US leads on forcing companies to disclose supply chain finance

The schemes (also known as “reverse factoring”) are controversial because some companies like CIMIC’s UGL have in the past required suppliers to accept discounts on their bills to have them paid in a timely manner. CIMIC subsequently scrapped its use of the schemes.

Even before Greensill Capital imploded in early 2021, the big four accountants had asked regulators to demand more transparency from companies who used the schemes and clarify whether money owed on invoices should be classified as trade payables or debt.

Credit ratings agencies have also pushed for more disclosure and economists are warning that rising costs are making it difficult for companies to pay bills.

“Our data also shows that all industries now have a higher proportion of late payers than they did in May, which means that higher prices and higher interest rates are already having a negative impact on business activity,” said Anneke Thompson, chief economist at credit reporting agency CreditorWatch.

The US’s Financial Accounting Standards Board (FASB), which has been reviewing the accounting of supplier financing schemes since December, agreed this month that companies should disclose information on the key terms of schemes, including a general description of payment terms and timing as well as any assets pledged as security.

All entities that use the schemes, including private companies, in connection with the purchase of goods and services will be required to make the new disclosures for fiscal years starting after December 15.

In its proposed update to accounting standards, FASB argues the new requirements will give investors a better understanding of a company’s working capital, liquidity and cash flows.

The IASB’s proposed amendments include asking companies to disclose information in notes about supplier finance arrangements and show the impact on liabilities and cash flows.

In a submission to the IASB’s review in March, the Australian Accounting Standards Board said its stakeholders believed the proposed changes would provide useful information but also wanted to understand the extent of cash payments made under supplier finance arrangements.

“We request clarification that material payments under supplier finance arrangements should be disclosed either as a separate line item in the statement of cash flows or as a note,” the AASB said.

The federal government has put pressure on companies to pay suppliers quickly, introducing a Payment Times Reporting Scheme in January 2021 that forces big companies to reveal exactly how long it takes them to pay small suppliers and whether they use supply chain finance.