That dusty pile of receivables is more than just a thorn in your side. It's putting your business in danger. Because every day an invoice remains unpaid, the thinner you stretch your cash flow. Not to mention your patience with customers and their aging IOUs. And neither of those is great.

Of course, buyers face an equally dangerous set of circumstances, just from the opposite perspective. Mounting payables are a financial catastrophe waiting to happen, also straining the ever-important relationship with vendors.

Enter the supplier finance program (SFP), a solution potentially benefiting everyone involved. However, as we're about to discuss, all things SFP are under a bright spotlight these days, so leadership must understand how these arrangements work, who is in scope of the new guidance, and what SFPs mean for reporting.

Understanding Supplier Financing Arrangements

Let's revisit that dusty pile of receivables. In this instance, you're a supplier with an uncollected stack of bills from your purchasers. And that stack is growing. So what's a fine businessperson such as yourself to do?

Well, aside from our insights on accounts receivable strategies, having an intermediary – typically a financial institution – buy these receivables from you seems like a pretty sound game plan. Zooming in a bit further, the intermediary either pays you at a discounted amount before the invoice due date or pays in full when it's due.

Ultimately, this type of arrangement gives suppliers such as yourself faster access to their money without waiting for payment terms to elapse. Likewise, it also helps buyers better manage their cash flow since they may be able to negotiate longer payment terms with suppliers, all while keeping those very important vendors happy since they still get paid on time by the intermediary.

And that, in an extremely broad nutshell, is a supplier finance program, putting a bounce in everyone's step because:

• Suppliers get faster access to their money while also reducing credit risk exposure
• Buyers can negotiate longer payment terms and even discounts from an intermediary
• Intermediaries provide a valuable service to both parties, also earning income from early payment discounts offered by suppliers as well as transaction fees charged to suppliers.

In short, when an entity purchases goods or services on credit from a supplier, that buyer can enter into an arrangement with a financial institution or another intermediary. In turn, that intermediary offers to purchase the receivables held by the supplier.

Types of Supplier Financing Arrangements

As you might have guessed, these arrangements aren't quite as simple and straightforward as we might have made them sound. In practice, supplier financing programs come in a variety of different flavors, including:

Structured Payment Plans

These programs involve buyers negotiating extended payment terms with suppliers, providing more favorable conditions. A financial institution or intermediary typically handles the transactions and oversees the payment process on the buyer's behalf.

Vendor Payment Solutions

A financial institution or third-party platform partners with buyers and suppliers so the suppliers can receive early payment on their invoices at a reduced rate. Buyers provide approved invoices, and suppliers decide whether to accept early payment, helping both parties manage their cash flow.

Reverse Factoring

Also known as supply chain finance (SCF) or supplier finance, a buyer works with a financial institution or intermediary to offer short-term credit to its suppliers. The buyer ensures the financial institution pays the suppliers on time, while the buyer repays the intermediary later, again benefiting both parties in cash flow strategy and management.

Dynamic Discounting

This flexible option allows suppliers to provide buyers with a discount on their invoices in exchange for early payment. The discount rate varies depending on the payment's timing, with higher discounts for earlier payments.

Trade Credit Insurance

This form of trade finance safeguards suppliers against the risk of non-payment from their buyers, letting them provide more favorable payment terms to their customers. Trade credit insurance policies cover scenarios such as bankruptcy.

We're not going to take a deeper dive into any of these since we're focusing on the reporting implications of supplier finance programs today. Just know that, as you probably guessed, there are complexities to these arrangements that a simple definition can't capture.

New Guidance on Supplier Finance Programs

Since our discussion has been all rainbows and unicorns thus far, let's start phasing in a bit more reality. And we're going to start with stakeholders since they're the ones that have largely instigated this recent spotlight on supplier finance programs.

Simply put, although people were seeing a significant increase in the use of supplier financing arrangements by companies, there was scant, inconsistent information about these programs in the financial statements. This void primarily stemmed from a lack of explicit requirements in US GAAP to disclose relevant information.

Thus, the FASB (Financial Accounting Standards Board) has addressed the need for additional information for stakeholders about an entity's use of supplier finance programs in Accounting Standards Update 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. Now, businesses must disclose more information on how these programs impact their working capital, liquidity, and cash flows.

Key Aspects Covered by ASU 2022-04

The new ASU zeroed in on required disclosures for entities using supplier financing programs to purchase goods or services. These disclosures primarily focus on the key terms of those arrangements and programs as well as information about their outstanding obligations at each reporting period.

Therefore, in terms of scope, the ASU targets all entities using supplier finance programs to purchase goods and services. Thus, determining if an entity has a supplier finance arrangement is the first essential piece of information to figure out.

Determining What Makes a Supplier Finance Program

While the new(ish) ASU is certainly a start on the codification front, it still leaves much to interpretation. In other words, it doesn't explicitly define what constitutes a supplier finance program. Instead, it says an entity must evaluate whether it has established such a program.

So, according to the ASU, an entity must consider all available evidence to determine if it has an SFP on its hands, including arrangements between the entity and both:

1. The finance provider or intermediary, and;
2. Suppliers whose invoices have been confirmed as valid.

Put another way, the buyer has most likely established a supplier finance program if it has committed to pay a party other than the supplier for a confirmed invoice without offset, deduction, or any other defenses to payment. Or, in even simpler terms, if your company buys stuff from suppliers and then pays via some bank or other intermediary, these rules are for you.

That said, there are also a few circumstances where it initially might look like there's an SFP in place but the guidance says otherwise, even though they may seem to satisfy the indicator guidance.

