Related News

New template may spur open account trade finance distribution

Yap departs MonetaGo, returns to banking

Supply chain finance industry hopeful EU will soften late payment rules

Balancing inflation and growth

Late payment issues worsening in global supply chains, Taulia data reveals

Proposed accounting standards that will require far greater disclosure of supply chain finance (SCF) arrangements in companies’ financial statements have been met with alarm by some in the trade finance sector.

The International Accounting Standards Board (IASB), which sets accounting standards broadly followed by more than 140 countries, published proposed standards for SCF disclosure in December last year, in the wake of concerns by investors that it can be difficult understand a company’s true financial health if its use of SCF is not clearly reported.

The board proposed revising the International Financial Reporting Standards (IFRS) to require buyers to disclose the terms and conditions of SCF arrangements they are involved in, the amount of payables already paid to suppliers by a finance provider, the range of payment terms arranged with suppliers, and information about liabilities that are part of the arrangement.

Among other changes, it also plans to add SCF programmes as an example of when buyers should disclose information “about changes in liabilities arising from financing activities and about an entity’s exposure to liquidity risk”.

The proposals garnered over 90 responses, with investors and investment advisors broadly supportive of the plans. A handful of large multinational companies, however, such as Petrobras, Nestlé and Volkswagen, criticised the mooted standards as cumbersome and unworkable.

Two top industry groups representing trade finance providers, the Bankers Association for Finance and Trade (Baft) and the International Trade and Forfaiting Association (ITFA) also say the proposals need to be redesigned.

Baft says in its submission that it disagrees with the key planned specific disclosure requirements. The Washington DC-based group says the proposal is “problematic, and it is not clear how the requested information would enhance the transparency of the buyer’s financial statements”.

It will often be difficult for a buyer to disclose the terms and conditions of an SCF arrangement because it is not party to the agreement between its suppliers and the financing provider, the submission says, adding that pricing may also differ across suppliers.

Baft argues that disclosing the full range of payment terms on offer to suppliers participating in SCF programmes “may be misleading” because payment terms can be extended for reasons such as long physical transit times of goods, rather than for financial reasons.

In its submission, ITFA says disclosing extended payment terms will require the preparers of financial statements to determine if payment terms have been extended, which it says could be difficult in the cases of long-running relationships.

“Where such term extensions are recent, auditors may feel obliged to ask entities to quantify the length of the term extension,” the ITFA submission adds. “In the circumstances described above, this will prove difficult and highly subjective.”

Both groups – and Taulia, a US-headquartered SCF provider – say that buyers may not have access to terms agreed between their suppliers and the SCF provider, and even if they do, disclosing them poses confidentiality risks and could discourage use of SCF programmes.

ITFA also objects to the planned requirement that buyers disclose the range of payment due dates for trade payables that are not part of an SCF programme.

Noting that payables may or may not be included in an SCF programme depending on a range of eligibility criteria, the submission asks “how, against such a background, could an entity determine if a payable fell into the programme or not especially if no information was available from the finance provider or supplier?”

“It is unclear what value this granular level of detail would bring in any case and, in our opinion, is a disproportionate burden on reporting entities,” ITFA says.

Many submitters also object to the proposed requirement to make buyers disclose – at the beginning and end of the reporting period – the carrying amount of liabilities for which suppliers have already been paid by a financier.

Taulia says in its submission that “there is a risk of this value being used inappropriately to include exposure in payables within debt or leverage ratios, making the buyer entity’s business look worse”. Instead, it proposes that a buyer should provide an assessment of its arrangements on its working capital, cash flows and liquidity.

Taulia also wants the IASB to clarify that the “provision of procurement or sales information to an independent financing arrangement provided by a fintech or financial institution” and “joining a network facilitating the finance of buyers and suppliers” by agreeing to its rulebook are not captured by the proposed disclosures.

Corporates which responded to the IASB’s consultation suggested that the existing standards, combined with a clarification issued in 2020, would be sufficient to assuage investors’ concerns about disclosure, particularly if the board provides more guidance.

“Clearer guidelines regarding the accounting for supplier financing would be a lot better suited to our needs than the obligation to ‘heal’ rather unspecific standards with extensive notes,” says a letter from carmaker Volkswagen’s head of group accounting and external reporting, Ingrun-Ulla Bartölke.

The existing IFRS standards are up to the task and “additional disclosure requirements will always add up to the problem of disclosure overload”, Bartölke says.

 

Investors say standards could go further

Most national accounting bodies which responded to the IASB’s consultation broadly backed the plans. The European Securities and Markets Authority, the EU markets regulator, also supports the proposal and suggests the standards could even be broadened.

It also warned that the standards need to be formulated so as to not allow companies to structure SCF arrangements to evade disclosure.

Fermat Capital Management, which says it manages investments in SCF for investors such as pension funds and banks, says the IASB’s draft does not go far enough. It argues that buyers should be required to reveal the name of the bank or financier behind each SCF arrangement and details of any security interests, which it says is needed to expose firms’ overreliance on limited sources of liquidity.

The Connecticut-based firm also wants the standards to require “affirmative statements” about SCF programmes, including on whether the programme is offered to all creditors and if it has exerted influence on the size or pricing of the arrangement.

Ownership Matters, an Australian governance advisory service for investors, says the proposed amendments to the standards will be “useful in assessing the relationship between the [buyer] and its suppliers and in assessing the likely impact on the entity should its SCF arrangements cease to operate due to a period of market dislocation or the failure of a trade finance provider”.

It also wants the standards to disclose whether the buyer has received rebates from the finance provider linked to the volume of payables steered through an SCF programme.

The comment period closed on March 28 and an IASB spokesperson says the feedback will now be analysed by its technical team.

The IFRS standards are used in most European, South American, Middle Eastern and Sub-Saharan African countries, in addition to Australia, Canada and some Asia Pacific nations.

The IASB’s equivalent body in the US, which sets the generally accepted accounting principles (GAAP) accounting rules, has also proposed requiring companies to disclose their use of SCF programmes. Those changes received a warmer reception from the industry, but investors were more sceptical.

The IASB first proposed setting SCF disclosure standards in 2020, but then opted to produce an agenda decision, which acts as guidance to preparers. However the collapse of supply chain financier Greensill in March 2021 renewed attention on risks in the sector.