FASB mandates disclosures for supplier finance programs

For the purpose of increasing openness on how buyers of products and services use supplier finance programs, the Financial Accounting Standards Board (FASB) adopted new disclosure requirements.

ASU 2022-04, Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, the most recent accounting rules update from FASB, was released on September 29.

Mahesh Narayanasami, a partner with KPMG in the department of professional practice, said that this "standard is all about disclosure and does not provide new guidance on recognition and measurement. Although these programs have existed for a long time, FASB is addressing stakeholder feedback about the lack of transparency in buyers’ financial statements about these programs."

Stakeholders have voiced concerns for years about how difficult it is to evaluate the impact of these arrangements on a company's working capital, cash flows, and liquidity due to the absence of disclosure requirements and uneven financial statement presentation of these arrangements.

The ASU mandates that annual and interim financial statements include both qualitative and quantitative information. It relates to customers (both public and private enterprises) that make purchases of products and services through supplier financing schemes.

Except for a rollforward of the amount of obligation outstanding effective for fiscal years beginning after Dec. 15, 2023, it is applicable for annual and intermediate periods commencing Dec. 15, 2022 (Jan. 1, 2023, for calendar year-end firms). Early adoption is permitted.

Supplier financing commitments are currently not required to be shown in a certain way according to U.S. generally accepted accounting principles (GAAP), thus purchasers put them in accounts payable, short-term debt, or another current liability depending on the conditions of the program.

Since preparers should have previously taken into account guidance that has changed over time based on corporate publications and SEC (Securities and Exchange Commission) speeches, Narayanasami stated that the ASU "should not lead to reclassifications from payables to debt." He did point out that there is already variability in practice with regard to how these amounts are displayed on balance sheets and cash flow statements, and that the ASU does require disclosure of where these amounts are presented on the balance sheet.

"The main question for companies is whether the amount owed to suppliers should be accounts payable or whether changes in terms mean it should be debt. This affects classification and financial ratios ," he stated.

What programs are under the ASU's purview?

Supplier finance programs are agreements between a buyer of products or services and a bank or other financial institution to pay the buyer's debts to suppliers. The buyer then pays the third party's later-due invoice sums. When the buyer certifies the invoices are legitimate, the suppliers will either be paid on the due date or they can ask the third party to pay them in advance at a discounted rate.

Structured payable agreements, payables financing arrangements, and reverse factoring are a few names for these programs. Extended payment periods and discounted amounts due are advantages for buyers, whereas lower credit exposure and transaction costs are advantages for suppliers.

A definition of "supplier finance programs" based on particular contract conditions in the ASU was not developed by FASB. Instead, it opted to speak more generically about supplier finance schemes in the ASU, based on "indicators."

The basis for the ASU's conclusions stated that "A buyer's payment commitment under the programs generally is irrevocable... once the supplier invoice is confirmed as valid," and that "A buyer’s payment commitment under the programs generally is irrevocable … once the supplier invoice is confirmed as valid."

The ASU mandates taking into account all relevant information on the program, including agreements between buyers, their suppliers, and any other parties involved, in order to assess if purchasers have a supplier finance program. Excluded from these agreements are those where a third party charges a fee for administration but does not offer any finance. The ASU expressly excludes traditional credit cards, common factoring agreements, and payment processing agreements from its reach.

What new disclosure obligations are there?

In order for users to comprehend the nature of the buyer's engagement in the arrangements, activity throughout the period, variations from period to period, and the potential size of the program, Subtopic 405-50 requires both qualitative and quantitative disclosures concerning supplier finance programs.

The disclosures for each yearly reporting period include:

Key terms of the programs: Payment conditions (time, how payments are decided) are often described in a note to the financial statements, together with any assets pledged as security or other assurances pertaining to the obligation to pay the third party.

Obligation amount: The outstanding amount that the buyer verified as valid to the third party at the conclusion of the reporting period and A rollforward of the obligation, including the beginning balance, amounts added to the program, amounts settled under the program, and ending balance.

Buyers are required to report the amount of outstanding commitments that were still in effect at the conclusion of each intermediate reporting period. The essential terms of the programs and balance sheet presentation disclosures are necessary in each intermediate period in the year of implementation. After the first year, they will only be needed yearly.

With the exception of the obligation rollforward, which only has to be applied prospectively, disclosures must be provided for each period for which a balance sheet is produced.

The nature and types of programs vary, thus preparers must make a judgment call on how much description of program words to provide, according to Narayanasami.

What should preparers do now?

The effective date is quickly approaching. Buyers should assess their programs to see if they fall under the ASU's purview. If so, they should ensure that they have the procedures and safeguards in place that they will require to abide by the new disclosure obligations as soon as they go into effect.

In accordance with the ASU's scope, auditors can help organizations examine their current processes and develop new disclosures.

"Companies should evaluate how many programs they have, the number of financial intermediaries involved, and then determine which programs are in the ASU’s scope," according to Narayanasami. "They should also consider what they want to communicate and whether they will disclose the information by program or in the aggregate and how much to aggregate. The ASU does not provide specific guidance on when aggregation is appropriate."

Based on SEC Regulation S-X Rule 5-02 requirements, SEC filers are already obligated to disclose payables to trade creditors separately from borrowings on their balance sheets. Public firms should think about whether their initiatives qualify as "supplier finance programs" for the purposes of this ASU and if the portrayal of their balance sheet and cash flow is suitable.

Additionally, the ASU standards do not modify how disclosures of significant ongoing or future arrangements, such as supplier finance programs, must be made in management's discussion and analysis (MD&A) liquidity reports.

The SEC's issues in this area may have previously been addressed by registrants, therefore the ASU's qualitative disclosure requirements should not be too onerous for them, according to Narayanasami.

By fLEXI tEAM