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July 12, 2021

Supply Chain Financing: FASB Moving Forward With Disclosure Proposal

We’ve previously blogged about Corp Fin’s push for more disclosure about supply chain finance arrangements & FASB’s decision to study a disclosure requirement. According to this WSJ article, FASB has decided to move forward with the goal of putting together a rule proposal by the end of this year. This excerpt describes supply chain finance arrangements and some of the reasons why formal disclosure requirements are under consideration:

As part of these programs, banks typically provide funding to pay a company’s supplier of goods and services. The supplier is paid earlier, but gets less than it would have without the agreement. The company pays the amount it owes the supplier to the bank, usually later than it would have paid its supplier. The bank then keeps the difference in exchange for its services. U.S. companies currently aren’t obliged to disclose supply-chain financing arrangements in their financial filings, which can make their liquidity position appear stronger than it actually is.

The tool has come under greater scrutiny from regulators and accounting rule-makers amid its growing popularity in recent years. Greensill Capital, a U.K.-based supply-chain finance provider, in March filed for insolvency after auditors of the company’s bank arm were unable to find evidence of collateral that one of its customers used for borrowing. Supply-chain financing was also a primary contributor to the 2018 implosion of U.K. firm Carillion PLC, according to Fitch Ratings.

The scope of the potential disclosure requirement was laid out at FASB’s June 30th meeting and summarized in FASB’s most recent project update. Companies would be required to describe the overall arrangements and would use certain contractual terms (such as the buyer confirmation) as indicators that an arrangement has been established. Disclosure would be required of the key terms of the arrangement as identified by management and the amount that the buyer has confirmed has been made available for suppliers to elect to be paid early for as of the end of reporting period. A description of where that amount appears on the balance sheet would also be required.

John Jenkins