The Financial Accounting Standards Board (FASB) on Monday issued a proposed update to its liabilities standard setting disclosure expectations for supplier finance programs.
Under current Generally Accepted Accounting Principles (GAAP), stakeholders are not given explicit disclosure requirements for supplier finance programs. FASB stated its Accounting Standards Codification Topic 405 update (Subtopic 405-50) is intended to help investors and other allocators of capital better consider the effect of these programs on a buyer’s working capital, liquidity, and cash flows.
Comments on the proposed Accounting Standards Update (ASU) are due by March 21, 2022.
The ASU would apply to all entities that use supplier finance programs in connection with the purchase of goods and services. As defined by FASB, supplier finance programs allow 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 the buyer has confirmed as valid. Other terms for these kinds of transactions include reverse factoring, payables finance, or structured payables arrangements.
In addition to the lack of explicit guidance currently included in GAAP, FASB stakeholders noted a lack of transparency around the presentation of obligations covered by supplier finance programs on balance sheets.
To address this feedback, the ASU would require the buyer in a supplier finance program to disclose sufficient information about the program to allow an investor to understand its nature, activity during the period, changes from period to period, and potential magnitude. “These disclosures would include the key terms of the program, as well as the obligation amount that the buyer has confirmed as valid to the third party that is outstanding at the end of the reporting period, a rollforward of that amount, and a description of where that amount is presented in the balance sheet,” FASB stated.
FASB added the proposed update would not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs.
An effective date for the proposal will be determined following consideration of comments received.
Enhanced guidance around supplier finance program disclosures was requested by the Big Four accounting firms—Deloitte, EY, KPMG, and PwC—in a letter to FASB sent in October 2019.