A significant change is taking place in the supply chain financing (SCF) industry. The nature and amount of SCF programs will need to be disclosed in financial statement footnotes beginning in 2023 for companies that extend payment periods with their vendors and set up SCF programs so those suppliers can be paid early by the third-party finance provider. It's one of the subjects the industry talks about most. The most common query relates to this topic.
The Financial Accounting Standards Board (FASB) recently released new guidelines for how public businesses must disclose supplier finance programs. We've answered several inquiries from buyers since announcing these new disclosure obligations. What do these modifications signify for our company? Will they be challenging to put into action? Do I need to worry?
Before the FASB released the final standard in late September 2022, businesses began to ask those questions. That resulted from many years of consideration, discussion, and argument, including shareholders, credit rating agencies, accounting companies, banks, regulators, and corporations. Several sizable insolvencies of businesses that have adopted SCF programs served as the primary source of attention from the international community and the media. Critics claimed that SCF's classification of debt as trade payables encouraged struggling businesses to conceal debt.
Is this a positive or negative development?
Clarification on the accounting handling of SCF is a positive idea. Poor supplier finance management treatment decisions are avoided by clarification. In addition, transparency improves understanding of how supply chain finance impacts a company's working capital and cash flow among investors, lenders, rating agencies, and shareholders. Basic principles of good financial reporting include knowing who a corporation owes money to, how much, and when.
With regard to third-party services that allow suppliers the opportunity to financial solutions and the value of accounts receivables, Skyscend has consistently recommended clients disclose any detail about early payment programs. In addition, we collaborate with our clients' auditors to deliver the necessary data.
Some businesses make their disclosures brief, while others provide additional information. With our assistance, most of these standards are already being met by our customers, which is fantastic. But eliminating ambiguity will lead to greater uniformity, which will benefit everyone.
Full transparency among all parties
A corporate buyer might include SCF liabilities in accounts payable or another line item on the balance sheet since accordance with generally accepted accounting (GAAP) does not yet have any detailed disclosure requirements regarding SCF programs. However, many investment-grade international firms now make use of the programs due to their rising popularity.
Along with their auditing and compliance teams, corporates who already have SCF programs or are thinking about starting them are delving into the specifics of what the FASB's new disclosure regulations imply for them practically. It's more transparency, which is more work. However, it does standardize disclosure, which is typically advantageous for stakeholders.
Even though it takes time and resources to publish the information, corporates and their stakeholders will gain from greater transparency and visibility around SCF activities. In addition, the analysts and investors who read the reports will have a better grasp of the financial statements and the company's assets and obligations, which is excellent for them. They might also be more eager to invest in the long run.
Wrapping Up
We anticipate that other European and international accounting standard-setting bodies will publish standards that are comparable to these. Globally, there is a need for uniformity and clarity in disclosing supplier finance programs. Accordingly, IASB is working to provide relative guidelines for the more than 130 nations they serve.
So, according to our clients, the majority of the information covered by the new rules is already being disclosed by many of our clients. We have the technologies, expertise, and systems in place to quickly supply the information your audits will need, and we are familiar with the subtleties of the standards for what must be disclosed. Please get in touch with Skyscend if you have any additional inquiries regarding how these changes may affect your company and supply chain finance.
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