New disclosure rules introduced by the IASB and FASB are set to increase transparency over supply chain finance arrangements.
For a number of years, companies have been using supply chain finance (SCF) programmes as a means of optimising working capital and offering early payments to their suppliers. SCF – also known as supplier finance or payables finance – can be offered by a single bank or on a multi-funding basis, with the cost of funding based on the buyer’s credit rating, rather than that of suppliers.
While SCF is a well-established model, investors, ratings agencies and regulators have questioned the level of transparency over how such programmes operate, not least because of some high-profile insolvencies. As such, accounting standards boards have taken action to require additional disclosures from companies using this type of arrangement.
In September 2022, the FASB issued an Accounting Standards Update (ASU) intended to increase transparency over the use of supplier finance programmes. Then, in May 2023, the International Accounting Standards Board (IASB) issued its new Supplier Finance Arrangements, which require companies that use supplier finance arrangements (SFAs) to provide additional disclosures about those programmes, including details of the SFA’s terms and conditions and the carrying amount of financial liabilities that are part of SFAs.
So, what do these developments mean for companies?
The quest for transparency
For both sets of rules, the industry supports the approach taken to provide transparency to analysts and investors, says Christian Hausherr, Product Manager Supply Chain Finance EMEA at Deutsche Bank. “What’s important to understand in my view is that supply chain finance agreements should not be categorised as credit instruments that automatically increase the leverage of a corporate,” he adds.
As Hausherr explains, the nature of an SCF programme is that a buyer gives a payment instruction with a certain maturity to its bank. “The important point in this context is that the payment obligation is to the supplier of the corporate, not the bank,” he adds. “That said, there is no credit element at all. A bank may (and I emphasise the word ‘may’) purchase a receivable from the supplier based on the payment instruction it received from the buyer. A reasonably set-up payables finance programme does nothing else than granting earlier funding to a buyer’s suppliers.”
Hausherr points out both the FASB and IASB disclosure rules require corporates to report on the use of SCF programmes, “which – per se – should not be an issue at all, as long as the contractual arrangements between the buyer and the seller follow standard market practice, which is the case in the majority of the business according to my understanding.”
At the same time, says Hausherr, “It is important to keep in mind these disclosure rules are not accounting rules, but financial information that contributes to an annual report. Whether and to what extent a buyer obligation to a bank is classified as bank debt is to be determined by the auditor that is mandated for an annual report.” As Hausherr points out, it is incorrect to assume payables finance obligations of a corporate that are part of a payables finance programme should generally be classified as bank debt.
While the new rules will require additional work by the companies running SCF programmes, the reception from many in the industry has been positive. Ali Ansari, Managing Director of Product – Payables at working capital solutions provider Taulia, says that the company’s clients have welcomed the transparency intended by the new requirements. “Many already disclose the data these rules require,” he adds. “I believe these requirements will provide the industry with much-needed clarity to help accelerate the growth of supply chain finance programmes.”