The Financial Accounting Standards Board (FASB) added new disclosure requirements for buyers of goods and services intended to increase transparency about how they use supplier finance programs.
FASB’s latest accounting standards update—ASU 2022-04, Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations—was issued Sept. 29.
“This standard is all about disclosure and does not provide new guidance on recognition and measurement,” said Mahesh Narayanasami, KPMG partner in the department of professional practice. “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 expressed concerns for years that the lack of disclosure requirements and inconsistent financial statement presentation of these arrangements makes it difficult to assess their effect on companies’ working capital, cash flows, and liquidity.
The ASU requires both qualitative and quantitative disclosures in annual and interim financial statements. It applies to buyers (both public and nonpublic companies) that use supplier finance programs for purchases of goods and services.
It is effective for annual and interim periods beginning Dec. 15, 2022 (Jan. 1, 2023, for calendar year-end companies), except for a rollforward of the amount of obligation outstanding effective for fiscal years beginning after Dec. 15, 2023. Early adoption is permitted.
There are no current specific requirements in U.S. generally accepted accounting principles (GAAP) about presentation of supplier finance obligations, so buyers present them either in accounts payable, short-term debt, or in another current liability based on the program terms.
“Generally, the ASU should not lead to reclassifications from payables to debt because preparers should have already considered guidance that has evolved over time based on firm publications and SEC (Securities and Exchange Commission) speeches,” Narayanasami said. However, he noted the ASU does require disclosure of where these amounts are presented on the balance sheet, and that there is currently diversity in practice in presentation on balance sheets and cash flow statements.
“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 said.
What programs are in the ASU’s scope?
Supplier finance programs are arrangements where a buyer of goods or services has an agreement with a third-party intermediary or bank to settle the buyer’s obligations with suppliers. The buyer then pays the invoice amounts due to the third party later. The suppliers have the option to request payment from the third party earlier than the invoice due date at a discounted amount, or they will be paid on the due date once the buyer confirms the invoices are valid.
These programs have several names, including structured payable arrangements, payables finance arrangements, and reverse factoring. Benefits for buyers include receiving extended payment terms and discounted amounts due, while benefits for suppliers include reduced credit exposure and earning transaction fees, among others.
FASB did not create a definition of “supplier finance programs” based on specific contract terms in the ASU. Instead, it chose to describe supplier finance programs in the ASU more generally, based on “indicators.”
The ASU’s basis for conclusions stated, “A buyer’s commitment to pay certain invoices to a third-party intermediary is an indicator that a supplier finance program may have been established,” and, “A buyer’s payment commitment under the programs generally is irrevocable … once the supplier invoice is confirmed as valid.”
To determine whether buyers have a supplier finance program, the ASU calls for consideration of all available evidence about the program, including arrangements between buyers, their suppliers, and the third parties involved. Arrangements where a third party provides administration for a fee but does not provide any financing are excluded. Traditional credit cards, normal factoring arrangements, and payment processing arrangements are specifically excluded from the scope of the ASU.
What are the new disclosure requirements?
Subtopic 405-50 requires both qualitative and quantitative disclosures about supplier finance programs sufficient for users to understand the nature of the buyer’s involvement in the arrangements, activity during the period, changes from period to period, and the potential magnitude of the program.
For each annual reporting period, the disclosures include:
Key terms of the programs: General description in a note to the financial statements of payment terms (timing, how payment is determined); assets pledged as security or other guarantees related to the commitment to pay the third party; and
Obligation amount: The outstanding amount the buyer confirmed as valid to the third party at the end of the reporting period; where the amount(s) are presented on the balance sheet; and a rollforward of the obligation, including the beginning balance, amounts added to the program, amounts settled under the program, and ending balance.
For interim reporting periods, buyers must disclose the amount of outstanding obligations confirmed as valid at the end of the period. In the year of adoption, the key terms of the programs and balance sheet presentation disclosures are required in each interim period. These will only be required annually after the initial year.
Retrospective application is required, so disclosures must be presented for each period for which a balance sheet is presented (except for the obligation rollforward—that only must be applied prospectively).
“It is a judgment call on the part of preparers on how much description of program terms to include because the nature and types of programs vary,” Narayanasami said.
What should preparers do now?
The effective date is not far away. Buyers should evaluate their programs to determine whether they fall within the scope of the ASU. If so, they should make sure they have the processes and controls in place they will need to comply with the new disclosure requirements at the effective dates.
Auditors can provide assistance to companies in their review of existing programs based on the ASU scope and in drafting their 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,” Narayanasami said. “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.”
SEC filers are already required to present payables to trade creditors separately from borrowings on their balance sheets, based on SEC Regulation S-X Rule 5-02 requirements. Public companies should consider whether their programs are “supplier finance programs” under this ASU and whether their balance sheet and cash flow presentations are appropriate.
In addition, current management’s discussion and analysis (MD&A) liquidity requirements address disclosures of material current or planned arrangements, including supplier finance programs, that are unchanged by the ASU requirements.
“Registrants may have already responded to SEC comments in this area, and the ASU’s qualitative disclosure requirements should not be too onerous for them,” Narayanasami said.