• Credit card agreements – The supplier would have the option to request early payment from the finance provider in a supplier finance program. In contrast, a credit card agreement directs the finance provider to pay the supplier.
• Payment processing arrangements – These arrangements would not qualify as a supplier financing program because they do not result in suppliers having the option to request early payment.

Disclosures Required Once a Company Establishes a Program

Let's assume you've gone through the indicators and determined you do, in fact, have a supplier finance program in place. Now what?

Well, remember why the new guidance exists in the first place. It's all about providing sufficient information so users of the financial statements can understand the nature, activity during the period, changes from period to period, and potential magnitude of all of its supplier finance programs.

Thus, for starters, companies should disclose key terms of the program, including the timing of payments, as well as any assets they've pledged as collateral or a form of security or other guarantees. Further, reporting entities must also disclose the obligation amount – that the buyer has confirmed as valid – to the financial institution or intermediary, including:

• The amount outstanding that remains unpaid by the buyer as of the end of the reporting period;
• A description of where that amount is presented on the balance sheet – whether in accounts payable or another balance sheet line item – and, if presented in more than one line item, the amount presented in each line item, and;
• A roll-forward of the obligations showing the opening balance, the amounts added to the program, the amounts settled under the program, and the closing balance.

For interim purposes, reporting entities must disclose the amount of obligations outstanding at the end of the period – that the entity has confirmed as valid – remaining unpaid by the buyer.

Thankfully, if you have multiple SFPs, you can aggregate the disclosures. However, as a word of caution, be sure you're not negating the purpose of the ASU in doing so. Thus, if programs have substantially different terms or conditions, you need to make that clear within those disclosures.

Classifying Obligations Under Supplier Financing Arrangements

You might've noticed we've spent most of our time on determining if you have a supplier finance program, what to disclose about them in your financial statements, but nothing on what to actually do with them in your financials. And that's for a very good reason – the ASU is mum on that particular area.

So, although the guidance doesn't affect the recognition, measurement, or financial statement presentation of supplier finance program obligations, you're classifying such obligations as either trade payables or bank debt, depending on the terms of the program. As such, there are various factors you should consider to help make this determination.

Is the supplier finance program offered to a wide variety of companies or a variety of suppliers?

If the program is available to a broad range of vendors, the obligation is more akin to a trade payable. On the other hand, if it's available only to limited vendors or requires the vendor or supplier to accept an early payment for less than the full supplier invoice, it's more like a debt.

Are the terms of the payables similar to what other buyers would have without a supplier finance program?

If terms are similar to those for entities without such a program, the obligation is more a trade payable. If not, the obligation is more akin to debt.

Is the program designed to extend payment terms for the entity beyond what is customary?

If the terms of the invoices are unchanged from the original terms, the obligation is more akin to a trade payable. If terms are changed – for example, by extending payment terms – it would suggest the obligation is more like a debt.

Aside from these three factors, other possible SFP terms suggest the arrangement is more debt than a trade payable, including:

• Extinguishing the original liability
• A change in the price of the goods or services to provide compensation to the vendors or suppliers who extend payment terms
• Changing seniority of the trade payable
• Requiring collateral to be posted on the trade payable

Above all else, it's important to think through these considerations and document conclusions around your assessment. Remember, classifying the obligation as trade payable versus debt can have broader implications, including an impact on your debt covenants.

SFP Considerations for SEC Registrants

In a surprise to exactly no one, the SEC has weighed in on required additional disclosure outside the financial statements for SEC registrants. Specifically, they want to see discussion within a registrant's MD&A about its supplier financing programs, at least when they're material to the current period or are expected to materially impact liquidity in the future. This includes discussion around:

• General terms of the programs, including their risks and benefits
• Any guarantees provided by subsidiaries or a reporting entity's parent
• Any plans to further extend terms to suppliers and any factors that may limit this strategy
• Information about trends and uncertainties related to extended payment terms

Other Points

Now that we're in the home stretch, let's wind things down with a blaze of bullet points on other points of consideration and importance around supplier finance programs.

• Effective date – The new ASU is effective for all entities - both public and private - starting in 2023 for calendar year-end companies, including interim periods within the same year. The lone exception relates to the required roll-forward disclosure beginning in 2024 for all entities, including interim periods within that year. Early adoption is permitted for those companies that want to provide the disclosure sooner.
• Application – Companies are only required to disclose roll-forward information prospectively, eliminating the need to provide a comparative roll-forward disclosure for other balance sheets they present. However, for all other disclosure requirements, the disclosures must be made retrospectively for all periods where a balance sheet is provided.
• Interim financial reporting – In the initial fiscal year of adoption, a company must include the disclosure around key terms and conditions of the program and balance sheet presentation in both its interim financial statements and annuals. Thereafter, entities must only include this information for the annual reporting period.
• International reporting – The IASB recently issued Supplier Finance Arrangements, which amended previous guidance relating to supplier finance programs. While the recent IFRS guidance is similar to the new ASU, there are some key differences that in scope entities must familiarize themselves with.

A Final Word from Embark

Whatever you choose to call them – supplier finance arrangements, supply chain finance programs, a sweet deal on the AP front – they can be a great way for corporate finance leaders to manage cash flow and improve supplier relationships. However, an SFP could do more harm than good without proper reporting backstopping your efforts.

But we don't want to see that happen to you. In fact, our financial reporting gurus exist to help you traverse the guidance badlands. So, if you have questions, concerns, or need hands-on assistance with your SFP disclosures – or any other reporting issues, for that matter – don't be a stranger. We’re just a short contact form away.