New Disclosures for Supply Finance Arrangements
A supplier finance program allows a buyer to offer its suppliers the option to be paid by a third party in advance of an invoice due date, based on invoices that the buyer has confirmed as valid. These transactions also are commonly known as reverse factoring, payables finance, or structured payables arrangements. On September 29, 2022, FASB issued Accounting Standards Update (ASU) 2022-04, Disclosure of Supplier Finance Program Obligations, which requires qualitative and quantitative information about such programs to allow an investor to understand the program’s nature, activity during the period, period-to-period changes, and potential magnitude. The effective date is the same for all entities with an extra year to implement rollforward disclosures.
Supply chain finance volumes have grown significantly in recent years, reaching a total value of $1.31 trillion in 2020, according to the latest BCR World Supply Chain Finance Report. In one high-profile incident in March 2021, U.K.-based Greensill Capital declared bankruptcy with losses estimated at $3 billion. Without standardized disclosures, analysts and regulators had to scour financial statements for clues about such programs, such as a sudden increase in cash flows or fluctuations in receivables and payables period over period to estimate the size and scope of such programs as there previously were no specific GAAP disclosure requirements. 1 As early as 2003, SEC staff members were speaking about these arrangements and the accounting implications. 2
The ASU applies to all entities that use supplier finance programs for the purchase of goods and services (defined as “buyers”). A supplier finance program is an arrangement that has all the following characteristics:
- An entity enters into an agreement with a finance provider or an intermediary
- The entity confirms supplier invoices as valid to the finance provider or intermediary under the agreement described above
- The entity’s supplier has the option to request early payment from a party other than the entity for invoices that the entity has confirmed as valid
Although not determinative, an indicator that an entity may have a supplier finance program is the commitment to pay a party other than the supplier for a confirmed invoice. An entity should consider all available evidence to determine if it has a supplier finance program.
FASB carefully crafted a narrow scope to avoid including other common payment arrangements like credit cards, payment processing, and normal factoring. The ASU would apply only for the buyer in a supplier finance program because disclosure requirements already exist in other accounting guidance for the supplier and the finance provider.
The ASU intentionally does not address the classification of the related payables in the financial statements. Companies will need to continue to evaluate the nature of the programs and related payables to determine if they should be classified as accounts payable or some form of bank debt in the balance sheet, with classification of cash flows in the statement of cash flows following suit.
A buyer would disclose the following program information in each annual reporting period:
- Key program terms, including but not limited to:
- A description of the payment terms, including payment timing and basis for its determination
- Assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary
- For the obligation amount that the buyer has confirmed as valid to the finance provider or intermediary, the amount outstanding as of the end of the period (the outstanding confirmed amount) and the following information about those obligations:
- A description of where that amount is presented in the balance sheet
- A rollforward of those obligations during the annual period, including the amount at the beginning of the reporting period, amounts added, obligations settled, and the ending balance
In each interim reporting period, the buyer should 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.
Effective Date & Transition
ASU 2022-04 is effective for all entities, except for the rollforward information, for fiscal years beginning after December 15, 2022, including interim periods therein. The rollforward information is effective for all entities for fiscal years beginning after December 15, 2023. Early adoption is permitted.
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.
The ASU should be applied retrospectively to all periods in which a balance sheet is presented, except for the rollforward information, which should be applied prospectively.
If you have questions about these changes, contact a professional at FORVIS today.
- 1For public entities, Regulation S-X, Rule 5-02, Balance Sheets, requires separate presentation of certain types of accounts and notes payable, including amounts payable to banks for borrowings and amounts payable to trade creditors. SEC Regulation S-K, Item 303, Management’s Discussion and Analysis of Financial Condition and Results of Operations, requires that a public entity discuss its liquidity and capital resources, and the SEC staff issued guidance in June 2020 to remind public entities of the need to consider the effect of the programs, among other activities, when preparing that discussion. Some public entities disclose information about their programs in accordance with those SEC requirements.
- 2Speech by Robert Comerford, SEC OCA Professional Accounting Fellow at the 2003 AICPA National Conference on Current SEC Developments.