FASB Proposes Vendor Financing Disclosure

Vendor financing arrangements should be disclosed in the notes to the financial statements of companies in a manner proposed update this week by the Financial Accounting Standards Board (FASB).

Agreements, sometimes referred to as reverse factoring because they are initiated by the buyer of goods or services rather than the seller, involve third-party finance companies that make advance payments to suppliers on behalf of the buyer.

Buyers tend to like arrangements because they help them manage their cash flow more efficiently, and sellers like them because they are more assured of getting timely payments, although in return they usually agree. reduced payment amounts.

Investors, analysts and accountants have expressed concern over the increasingly common deals, as they are typically reported under the accounts payable item on the balance sheet, even though they represent a form of debt.

Without disclosure of the terms of the agreements and the amounts involved, investors and analysts will not necessarily be aware of the responsibility they represent if the third-party payer experiences financial difficulties or terminates the relationship, forcing the buyer to make the payments that they represent. ‘they hadn’t prepared for.

Carillion, a UK construction management company that went bankrupt in 2018, in part because of payments it owed under undisclosed third-party agreements, has gone badly wrong.

Disclosure flexibility

According to the FASB’s proposal, buyers should disclose enough information about the agreements in their notes to allow investors to understand their terms, use, and the amount of liability they represent.

What exactly should be disclosed would be left to the companies as long as they abide by the intent of the FASB.

“The board has decided to leave discretion to management to identify which terms of the program should be disclosed,” the FASB said. “The Board reviewed but decided not to specify which terms of the program are key terms as this could lead to them being considered as scope criteria or as criteria for presentation of the balance sheet. In addition, some Board members believe that management is in the best position to identify key terms in a program.

To help companies decide what to disclose, the FASB has included an example of a hypothetical key term disclosure in the discussion portion of its proposed update.

The board also considered requiring companies to disclose balance sheet provisions as an item, but decided not to do so, saying it was best to act quickly as long as the terms were sufficiently disclosed in the statements. notes.

“The Board believes that revisiting balance sheet presentation requirements would delay the immediate need for investors to improve disclosure,” the FASB said.

The FASB is seeking companies to comment on the proposal so that it can address concerns before releasing the update for effect. Comments are due March 21.

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