September 1, 2020
Supply-Chain Finance: Corp Fin Stepping Up Scrutiny
Corp Fin has sent comment letters to several well-established companies to request more info on their supply-chain finance arrangements – a practice that this WSJ article says the three biggest ratings firms highlighted as a “sleeping risk” last spring. Here’s an excerpt from the June comment letter to the Coca-Cola Company:
We note from your disclosures that accounts payable increased roughly $1.1 billion in 2019 due to the extension of payment terms with your suppliers. We further note from external sources that it appears you have in place a supply chain finance program. To the extent supply chain finance arrangements are reasonably likely to affect your liquidity in the future, please disclose the following:
• The impact the arrangements have on operating cash flows;
• The material and relevant terms of the arrangements;
• The general risks and benefits of the arrangements;
• Any guarantees provided by subsidiaries and/or the parent;
• Any plans to further extend terms to suppliers;
• Any factors that may limit your ability to continue using similar arrangements to further improve operating cash flows; and
• Trends and uncertainties related to the extension of payment terms under the arrangements.
In addition, please consider disclosing and discussing changes in your accounts payable days outstanding to provide investor’s with a metric of how supply chain finance arrangements impact your working capital.
In this response, the company resolved the comment by providing a draft of its intended future disclosure to describe the supply chain finance program in more detail in its MD&A – as well as its impact on cash flows, and associated risks & benefits.
This WSJ article notes that the SEC has increased scrutiny of supply chain finance arrangements over the last year and a half, and names a few more companies who’ve been on the receiving end of that scrutiny. Corp Fin called out supply chain finance arrangements in its Topic 9A Disclosure Guidance in June – and the practice also got a mention in the SEC’s adopting release for last week’s Reg S-K amendments:
Under the proposed amendments to Item 101(c), the revised rule would not explicitly reference the disclosure requirements under Item 101(c)(1)(vi) regarding disclosure of working capital practices, Item 101(c)(1)(ii) requirement regarding disclosure about new segments, or the Item 101(c)(1)(viii) dollar amount of backlog orders believed to be firm. Nevertheless, under the proposed principles-based approach, registrants would have to provide disclosure about these topics, as well as any other topics regarding their business, if they are material to an understanding of the business and not otherwise disclosed.
For example, if supply chain finance arrangements used by a registrant are a significant part of its working capital practices, they may be material to understanding the nature of its commercial relationships. While MD&A disclosures on the topic are more focused on the potential material impact of such arrangements on the registrant’s periodic cash flows and financial condition, the proposed principles-based approach would call for additional disclosure if material to an understanding of those commercial relationships. We discuss the proposals and our revisions with respect to the final amendments below.
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