FASB ASU requires supplier finance program disclosures

Breaking it down

The ASU provisions

On Sept. 29, 2022, the FASB released ASU 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations,” to increase the transparency of supplier finance programs regarding the use of such programs by the buyer party (that is, the disclosing entity) and the programs’ effects on an entity’s working capital, liquidity, and cash flows. Previously, no explicit GAAP disclosure requirements provided users of the financial statements with transparency regarding an entity’s use of these programs.

Supplier finance programs allow a buyer entity to offer its suppliers the option to access payment in advance of an invoice due date. Payment is then made by a third-party finance provider or intermediary based on invoices that the buyer has confirmed as valid. The ASU requires buyer entities to disclose specific information about these programs to allow users to understand the programs’ nature, activity during the period, changes from period to period, and potential magnitude.

The FASB has provided characteristics to determine whether an entity has established a supplier finance program and, therefore, is subject to the disclosures required by Subtopic 405-50. An arrangement with all the following characteristics is considered a supplier finance program:

• An entity enters into an agreement with a finance provider or an intermediary.
• The entity confirms supplier invoices as valid to the finance provider or intermediary under the agreement, which usually represents its commitment to make payment for the confirmed amounts.
• The entity’s supplier has the option to request early payment from the finance provider or intermediary for invoices that the entity has validated via the program.

Disclosures

While the ASU does not mandate changes to the financial statements, it introduces new disclosures for supplier finance programs. Specifically, buyer entities must disclose:

• The key terms of the arrangement, including the agreed-upon payment due date, the payment terms and the basis for determination, and the assets pledged as security to the finance provider or intermediary
• The amounts confirmed by the buyer (that is, the amounts that the buyer has made available for suppliers that elect to be paid early) that are outstanding at the end of the reporting period and a description of where the amounts are presented in the balance sheet

An entity also must present a rollforward of the obligations at the end of the annual reporting period, including the amount of those obligations outstanding at the beginning of the reporting period, the amount of those obligations added to the program during the reporting period, the amount of those obligations settled during the reporting period, and the amount of those obligations outstanding at the end of the reporting period.

ASU 2022-04 requires entities to disclose the amount of the obligation outstanding at each interim reporting period, but the rollforward information is not required for interim period disclosures. Additionally, the ASU allows buyer entities that use more than one supplier finance program to aggregate disclosures as long as useful information is not obscured by the aggregation of programs with substantially different characteristics.

Transition and effective date

ASU 2022-04 is effective for all entities for fiscal years beginning after Dec. 15, 2022, and interim periods within those fiscal years. The requirement on rollforward information is effective for fiscal years beginning after Dec. 15, 2023. Early adoption is permitted.

All entities must adopt the changes retrospectively to all periods in which a balance sheet is presented, except for the requirement on rollforward information, which must be applied prospectively.

Example

The following example demonstrates the disclosure and rollforward provisions of the ASU:

Company A enters into a supplier finance program with Intermediary B. Company A agrees to pay Intermediary B the stated amount of the invoices that Company A has confirmed on Intermediary B’s supplier finance platform on the invoice maturity dates. Intermediary B charges Company A an annual subscription fee and service fee to use platform. The agreement does not require Company A to provide Intermediary B with collateral or other forms of guarantees. A 90-day-minimum notice period is required by either party to terminate the agreement. Intermediary B enters into a separate agreement with Company A’s suppliers and provides them with the option to request early payment from Intermediary B for all invoices confirmed by Company A, and Company A is not involved in establishing the terms or conditions of these separate arrangements. Company A does not participate in the transactions between its suppliers and Intermediary B. The payment terms for the suppliers participating in the supplier finance program are 90 days.

Upon the adoption of ASU 2022-04, Company A must disclose the key terms of its supplier finance program. Following is an example of the key terms that Company A should disclose based on the given fact pattern:

Under a supplier finance program with Intermediary B, Company A agrees to pay Intermediary B the stated amount of confirmed invoices on the original maturity dates of the invoices, an annual subscription fee for Intermediary B’s supplier finance platform, and service fees for support related to the platform. Either party may terminate the agreement upon at least 90 days’ notice. Under the arrangement, Company A is not required to provide Intermediary B with secured legal assets or other forms of guarantees. Company A has no involvement in the establishment of terms and conditions of the arrangement between its suppliers and Intermediary B and does not participate in the transactions between its suppliers and Intermediary B. The payment terms are 90 days from the invoice date for Company A’s suppliers that are participating in the program.

At the end of the annual reporting period, Company A must present a rollforward of outstanding obligations confirmed as valid under its supplier finance program:

								20X2		 20X1
Confirmed obligations at the beginning of the year		$100		  $50
Invoices confirmed during the year				 400		  200
Confirmed invoices paid during the year				(350)		 (150)
Confirmed obligations outstanding at the end of the year        $150		 $100