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FASB

Newly Minted FASB Rules on Supplier Finance Programs Will Reveal Financial Health of Companies

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

Starting next year, U.S. companies that use supplier finance programs to buy goods or services must disclose the full terms of those programs, including assets pledged to secure the transaction.

The FASB on Sept. 29, 2022, issued Accounting Standard Update (ASU) No. 2022-04Liabilities–Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, to require a buyer in such financing arrangements to disclose in financial statement footnotes details about their business impacts.

Buyers must disclose the key terms of the program and where any obligations owed to a finance company have been presented in the financial statements, plus a rollforward of those obligations—information investors would find useful, according to rule text.

Supplier finance programs vary and are popular because they offer a flexible structure for paying for goods and services, enabling large companies to keep more cash on hand. But because U.S. GAAP does not require them to, companies have not been transparent about the effects those programs have on working capital, liquidity, and cash flows. That will change.

“The FASB’s new ASU responds to requests from investors for greater transparency around a buyer’s use of supplier finance programs,” FASB Chair Richard Jones said in a statement. “It enhances transparency by requiring new disclosures intended to help them better consider the effect of these programs on a company’s working capital, liquidity, and cash flows over time.”

A company “may incur costs to enhance its information technology systems and change its processes and controls,” but the rules are operable and the FASB “does not anticipate that most buyers in a supplier finance program will incur significant costs in complying with the amendments,” the board concluded.

The provisions take effect on Jan. 1, 2023, for calendar year-end filers.

Fills a Gap in GAAP

One way a supplier finance program may operate is that a buyer sets 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.

The board said that because supplier finance programs are a relatively new form of arrangement that continue to evolve, they stuck to a general description of the arrangement. The rules also include an indicator to assist accountants in identifying the programs. Specifically, “a buyer’s commitment to pay certain invoices to a third-party intermediary is an indicator that a supplier finance program may have been established.”

Accountants back the guidance as a good first step but said registrants may need to tread with caution in presentation matters.

“GAAP currently has no guidance on the accounting for these programs by the buyer, so this ASU will help fill in a ‘gap’ in GAAP,” Scott Ehrlich, president of Mind the GAAP, LLC, said. “Now, even after this ASU becomes effective, there still won’t be any specific guidance in US GAAP on where to present the amounts owed by the buyers to the finance companies,” he said. “That is, it will be up to the buyer to decide whether these obligations should be presented as accounts payable or short-term debt – although SEC registrants might want to tread carefully here, as the Commission doesn’t seem to like presentation as accounts payable.”

By in large, “we support the provisions of this new ASU,” Ehrlich added.

Nitty-Gritty of Disclosures

The standard requires that in each annual reporting period, a buyer must disclose:

  • 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 to the finance provider or intermediary: a) the amount outstanding that remains unpaid by the buyer as of the end of the annual period (the outstanding confirmed amount); b) a description of where those obligations are presented in the balance sheet; c) a rollforward of those obligations during the annual period, including the amount of obligations confirmed and the amount of obligations subsequently paid.

In each interim reporting period, the buyer must disclose:

  • The amount of obligations outstanding that the buyer has confirmed as valid to the finance provider or intermediary as of the end of the interim period.

Fiscal Year Filers and Transition

For fiscal year filers, the rules take effect after Dec. 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after Dec. 15, 2023. Early adoption is permitted, the ASU states.

During the fiscal year of adoption, “the information on the key terms of the programs and the balance sheet presentation of the program obligations, which are annual disclosure requirements, should be disclosed in each interim period.”

Companies must apply the guidance retrospectively to each period in which a balance sheet is presented; the amended rollforward information should be applied prospectively.

 

This article originally appeared in the October 3, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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