What Do New Changes to FASB Accounting Standards Mean for Supply Chain Finance?
By 5 minute read• Published October 21, 2022 •
The Financial Accounting Standards Board (FASB) recently issued new requirements for how supplier finance programs must be reported by public companies. Since revealing these new disclosure requirements, we’ve fielded a lot of questions from buyers. What do these changes mean for our business? Will they be difficult to implement? Should I be worried?
Here’s what you need to know – and why PrimeRevenue customers don’t need to worry:
Until now, there have been no requirements for U.S.-based public companies to disclose if they are running a supplier finance program – whether it be supply chain finance, payables finance or structured payables arrangements. Under the new rules, companies using supplier finance will be required to disclose information about the program in order “to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude.”
For fiscal years starting after December 15, 2022, buyers will be required to disclose the following information in each annual reporting period:
- The key terms of the program, including a description of the payment terms (including payment timing and basis for its determination) and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary.
- For the obligations that the buyer has confirmed as valid to the finance provider or intermediary.
- The amount outstanding that remains unpaid by the buyer as of the end of the annual period (the outstanding confirmed amount).
- A description of where those obligations are presented in the balance sheet.
- A roll-forward of those obligations during the annual period, including the number of obligations confirmed and the amount of obligations subsequently paid.
- The buyer should disclose the outstanding confirmed amount as of the end of each interim period.
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.
Is this a good thing or a bad thing?
As we’ve stated in the past, clarification on accounting treatment for supply chain finance is a good thing. Clarification keeps bad actors and bad supplier finance accounting treatment decisions at bay. Transparency gives external financial stakeholders (investors, banks, ratings agencies, shareholders, etc.) a clearer understanding of how supplier finance affects a company’s working capital and cash flow. Knowing who a company owes, how much and when are basic tenets of responsible financial reporting.
PrimeRevenue has always advised customers to disclose information about early payment programs – specifically around third-party services that give suppliers the option to finance advance payment and the value of outstanding receivables. In addition, we work with our customers and their auditors to provide required information on a quarterly basis. Some companies keep their disclosures brief; others share more details. So, in essence, our customers are already meeting most of these requirements with our help, which is a great thing. But removing the grey area will create more consistency, which we believe will be good for everyone.
Why are supplier payment terms such an important focus of these changes?
The biggest change in the new requirements is disclosure of supplier payment terms and how these payment terms have been determined.
This obviously underscores the importance of validating that a buyer’s payment terms are in line with industry averages. PrimeRevenue has deep expertise in helping clients determine and validate “fair” supplier payment terms. We’re already doing this. However, we caution companies that rely on other third-party sources for this information – supplier payment terms vary widely by industry. It’s important to consult with experts that understand the nuances and ranges at an industry-by-industry level as well as the importance of a thoughtfully designed supply chain finance program.
What are the implications for non-U.S. accounting standards?
We expect similar requirements will be issued by other accounting standard-setting bodies in Europe and beyond. There is a global need for clarification and consistency in how supplier finance programs are disclosed, and there are ongoing efforts by the International Accounting Standards Board (IASB) to set similar requirements for the 140+ countries they serve.
So…is this going to be another accounting headache?
For PrimeRevenue customers, the answer is no! We’re already helping many customers disclose the bulk of the information covered in the new requirements. We understand the nuances of the requirements for what must be disclosed, and have the technology, people, and processes in place to quickly and easily provide the information your auditors will need.
If you have further questions about how these changes will impact your business, let us know.