FASB Update: What Percentage of My Accounts Payables Should Be Represented in Supply Chain Finance Disclosures?

I recently spoke with a reporter about the Financial Accounting Standards Board’s (FASB) new requirements for how supplier finance programs should be disclosed by public companies. As companies begin to share more about their supply chain finance programs, it’s only natural for questions to arise. We’ve taken a strong stance on transparency and are encouraged that regulatory bodies like FASB and IASB are giving clearer guidance on what companies should disclose. The question in this case was this – how much of a company’s accounts payable should be involved in a supply chain finance program? In other words, how much is too much?

It’s a fair question. Some analysts have been surprised at the ranges they’re seeing in recent disclosures. The percentage for one company may be 80% while another may be 25%. What do these numbers indicate (if anything)? Is there some sort of unofficial threshold treasury and finance leaders should be aware of?

How much of a company’s accounts payable should be involved in a supply chain finance program?

The “how much is too much” question is irrelevant. A company can have 100% of their accounts payables represented in their supply chain finance program – just as long as the program is being run properly. Some of the key indicators of a properly run program include payment terms are negotiated with the suppliers (not the funders), suppliers have discretion over whether they elect early payment, and funders have no additional rights to payment than suppliers.

Remember – the obligations within a supply chain finance program are no different than any other AP obligation. The company is obligated to pay the full amount owed to a supplier on the date it is due.

One thing to consider is that while supply chain finance has been around for decades, there are certain industries that use it more often than others. Automotive and food and beverage are two sectors where supply chain finance programs have been widely popular for years. It’s not uncommon to see companies in these sectors run a larger percentage of their accounts payables through supply chain finance. In other industries where supply chain finance is still nascent, the percentages tend to be lower.

What does a high or low accounts payable percentage indicate (if anything)?

Higher accounts payable percentages suggest a couple of things. First, it shows the company has operationalized supply chain finance and the program has essentially reached “standard operating procedure” status. This indicates the company is more fully optimizing its cash flow, which is a positive signal to customers, suppliers, investors and so on.

Second, a higher percentage is a strong sign that the company is giving more suppliers the opportunity to participate in supply chain finance. That’s also good news. Historically, supply chain finance programs have only been reserved for a company’s largest or most strategic suppliers and/or those limited to certain regions. By expanding the program’s reach to suppliers of all sizes in more geographies, both buyers and suppliers are able to improve cash flow and financial forecasting. This demonstrates a healthy commitment to supply chain fiscal health and resiliency.

What happens if the percentage of accounts payables increases or decreases? What does that mean to the outside world?

Any material variances in the percentage of accounts payables being run through a supply chain finance program should be viewed through the lens of the natural business cycle. Retailers typically see a spike in accounts payables around the holidays. Food producer costs are highly seasonal. There is a normal course of business in many industries. There are often other non-cyclical factors in play. One example is when a company rolls out a supply chain finance program to a new group of suppliers, or when a large supplier exits the program. These factors (and numerous others) can move the needle on AP percentages quarter-to-quarter without implying anything noteworthy about the business’s financial health.

It’s also important to point out we are still in the early days of the FASB’s new disclosure requirements. And while we’ve learned a lot already, it will take a couple of years of quarterly disclosures for companies (and the market) to determine what’s a “normal” baseline for accounts payables/supply chain finance program percentages. From there, companies will be able to better understand what falls within the parameters of the natural business cycle and how a company’s supplier finance program is expanding or contracting.

When will the International Accounting Standards Board update their disclosure requirements for supplier finance programs?

They already have! On May 25, 2023, the IASB announced new requirements for specific disclosures about supplier finance arrangements (SFAs). Similar to the provenance of the FASBs new requirements, this is in response to investor requests for more detailed information about supplier finance programs and how they impact the business’s liabilities and liquidity risk.

The IASB’s new requirements are almost identical to the new requirements set forth by the FASB at the end of last year. They go into effect for annual reporting periods beginning on or after January 1, 2024.

Still have questions?

If you have questions about FASB or IASB disclosure requirements for supplier finance programs, let us know. As I’ve said before, when it comes to dissecting and executing on these new guidelines, experience matters. PrimeRevenue has been helping current clients meet today’s requirements for the last four years, and we believe our work has helped shape the current direction of new reporting requirements. It’s also shaped how our solution helps companies meet these requirements. We look forward to helping our clients easily and painlessly usher in a new era of transparency around supply chain finance.