The FASB on September 22, 2021, voted to issue a proposal that would require a buyer to disclose its supplier finance program obligations, three-tiered type agreements with a payment process that investors say they get no information on.
The guidance will be proposed either late in the fourth quarter this year or early 2022, according to the discussions. Companies will get 90 days to submit comments.
If finalized, companies would be required to provide the disclosures retrospectively for each period in which a balance sheet is presented, the board agreed. The guidance would allow for early adoption.
“The retrospective application enables an analyst to start a trend analysis on day one,” analyst and FASB member Gary Buesser, said. “To me investors are asking us for information on these new programs and they generally have no disclosure, therefore the sooner this is implemented the better,” he said. “So we need to have an effective date much sooner than some of those more complex standards.”
Supplier finance programs involve three parties that work together as follows: a reporting entity confirms to a finance provider certain supplier invoices that it intends to pay, the finance provider pays their reporting entity suppliers, and the reporting entity later repays the finance provider often on the same terms that the reporting entity had negotiated with the supplier.
The forthcoming proposal would require the buyer to disclose the key terms of the program, the amount of obligations confirmed by the buyer that is outstanding at the end of the reporting period (the outstanding confirmed amount), and a description of where that amount is presented in the balance sheet, according to board discussions.
The board also voted to require a buyer to annually disclose a rollforward of the outstanding confirmed amount, which would include the outstanding confirmed amount at the beginning of the reporting period, the amounts added to the program, and the amounts settled through the program in the period. The rollforward would not be required on an interim basis, the board said by 4 to 3 vote.
In general, board members said the rollforward would provide useful context to an investor to understand the size and the scale of the program, and would enable investors to ask better questions.
“The rollforward information is compelling to financial statement users to really fill out their understanding of the program,” FASB member Fred Cannon, also an analyst, said. “I do think this rollforward information would be critical,”
The guidance is being developed at a time when use of supplier finance agreements have grown in the U.S. A 2019 survey found that 49 percent of companies said they have supplier finance programs, and another 37 percent were actively considering adding these programs, according to prior board discussions
Currently, U.S. GAAP does not require companies to disclose supply-chain financing arrangements, and analysts have questioned whether companies have less cash than they are reporting.
Analysts have said that since these programs allow companies to extend their payment terms, they are looking to see whether there could be a distortion in the cash flow from operations.
This article originally appeared in the September 23, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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