Insight & Analysis

Cleaning up supplier finance

Published: May 2023

The updated disclosure of supplier finance programme obligations that came into effect at the start of this year are expected to improve the quality of financial information available to investors and creditors.

In September 2022 the Financial Accounting Standards Board (FASB) published an update to the treatment of liabilities in supplier finance programmes.

The update requires buyers in supplier finance programmes to disclose sufficient information about the programme to allow a user of financial statements to understand the programme’s nature, activity during the period, changes from period to period, and potential magnitude.

The FASB said it introduced the changes in response to concerns from stakeholders around the transparency of such programmes.

The amendments address investor and other financial statement user requests for additional information about the use of supplier finance programmes by the buyer party to understand the effect of those programmes on an entity’s working capital, liquidity and cash flows.

One-in-four respondents to Demica’s 2023 benchmark report for banks in trade finance suggested changes to disclosure rules would reduce demand for payables finance. Bob Stark, Global Head of Market Strategy at Kyriba, says he hasn’t seen many organisations use the new disclose rules as a reason to shut down their existing payables financing programmes.

“However, we have spoken with CFOs, controllers and procurement teams that are seeking guidance on how to standardise the set-up and efficiently execute these programmes with the new rules in place,” he says. “We are also seeing increased demand for automation to simplify the roll-out and delivery of payables financing.”

According to Stark, increased transparency is welcome as it increases confidence in financed transactions, giving suppliers better visibility into the terms of financing programmes – which can be a catalyst to increase supplier participation.

“Especially in the light of failures such as Greensill Capital, increasing confidence in the structure and delivery of payables financing is welcome news for those looking to increase the success and adoption of their supplier financing programmes,” he says.

When asked about other changes coming down the line that could impact payables finance programmes, Stark refers to the incorporation of ESG incentives.

He explains the new FASB and IASB disclosure rules will set standards and benchmarks for how buyers reward suppliers who meet specified ESG targets – a net positive for those organisations who have committed to improving sustainability, diversity and governance.

Demica’s report found despite much discussion about the new rules, banks did not expect much to change in terms of the products they offer their customers.

Fewer than one-in-ten said the rules would impact their customer offerings and fewer than 5% said changes to disclosure requirements were making it more difficult to set up payables transactions.

These findings are reflected in the comments of Christina Gnad, Global Head Working Capital and Regional Head, Trade & Lending Americas at Deutsche Bank, who says the FASB requirements are a reporting discussion rather than an accounting debate.

“If the FASB had taken the stance that any portion of these obligations would require accounting reclassification as bank debt, more corporates may have faced tougher decisions about the future of their programmes,” she adds.

The disclosure rules are well known to Citi clients given communication and discussions around the topic and a number have already enhanced their programmes explains Adoniro Cestari, Global Head of Working Capital Solutions & Structured Trade at Citi Treasury and Trade Solutions.

“We believe that only a small proportion of organisations industry-wide have increased payment terms beyond what is reasonable for their industries,” he says. “The new rules will force those with non-traditional supplier finance practices to adjust their approach.”

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