Our Views on the Proposed FASB and IFRS Payables Reporting Rules
In December 2021 the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) released their proposed amendments to their accounting standards that will require buyers of goods/services who use supplier finance programs/arrangements1 in respect of their payables to disclose key terms of those supplier finance programs in their financial statements.
A range of factors has prompted FASB and IASB to put forward these proposed amendments. These include commentary by investors and other stakeholders on the lack of transparency around the presentation of the obligations covered by supplier finance programs on buyer balance sheets, concern that these arrangements impact buyer cash flow and liquidity when payment terms for their payables are stretched well beyond industry norms, and pressure from rating agencies and regulatory authorities in the wake of certain recent high profile insolvencies in Europe where supplier finance programs were being used. The purpose of the proposals is therefore to enable investors, creditors, and other stakeholders in respect of a buyer to assess the effects of supplier finance programs on such buyer’s liabilities and cash flows by requiring a buyer to provide both quantitative and qualitative disclosures regarding its use of supplier finance programs. Both FASB and IASB do make clear in their proposals though that the proposals will not deal with how a payable which forms part of a supplier finance program should be characterized on the balance sheet of a buyer.
We have reviewed both proposals and have a number of comments which we plan to submit to FASB and IASB by the deadlines for responses below. We have summarized our thoughts below and also refer you to our prior posts on this issue at the following links:
Update on IFRS Disclosure Requirements for Supplier Finance Arrangements | Retained Interest
Financial Statement Disclosure of Supply Chain and Other Trade Payables Programs | Retained Interest
Both FASB and IASB have decided not to create a specific definition of a “supplier finance program” to avoid being too restrictive in the scope of structures included within the purview of the amendments and have instead sought to broadly characterize the type of arrangement that should be considered to be a supplier finance program. Ignoring the fact that by characterizing a supplier finance program, they have both in reality created a definition:
- under the FASB proposal, such programs are described as having the following features: (1) the buyer has entered into an agreement with a finance provider to establish the program, (2) the buyer confirms supplier invoices as valid to the finance provider under such agreement, and (3) its supplier has the option to request early payment from a third party for invoices that the buyer has confirmed as valid; and
- under the IASB proposal, a “supplier finance arrangement” is characterized as (paraphrased) an arrangement where one or more finance providers offers to pay amounts that a buyer owes to its suppliers and the buyer agrees to pay the finance providers on the same date as, or a date which is later than, the date the suppliers are paid, and such arrangement provides the buyer with extended payment terms or the suppliers with early payment terms when compared to the original due dates for the payables. Further, the IASB proposal states that such arrangements are often referred to as “supply chain finance, payables finance or reverse factoring arrangements.”
Our concern is that the lack of precision as to which structures are actually within the scope of the proposals means that some finance arrangements which should not be within scope may inadvertently be construed as subject to the proposals and other finance arrangements which are clearly meant to be within the scope may not be.
For example, both proposals as currently drafted can be interpreted to include transactions involving only a single supplier and a single buyer, such as a supplier-led receivable discounting arrangement where the buyer is asked to confirm the existence of the receivable. Further, in supplier-led receivables purchase arrangements, factors or receivables purchasers routinely ask for buyer confirmations solely as a fraud or risk mitigation strategy in respect of the supplier. We assume this type of single contract monetization and supplier-led receivables purchase arrangement was not intended to fall within the ambit of the proposals. Equally, a strict interpretation of the FASB proposal would mean that a supplier finance program where the finance provider purchases the payables from the supplier would not necessarily fall within the ambit of the proposals because the supplier is technically not “early paid” but is paid a purchase price in exchange for selling the receivable to the finance provider. However, we assume supplier finance program based on a classic reverse discounting structure are intended to fall within the ambit of the proposals. A similar point can be made in respect of the IASB proposal which equally uses terminology such as “early payment terms,” which is technically not correct for a reverse discounting structure.
Building on our concern with the characterization approach adopted by FASB and IASB, we are not necessarily clear as to why they have characterized supplier finance programs in the way that they have. Our concerns are two-fold:
First, one of the chief hallmarks of a supplier finance program (whether it is based on a reverse factoring structure or an extinguishment or corporate payment undertaking model) is that the buyer gives the finance provider an undertaking that such buyer shall pay the relevant payable on a specific date in a specific amount without offset, deduction, or any other defenses to payment of any kind [Emphasis Added]. It is on the basis of this payment undertaking that a finance provider is willing to pay the relevant supplier (whether as a purchase price or early payment) before the original due date of the relevant payable, and without such payment undertaking, the finance provider will not make payment to the relevant supplier until the buyer has put it in funds because the finance provider has no comfort that the buyer will indeed settle that payable to the finance provider in full. However, it appears that FASB and IASB do not want to limit their characterizations to arrangements which include a payment undertaking and instead want them to also capture arrangements without a payment undertaking (e.g. arrangements where the buyer has simply confirmed that a payable exists). It is not clear why they have chosen to do this, considering it is the payment undertaking that gives rise to the concerns that investors and creditors have in respect of undisclosed supplier finance programs.
Second, a supplier finance program may or may not result in the payment terms of a buyer’s payables being increased and both the FASB and IASB proposals intend to capture all arrangements, whether or not the payment terms have being extended. We question though why arrangements which do not result in the payment terms being extended are being brought within the ambit of the proposal considering that such arrangements generate no additional working capital in the buyer’s supply chain?
In respect of the new disclosure obligations for supplier finance programs, as mere lawyers, it is hard for us to comment on this sufficiently, and we will leave that to market participants who are more adept in those matters. However, many of the quantitative requirements, particularly in the case of the IASB proposal, do seem to have potential to be burdensome, particularly on smaller buyers, and finance providers may have to be ready to provide support to the extent buyers do not have in hand certain information. We would suggest that the disclosure requirements be amended to make very clear that they are intended to only be at a high level and not on a granular basis and that further direction is provided as to what level of detail is required for describing the “key terms” (FASB) or the “terms and conditions” (IASB) of a supplier finance program. This also raises the question of whether there should be some form of materiality threshold before any supplier finance program or group of programs within the same reporting period become subject to the disclosure requirements in the first place.
The deadline for parties to respond to the FASB proposal is March 21, 2022. The deadline for the IASB proposal is March 28, 2022. The proposals are located at the links below, and public responses already received by the agencies can be found on the FASB and IASB websites, respectively.
Exposure Draft: Supplier Finance Arrangements (ifrs.org)
1 Note: FASB uses the term “Supplier Finance Programs” whereas IASB uses the term “Supplier Finance Arrangements”. For the purposes of this note, we shall use “supplier finance programs” for ease.
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