Financial Statement Disclosure of Supply Chain and other Trade Payables Programs
Trade payables programs have in recent years increased greatly in popularity among both large and small companies. While originally the sole domain of the large global banks and firmly based on a fairly straightforward reverse factoring model, these programs are now offered by banks and many non-bank market participants using a variety of structures and funding sources.
As we discussed in our post on April 22, 2020, the "Big Four" accounting firms and the Office of the Investor Advocate of the SEC, among others, have recently been calling for guidance from the Financial Accounting Standards Board ("FASB") on two distinct issues with respect to the financial reporting of trade payables programs: (i) the financial statement disclosure requirements for public companies utilizing such programs and (ii) whether such programs should be treated as trade payables on a company's balance sheet or, instead, as short-term debt obligations. According to critics, the increased popularity of these programs, along with the relatively modest disclosures required currently under US GAAP are raising questions as to whether these trade payables programs potentially obscure the financial reality of companies from investors. In particular, critics have expressed a concern that these programs – which sometimes allow for longer terms for a company's trade payables than the company would be able to negotiate in the absence of such a program – (i) could cause artificial improvements to a company's cash flow that could evaporate overnight if the financier of its payables program decided to discontinue funding and (ii) could potentially obscure a company's true leverage. However, proponents of these programs argue, among other things, that these programs serve a vital economic function by providing efficient working capital to a company's supplier base without in any way distorting the underlying supplier/buyer commercial relationship or the trade payable nature of the company's obligations.
Last Wednesday, FASB held a board meeting to discuss whether developing guidance with respect to trade payables programs should be added to their agenda. FASB made clear that this proposed agenda item does not include examination of supplier-led factoring, receivables purchase or receivables securitization arrangements. The scope of the proposal only includes buyer-led trade payables programs.
During the meeting, the Board members voted 5-2 in favor of adding the creation of guidance on disclosure requirements with respect to trade payables programs to their agenda. However, FASB declined, for now, to take up the issue of whether trade payables programs should be classified as trade payables or short-term debt on balance sheets, although some Board members acknowledged that this may be necessary at some point. Should this be the case, it is likely that the Board would need to delve into the legal substance of trade payables structures, which varies greatly from program to program.
FASB's next steps will include the solicitation of feedback from companies and their accounting firms, the development of a draft proposal, a public comment process and the issuance of final guidance. The guidance that will eventually be provided by FASB should speak to the nature and extent of disclosure that will be required in financial statements with respect to these programs. Given the importance of these questions for the supply chain finance industry, we anticipate that, in the coming months, industry participants will be keen to convey to FASB the importance and durability of the payables product.
Originally published by Mayer Brown, October 2020
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