FASB issued a proposed Accounting Standards Update (ASU) on Monday that is intended to help investors and other financial statement users better consider the effect of supplier finance programs on a buyer's working capital, liquidity, and cash flows.
The proposed ASU, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, would affect buyers that use supplier finance programs in connection with the purchase of goods and services, a FASB news release said. Supplier finance programs allow a buyer to offer suppliers the option to be paid by a third party in advance of an invoice due date, based on invoices the buyer has confirmed as valid. These transactions are also known as reverse factoring, payables finance, or structured payables arrangements.
Stakeholders have observed a lack of transparency about supplier finance programs, the FASB release said, for two key reasons:
- There are no explicit disclosure requirements in GAAP for those programs.
- A buyer may present obligations covered by those programs in the same balance sheet line item as accounts payable or in another balance sheet line item depending on the facts and circumstances of the arrangement.
According to FASB, the proposed amendments would "improve financial reporting by requiring new disclosures about the programs, thereby allowing financial statement users to better consider the effect of the programs on an entity's working capital, liquidity, and cash flows."
The proposal would address these issues by requiring the buyer in a supplier finance program to disclose sufficient information about the program to allow an investor to understand the program's nature, activity during the period, changes from period to period, and potential magnitude, the FASB release said. "These disclosures would include the key terms of the program, as well as the obligation amount that the buyer has confirmed as valid to the third party that is outstanding at the end of the reporting period, a rollforward of that amount, and a description of where that amount is presented in the balance sheet," the release said.
The proposed update can be accessed on fasb.org. The comment deadline is March 21, 2022.
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