The Financial Accounting Standards Board on Wednesday proposed a rule that would require companies to disclose key terms and the extent of their supply chain financing, a move designed to help investors better understand the short-term lending mechanism.
Supply chain financing, often provided by banks, pays a company’s suppliers earlier than they normally would, at a small discount. The company later pays the bank the full amount, which allows the company to hold on to its money for longer.
Financial institutions offering such financing include Citigroup Inc.
and JPMorgan Chase & Co. Retail giant Walmart Inc.,
aircraft manufacturer Boeing Co.
, beverage maker Keurig Dr Pepper Inc.
and many other blue-chip companies use chain financing.
Until now, US companies were not required to disclose supply chain financing arrangements in their financial statements. They often classify their programs as creditors, which are amounts that the companies owe to their suppliers or vendors. Accounting firms have urged the US accounting standards setter to provide clear guidelines on how to disclose supply chain financing.
Wednesday’s proposal would force companies to release key terms of their financing programs, possibly including details of any involvement in the agreement between the supplier and the financial services provider. Companies should also disclose the value of invoices that qualify for early payment by the lender. Investors can then gauge the size of supply chain programs by comparing them to companies’ total debt, according to the FASB.
Companies should indicate in the footnotes of their annual accounts which item on the balance sheet contains the outstanding invoices. The board also proposed requiring companies to provide a so-called “rollforward”, or the invoice amount they still have to pay under the program. That figure could help some investors and other financial statement users analyze companies’ cash flows, the FASB said.
The proposal comes several months after the implosion of Greensill Capital, a financing company specializing in supply chain financing, which went bankrupt in March. Greensill’s problems stemmed from making other, riskier loans, but supply chain financing has generally attracted the attention of the Securities and Exchange Commission and other regulators, as well as rating agencies.
Ben Lourie, an associate professor at the Paul Merage School of Business at the University of California, Irvine’s Paul Merage School of Business, said some drawbacks of the proposal include asking companies to disclose the full extent of their supply chain financing program and not what is actually included by suppliers, and requests for annual disclosures rather than quarterly disclosures.
dr. Lourie, who has pushed for stricter disclosure requirements, said he would urge the FASB to require quarterly disclosures because he believes it will be difficult for investors to understand what happens if they receive the information once a year.
The FASB plans to release a formal proposal in the coming months and then ask the public for feedback. It estimates it will issue a new rule in the second half of next year, a spokeswoman said.
Meanwhile, the International Accounting Standards Board, which sets standards for many jurisdictions outside the US, expects to release a proposal in the fourth quarter asking companies to provide information about their supply chain financing projects.
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Appeared in the September 23, 2021 print edition as “Rule Sought On Dislosing Supply-Chain Financing.”