Mr. Hausherr—chair of the Global Supply Chain Finance Forum—said the FASB’s disclosure rules are not a reason corporate buyers should feel they have to shut down programs. “From the outset the industry was involved and gave its recommendations. We explained to the accounting bodies what we actually do and provided specific standards they could refer to,” he said. “What we are talking about now is not an accounting debate, it’s a reporting discussion. There may be an indirect impact on the accounting, but if industry recommendations are followed, there’s no need to step into a classification or accounting debate.”
What Must Be Disclosed
Here is the FASB’s description1 of the main provisions of what corporate buyers that use SCF programs must disclose 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:
a. The amount outstanding that remains unpaid by the buyer as of the end of the annual period (the outstanding confirmed amount)
b. A description of where those obligations are presented in the balance sheet
c. A rollforward of those obligations during the annual period, including the amount of obligations confirmed and the amount of obligations subsequently paid. [Note: the roll-forward requirement goes into effect in 2024.]
“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.”
What To Do Now: A Checklist
And here’s a checklist of considerations provided by Deutsche Bank for corporates reviewing the new FASB disclosure rule and examining an existing SCF program or designing a new one.
- Ensure that key stakeholders know the disclosure rule exists and that your auditor is up to speed with all its requirements.
- Understand the implications of the regulation and how a payables finance program may be presented ideally in the balance sheet.
- Employ sensitivity on contractual design with the bank/SCF service provider and how the payables finance program is set up with respect to the buyer-seller relationship; the buyer-bank relationship; and the seller-bank relationship. These need to follow a certain structure laid out in industry standards.
- Corporate buyers—and their procurement teams—must understand the SCF program is optional; no supplier may be forced into a payables finance program.
- Ensure that payment terms make sense and fit the industry and region. Make sure the share of overall procurement value or volume run through the SCF program is not excessive.
Although some corporates may look for options to traditional supply chain finance programs that do not require disclosure, many will not. “We expect most corporates currently using SCF programs to maintain them,” Mr. Dunn said. “We believe the economic value unlocked for both buyers and their suppliers will outweigh any potential burden created by disclosure for a program.”