Accounting for Supplier Finance Programs (ASC 405-50)

One of the new ASUs we cover in our U.S. GAAP Update course this year is ASU 2022-04 Disclosure of Supplier Finance Program Obligations. This post walks through these programs, including the related accounting requirements and disclosures.

Supplier finance programs: Overview

Before we get into the nuts and bolts of supplier finance programs, let me get something off my chest. As a small business owner and a supplier to large organizations, I am not a fan of supplier finance programs. They are billed as a win-win-win for all the parties involved: the buyer, the third-party finance provider, and the supplier (GAAP Dynamics). However, it usually involves the supplier making a concession (for example, accepting less than 100% of their invoice amount), that they would have not otherwise accepted.

Check out this video where we discuss more information on the basics of supplier finance programs.

Let’s take a look at an example of a supplier finance program involving Walmart:

This example specifically relates to a reverse factoring agreement. Other names for such arrangements include supply-chain finance, trade finance, structured payables, payables service agreements, and vendor financing arrangements.

A supplier finance program is designed to maximize working capital by leveraging the buyer’s (in our example Walmart’s) relationship with a third-party funding mechanism, which in our example was JPMorgan Chase. As a result, Walmart’s suppliers gain attractive funding based on Walmart’s creditworthiness, not their own.

Typically, the supplier is paid by the finance provider earlier than the payment terms, and at a discount, while the buyer receives an extended payment date (in some cases by more than 120 days). Typically, the finance provider funds the program and receives a fee.

Analysis of the transaction

Let’s break down this transaction:

In our example, Walmart receives goods or services from the supplier. The payment terms are net 30, but Walmart typically pays in 15-20 days.

Walmart enters a reverse factoring program, whereby they agree to pay the invoice amount directly to JPMorgan Chase at 60 days. If Walmart usually paid its bills within 15 days, that extra 45 days would free up cash. It doesn’t seem like much but imagine Walmart extending all its payable balances across all its suppliers. The effect on working capital in the cash conversion cycle becomes quite meaningful.

With respect to the supplier, they get paid directly from JPMorgan Chase. They can either wait 60 days for 100% of money it is owed, or, for a discount, it can get paid within 15 days

How should these transactions be accounted for and disclosed by Walmart in its financial statements?

The answer to this question is that there are no rules for recognition, measurement, or financial presentation of supplier finance programs under U.S. GAAP! The SEC does give some indicators of when trade payable classification would no longer be appropriate, as well as recommended disclosures companies should make in their MD&A, but this is only applicable to public entities.

Disclosure requirements

The objective of the disclosure requirements under ASC 405-50 is for the buyer to disclose sufficient information to enable financial statement users to understand the nature, activity during the period, changes from period to period and potential magnitude of its supplier finance programs. 

To achieve that objective, a buyer discloses qualitative and quantitative information about two aspects of its program annually – key terms and the amount of obligation buyer has confirmed as valid.

Key terms

Key terms include a general description of the payment terms (including payment timing and basis for the determination) and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary. 

Amount of obligation buyer has confirmed as valid

Required disclosures regarding this obligation are:

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

Use more than one supplier finance program? If so, you may aggregate disclosures, but not to the extent that the aggregation obscures useful information about programs that have substantially different characteristics.

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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.