TheCorporateCounsel.net

Supply chain financing has been a disclosure hot topic for a while now. In late 2022, FASB issued new standards that require qualitative and quantitative disclosure about reverse factoring arrangements and updated quarterly disclosure of a company’s outstanding balance of obligations. With one exception, the new standards were effective for fiscal years ending after December 15, 2022, including the interim quarterly periods, and apply retrospectively to each period in which a balance sheet is presented.

This alert from Morgan Lewis discusses findings from new disclosures under these standards, and it sounds like they run the gamut:

Several companies have disclosed their reverse factoring arrangements since the standards went into effect. Among the disclosing companies, some report reverse factoring programs that constitute a majority of their total money due to suppliers, whereas some report these programs as a small percentage of their overall accounts payable.

Companies also differ in how much information they disclose about these programs—some companies report the existence of supplier finance programs in their periodic reports along with the related financial metrics, while some others have only disclosed that they have these arrangements and that the outstanding payment obligations under them are not material to the company’s financial statements.

In light of the diverse approaches both in the use of supply chain financing and in related disclosure, companies need to be thoughtful about their disclosure approach. Here’s more from the alert:

Per FASB, an entity can determine the level of disclosure necessary to enhance transparency of their use of reverse factoring programs—for example, a company can aggregate its disclosures if it uses more than one reverse factoring program so long as such programs do not have substantially different characteristics.

Disclosure should support the goal of allowing a user of a company’s financial statement to understand the nature and magnitude of a company’s reverse factoring programs, including activity during the period and changes from one period to the next.

Companies with supply chain financing should think about reverse factoring programs more carefully and holistically, alongside their other debt financing arrangements. As supply chain financing continues to receive more attention from investors, accountants, and regulators, companies should include the programs in their normal reporting and treasury processes.

– Meredith Ervine