By:

Jeffrey Gulbin

[email protected]

Chief Financial Officer and Treasurer

Finacity Corporation

263 Tresser Blvd., 10th Floor

Stamford, CT 06901

During September 2022, the FASB issued Accounting Standard Update ASU 2022-04 (Subtopic 405-50), Disclosure of Supplier Finance Programs which are also commonly referred to as reverse factoring, payables finance or structured payables. The update requires transparent disclosures covering key terms of these programs including items such as, amounts outstanding, balance sheet presentation, and a newly required roll forward presentation. The disclosures are applicable to public and nonpublic companies with early adoption permitted. In summary, all calendar year-end companies will need to disclose all key terms, balance sheet presentation and confirmed amounts outstanding for all interim and annual reporting periods in 2023. For 2024, interim periods will require confirmed amounts outstanding. Annual reporting will entail disclosing key terms, balance sheet presentation, confirmed amounts outstanding and roll forwards of annual activity. Finacity and its unique technology platform can assist corporates in preparing the detailed activity reporting required for a proper roll forward and other disclosures necessary under the ASU2022-04 (Subtopic405-50). We recommend US corporates begin planning for the near- and long-term implementation of these disclosure requirements. We will highlight the new key disclosures below that financial professionals should consider when implementing the US GAAP standard.

IFRS reporting is also taking a similar tack to US GAAP in that the International Accounting Standards Board tentatively agreed to a one-year acceleration for standards focused on what companies disclose on their Supplier Finance Programs in February 2023. Commencing on January 1, 2024, instead of 2025, IFRS reporting companies will be subject to new standards that will require disclosure surrounding details such as size and certain terms of the program.

KEY TERMS OF THE PROGRAM

As noted in ASC 405-50-50-1-3, the objectives for an entity are to disclose sufficient information to enable users of financial statements to understand the nature, activity during the period to period, and potential magnitude of the entity’s supplier finance programs. These new disclosures must include a thorough description of payment terms, inclusive of payment timing and the basis for its determination. Entities must also disclose assets that are pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary.

 It is also important to note that if an entity uses more than one supplier finance program, the entity may aggregate disclosures, but not to the extent that useful information is obscured by the aggregation of programs that have substantially different characteristics.

 BALANCE SHEET PRESENTATION

There are a range of classification factors and evidence which must be evaluated to determine the substance of the buyer’s liability including arrangements between the reporting entity and the finance provider or intermediary. The common balance sheet classifications for this type of program are trade payables and debt. When determining the balance sheet classification, an entity should consider two important questions. The first being whether the terms of the liability are typical for the entity and its industry. The second involves whether the supplier finance program was materially modified to an extent that it should be considered a new arrangement. The answers to these questions and other classification factors may require a change in balance sheet classification that could affect the entities’ leverage ratios and covenants.

OBLIGATIONS CONFIRMED VALID UNDER THE PROGRAM

ASC 405-50-50-3 notes that the new disclosures require that entities confirm and disclose valid obligations outstanding at the end of a reporting period to the finance provider or intermediary under the program. This is the number of obligations confirmed under the program that remains unpaid by the entity. Additional information required also includes where the obligations are presented in the balance sheet. If presented in more than one line item, the entity shall disclose the amount outstanding at the end of the reporting period in each line item. ASC405-50-50-4 states that in interim periods, a reporting entity should disclose the number of obligations confirmed as valid that remain outstanding at the end of the reporting period. Also, during the fiscal year of adoption, the information on the key terms and balance sheet presentation, which are annual disclosure requirements, should also be disclosed in each interim period.

ROLLFORWARD OF ANNUAL ACTIVITY

The last level of disclosure under the new disclosure requirements entails creating a roll forward of annual activity. At a minimum, the roll forward must include all the following:

• Amount outstanding at the beginning of the period
• Amounts added to the program during the reporting period
• Amounts settled during the reporting period
• Amounts outstanding at the end of the reporting period

TRANSITION PROVISIONS

• During the fiscal year of adoption, all annual disclosures (with exception to the roll forward) must be disclosed in each interim period.
• Retrospective application is required for each period in which a balance sheet is presented, except for the roll forward, which should be applied prospectively.

SUMMARY

US GAAP reporters, CFOs and Treasurers managing supplier finance programs will need to focus and direct resources to address the new extensive disclosure requirements associated with ASU 2022-04. As noted above, these disclosures require key identification of terms of the program, balance sheet presentation, confirmation of outstanding obligations and an extensive roll forward   presentation and analysis. These disclosures will need to be reported annually and for interim reporting periods, hence the need for a dynamic analysis. It is also important to note that for IFRS reporting entities similar disclosures have been accelerated and will be in play for 2024. Finacity is well versed in supplier finance programs and can utilize its technology platform to provide dynamic reporting on a program’s payables to help ease the implementation pain and ongoing reporting. Furthermore, Finacity is also able to assist clients in providing external validation support to client’s auditors to provide proper sign off. Facilitating over sixty million receivable items with $150 billion in annual flow for transactions ranging from $1 million to $2.1 billion, rated investment grade through ‘Caa’, we feel our cost-effective solution can tackle these upcoming challenges corporates will encounter. Please feel free to reach out to us to as we would welcome the opportunity to ease this burden and serve your company.

References:

ASU 2022-04

 ASC 405-50-50-1-4

 PWC Viewpoint 11.31.5

 PWC Quarterly Accounting Webcast Q1 2023

Disclosure:

Statements contained in this section are based on opinions and beliefs of Finacity as of the date hereof. Such statements involve known and unknown risks and uncertainties, and undue reliance should not be placed thereon.