Companies may be required to disclose details of their supply chain finance (SCF) programmes, with an influential US standards-setting body agreeing to examine investor concerns over a lack of transparency.
Following a request from the ‘big four’ accounting firms, as well as growing pressure from regulators, the Financial Accounting Standards Board (FASB) last week agreed to investigate whether disclosure standards may be necessary for such programmes.
Members of the FASB – an independent body that sets financial reporting standards for public and private companies – argued that investors are currently unable to examine a company’s full financial health if their SCF arrangements are not known.
“This is an evolving area, it alters cashflow, and at the end of the day this is exactly the type of area where investors are needing more information,” said board member Hal Schroeder, speaking during a virtual meeting last week.
“It’s clear that they don’t have the transparency that’s needed today.”
Though SCF programmes vary, they typically involve a financial intermediary paying suppliers’ invoices early – generally at a discount – while granting the buyer extended payment terms, maximising working capital. When initiated by the buyer, that model is also known as reverse factoring.
Ratings agencies have long expressed concerns about the potential risks, citing the collapses of Carillion in the UK and Abengoa in Spain as examples where programmes were used to mask financial distress.
Accounting firms have argued for disclosure of reverse factoring arrangements, but industry insiders are resistant to measures that would see them classified as bank-like debt. They also say high-profile negative incidents are rare, and represent a misuse of SCF.
For FASB member Christine Botosan, the main issue is a lack of clear and consistent information for those that rely on firms’ financial statements, which means investors “are finding that it’s making it more difficult for them to make good investment decisions”.
Though a small number of firms already include their use of SCF programmes in statements, Botosan said those disclosures “are inadequate, they’re not comparable, and they don’t provide adequate specificity”.
“So even among those that are disclosing, the users are not finding those disclosures to be sufficient,” she added.
Since writing to the standards board last year, three of the four ratings agencies still support the introduction of disclosure rules, though FASB project manager James Starkey revealed during the meeting that one has since expressed “mixed views”.
Another change since then has been closer attention from the Securities and Exchange Commission (SEC), a federal US regulator that had already endorsed the letter from the ‘big four’.
It emerged earlier this year that several companies, including Coca Cola and Boeing, were instructed by the SEC to disclose details of their supplier payment programmes.
In Coca Cola’s case, the regulator had noticed its accounts payable increased by around US$1.1bn over the course of 2019 due to an extension of supplier payment terms, and demanded more detail on how that affects its overall operating working capital.
In response, the company said in a regulatory filing that any liquidity benefits derive only from that extension of payment terms, and that its SCF programme “has no impact on our cash flows”.
FASB member Christina Chang suggested the increase in disclosure seen among such firms could indicate a trend towards greater transparency, though fellow board member Gary Buesser suggested companies doing so “have been subject to SEC comment letters and therefore are following up on that”.
Buesser added that it is still unclear exactly what should be disclosed. “[Investors] want quantitative disclosure,” he said. Simply stating that a programme is in place, without further details, is “not worth the ink on the paper it’s printed on”.
Another issue identified was scope. If a supplier – rather than a buyer – chooses to seek financing on its invoices, the buyer may never become aware of that, and so could not be expected to disclose the existence of a programme.
FASB chair Richard Jones said the starting point for its project would be laying down clear definitions, so companies know their reverse factoring programmes are “either in the scope or not”.
He further noted that adding a subject to the board’s agenda does not necessarily mean new disclosure requirements will be introduced.