In recent years, accounts payable programs have become increasingly popular with large and small businesses. While originally the exclusive domain of the big global banks and firmly based on a fairly straightforward reverse factoring model, these programs are now offered by banks and many non-bank market participants using a variety of structures and methods. funding sources.
As we discussed in our April 22, 2020 article, the “big four” accounting firms and the SEC’s Office of the Investor Counsel, among others, recently sought advice from the Financial Accounting Standards Board (“FASB“) on two separate issues regarding financial reporting on trade payables programs: (i) the financial statement disclosure requirements for public companies using such programs and (ii) should such programs be addressed as trade payables on a company’s balance sheet or, instead, as short-term debt obligations. Critics say the growing popularity of these programs, along with the relatively modest disclosures currently required under of US GAAP raise questions as to whether these creditors programs potentially obscure the financial reality of companies to investors. In particular, critics have expressed concern that these programs – which sometimes allow longer timeframes for debt commercial activities of a company than that which the company would be able to negotiate in the absence of such a program – (i) could result in artificial improvements in a company’s cash flow that could evaporate overnight if the financier of its accounts payable program decides to stop funding and (ii) could potentially mask the true leverage of a business. However, proponents of these programs argue, among other things, that these programs perform a vital economic function by providing efficient working capital to a company’s supplier base without in any way altering the sub-supplier / buyer business relationship. underlying or commercial nature of the company’s obligations.
Last Wednesday, the FASB held a board meeting to discuss whether to add to its agenda the development of guidelines for accounts payable programs. The FASB has made it clear that this proposed agenda item does not include the review of supplier-led factoring, receivables purchasing or receivables securitization arrangements. The scope of the proposal includes only buyer-led accounts payable programs.
During the meeting, board members voted 5-2 in favor of adding to their agenda the creation of guidance on disclosure requirements for accounts payable programs. However, the FASB has declined, for now, to address the question of whether trade debt programs should be classified as trade debt or short-term debt on balance sheets, although some board members have acknowledged that it might be necessary at some point. If this were the case, it is likely that the Board would need to consider the legal substance of the accounts payable structures, which vary considerably from program to program.
Next steps for the FASB will include soliciting feedback from companies and their accounting firms, developing a draft proposal, a public consultation process, and issuing final guidance. Any guidance that may be provided by the FASB should address the nature and extent of the disclosures to be provided in the financial statements regarding these programs. Given the importance of these issues to the supply chain finance industry, we anticipate that, in the coming months, industry participants will be keen to convey to the FASB the importance and sustainability of creditors’ proceeds.