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Perspective
23 November 2022

Supplier finance in plain sight: What do the new FASB disclosure rules mean for our industry?

In:
Oil & gas
Region:
Middle East & Africa, Americas, Asia-Pacific, Europe
Head of Trade, Treasury and Risk
There is going to be a major change in the world of supply chain finance (SCF) next year that will bring more transparency to SCF programmes. What do the new FASB standards mean for corporate suppliers and buyers and for investors?

On 29 September, the Financial Accounting Standards Board (FASB) released a new standard on disclosure which will affect corporate supplier finance programmes, and so will impact SCF as a whole. In 2023, companies that report in the US will start to have to disclose outstanding balances and key terms of the popular inventory-financing schemes, and disclosure will become more standardised. How will more disclosure work, and how can it become a more positive thing for companies, SCF as a product, and ultimately, for investors?

On 7 December there is an opportunity to quiz the FASB itself what the disclosures will mean for corporates and for trade. Gary R Buesser, board member at the FASB, in the US, will be talking live to TXF about the new disclosure rules.

While the FASB’s disclosure rules specifically make supplier finance programmes less opaque, they won’t require reclassification of trade payables. Indeed, the standard does not mean that a company has to reclassify SCF obligations on its balance sheet from trade payables to bank debt. Nonetheless, there will be impacts for companies running SCF programmes. 

What’s happening?

Companies that extend payment terms with their suppliers and set up SCF facilities so those suppliers can get their money earlier from banks or from other finance providers will have to let the regulator know about the terms and size of their SCF programmes through a narrative in their financial statement footnotes. 

That means that people who use the company’s financial statements should have enough information to know what the nature of the programme is, how active it has been, how that has changed and how big it is. This is intended to help make more visible the effect of these programmes on a company’s working capital, liquidity, and cash flows over time. Companies (buyers) will need to provide certain qualitative and quantitative information.

More reporting requirements for corporates are not universally popular (and corporates’ concerns, such as Pfizer’s arguments against elements of roll forward reporting – amounts invoiced that haven’t been paid out – are publicly shown in letters to the regulator in advance of the statement), but the transparency itself should be beneficial, and it will become more standardised. “It’s good for [corporates] because the analysts and investors who are reading the reports will get a better understanding of the balance sheet and the company’s assets and liabilities. And at the end of the day, they may be more willing to invest,” says Christian Hausherr, chair of the Global Supply Chain Finance Forum, and product manager for supply chain finance, EMEA, at Deutsche Bank.

 Why now? Reporting not accounting

The FASB’s actions have been a long time in the making (read here about the US Securities and Exchange Commission (SEC’s) moves to push disclosure that TXF wrote prior to COVID and Greensill). For instance, as far back as 2019, the SEC asked Keurig Dr Pepper, (regarding 10-K filings for FY to December 2018) for the company to provide its own analysis of whether its accounts payable programme (not provided by a bank) should be considered as debt financing instead of accounts payable.

“From the outset, the industry was involved and gave its recommendations,” says Hausherr. “We explained to the accounting bodies what we actually do and provided specific standards they could refer to. What we are talking about now is not an accounting debate, it’s a reporting discussion. There may be an indirect impact on the accounting, but if industry recommendations are followed, there’s no need to step into a classification or accounting debate.”

Some SCF programmes had been criticised as they have miscategorised as having debt-like features. Widely publicised failures, and opacity, which could conceal potentially fraudulent practices (as alleged in the Greensill collapse), have not been easy to spot on balance sheets. Indeed, some companies were able to conceal debt by classifying it as trade payables instead. 

Until now, company buyers under US GAAP (generally accepted accounting principles) haven’t had to say where in accounts payable or in another balance sheet line item their SCF programmes should sit. Now, if vendors are paid early by a bank or other third-party finance provider, they will have to at least disclose the terms and size of the supplier finance programmes, although they don’t have to reclassify them as, say, bank debt.

That’s important, as it means corporates should not fear having to shut down supplier finance programmes because of the regulation making them have to reclassify the programmes. “You need to determine what you actually do in a supply chain finance programme and you need to report. And it’s at the absolute discretion of the auditor whether this is trade payables or debt,” says Hausherr. 

According to the FASB: 

“A company that uses a supplier finance programme in connection with the purchase of goods or services will be required to disclose sufficient information about the programme to allow a user of financial statements to understand the programme’s nature, activity during the period, changes from period to period, and potential magnitude. Specifically, a buyer will be required to provide the following qualitative and quantitative information:

1.    The key terms of the programme, 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

2.    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 roll forward of those obligations during the annual period, including the amount of obligations confirmed and the amount of obligations subsequently paid.

The buyer should disclose the outstanding confirmed amount as of the end of each interim period.”

What about the rest of the SCF world?

US regulators like everything to be in plain sight. The devil may be in the details, but the details are there, and FASB traditionally keeps its workings in view of anyone who wants to see them. It cannot go unnoticed that many of the scandals in SCF – notably Abengoa – occurred under jurisdictions that are not under US GAAP and regulated by FASB. Reverse factoring, aka ‘confirming’ in the Spanish-speaking world – is a popular tool in Europe. 

So, what of the International Accounting Standards Board (IASB) itself? Is it’s tack likely to be radically different from that of IASB? It’s complicated. IASB, in July 2022 noted, “The IASB discussed feedback on its Exposure Draft Supplier Finance Arrangements. The Exposure Draft proposed amendments to the disclosure requirements in IAS 7 Statement of Cash Flows and in IFRS 7 Financial Instruments: Disclosures to enable users of financial statements to assess the effects of such arrangements. The IASB was not asked to make any decisions.”

In a late November feedback analysis agenda for the IASB, it looks possible that something could happen soon on supplier finance disclosures – and the paper makes for interesting reading for those interested in this kind of thing. Another case of watch this space in Europe perhaps. 

Nonetheless, what’s happening in the US should certainly be on the agenda of any corporate who uses, or plans to use, supplier finance.

Don’t miss the chance to find out more from the FASB itself on 7 December. Register and submit your questions here.
 

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