The number of companies that use supply chain finance has exploded – especially among publicly traded companies eager to improve cash flow, pay down debt and deliver more value to shareholders while supporting their supply chain. In fact, The Economist reports supply chain finance is a $21B market that represents 18% of all trade finance transactions.
Unsurprisingly, accounting bodies are taking notice. The prevalence of supply chain finance has prompted many to become more proficient in understanding how these programs operate, the financial benefits they offer to participants, and the disclosures (if any) that should be made in publicly-filed financial statements.
Codifying industry best practice.
We believe the uptick in interest from accounting organizations is a direct result of supply chain finance’s growing popularity. A decade ago, supply chain finance programs were few and far between. The early adopters pioneered both the practical implementation of supply chain finance programs as well as the general standards around accounting treatment. Today, a majority of industry-leading enterprises use supply chain finance to improve their working capital and provide an early payment option for suppliers.
Neither the SEC nor FASB has ever officially provided clear and specific guidance on how supply chain finance programs should be structured and how to account for them. However, the Big 4 accounting firms have been assessing these programs for years and opining on the appropriate accounting treatment. Over time, industry practitioners in conjunction with the Big 4 have loosely codified a “right way” and a “wrong way” to implement programs with an eye towards responsibility and accounting neutrality.
Is your provider clear on established best practices governing supply chain finance program disclosure?
As supply chain finance gains popularity, accounting organizations have sought a clearer understanding of best practices governing program disclosure. What they’ve learned is that established protocols and best practices make sure the right program information is disclosed properly and trade payables are not reclassified as debt.
When implementing a program, it’s critical to ensure your provider is experienced with these conversations and understands the nuances of “right way” supply chain finance.PrimeRevenue has guided customers through these conversations while helping shape the guidelines for responsible supply chain finance programs.
Practicing Responsible, Sustainable Supply Chain Finance
We advise our clients to take an unambiguous approach to supply chain finance, and none of our customers that follow our conservative approach have had any issues. By adopting the following best practices, companies can feel comfortable and confident in the legitimacy of their program and rest assured they are practicing responsible supply chain finance.
First and foremost, companies need to make sure supply chain finance rolls up under trade payables. Check out this post about proper accounting treatment and how to avoid the reclassification of trade payables.
Second, if the size of your program reaches the threshold of materiality (and it should: otherwise, why are you implementing a program?), there should be a footnote in your financial disclosures. This provides an extra layer of transparency to the supply chain finance program and ensures stakeholders are aware of the use of the program.
Lastly, partner with a provider that acts as a facilitator of supply chain finance programs. With a third party sitting in the middle to manage the workflows between buyer, supplier and funder, there is no direct relationship between the company sponsoring the supply chain finance program and the financial institution (funder). This eliminates the direct benefit back to the buyer (rebates) and precludes any chance of negative accounting treatment.
Looking Ahead to 2021
We believe 2021 will bring even greater transparency to supply chain finance accounting best practices. It’s a good thing for all parties involved – buyers, suppliers, funders and providers. Supply chain finance has already proven to be instrumental in helping companies navigate the dual pressures of economic uncertainty and transformation, and those pressures will only increase in the coming year. More clarity around best practices for proper accounting treatment and financial disclosure will only strengthen its potential to benefit buyers and suppliers.
Published December 16, 2019