged with IFRS Accounting Standards, though Big Four accounting firms – that typically service multinational companies – brought the topic to the board.

The FASB will therefore monitor the IASB’s project, the discussions indicated.

“This was raised to us by practitioners, and users were on board with them,” FASB Chair Richard Jones said. While it is important for the board to learn from the IASB efforts on its more broadly scoped project, the U.S. GAAP codification has “disclosures related to debt financings including assets that have been pledged [which] it would still be applicable if you had a debt financing, which is similar to what the IASB is looking at,” he said.

The discussions wrapped up redeliberations on Proposed Accounting Standards Update (ASU) No. 2021-007Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which was issued in December 2021 for public comment.

In voting to finalize the proposal, the FASB also considered but decided that no special consideration will be given to private companies because new recognition or presentation requirements are not being created. Moreover, the programs often would be supported by technology that makes the relevant information required to be disclosed readily accessible, according to the discussions.

For fiscal-year reporters, the standard would apply retrospectively beginning after Dec. 15, 2022, except for the annual roll-forward information, which would be required prospectively in fiscal years beginning after Dec. 15, 2023.

During the year of adoption, when the amount of the obligation outstanding is disclosed in the first interim period, the information of the key terms of the programs and the balance sheet presentation of the program obligations should also be disclosed.

 

This article originally appeared in the July 21, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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