FASB to Explore Greater Disclosure of Supply-Chain Financing

Investors are a step closer to gaining greater clarity on companies’ so-called supply-chain finance programs.

The Financial Accounting Standards Board, the private organization that sets accounting standards, voted Wednesday to add to its agenda a project exploring greater disclosure surrounding the arrangements.

Supply-chain finance is essentially a form of short-term borrowing to pay for goods and services. The funding, often provided by banks, pays a company’s suppliers earlier than they would normally be paid, at a slight discount. The company then pays the bank later, allowing the company to hang on to cash longer.

Financial institutions that offer such funding include

Citigroup Inc.,

Greensill Capital and HSBC Holdings PLC. Coca-Cola Co. and

Boeing Co.

and many other blue-chip companies make use of the financing.

The tool has attracted scrutiny from the U.S. Securities and Exchange Commission, ratings firms and market participants, some of whom say it allows companies to portray overly optimistic financial health. The SEC in recent months has asked some large companies to provide more details about their supply-chain finance programs.

The FASB’s decision to work on the issue was spurred by a joint letter the Big Four accounting firms sent last year, asking the board for guidance on disclosures companies should make about supply-chain finance.

The firms asked the FASB for guidance on how the arrangements should be reflected in cash flow statements. They also detailed the difficulties in ascertaining whether such programs should be counted as accounts payable or as debt.

More transparency, they wrote, would help investors understand a company’s financial position, even if the FASB doesn’t ultimately offer guidance on classification.

The FASB voted Wednesday to focus the project on disclosure. One result could be requiring companies to add footnotes to their financial statements explaining the nature of the programs they use.

Board members during Wednesday’s meeting highlighted the growing use of supply-chain finance among companies as well as the lack of disclosure. Fewer than 5% of the nonfinancial companies that

Moody’s Investors Service

rates globally disclose supply-chain financing in their financial statements, the ratings firm said last year. Companies generally aren’t required currently to disclose that information.

A FASB spokesperson said Wednesday’s decision is the first step to determine whether there are opportunities to bring more transparency to these transactions.

The organization’s next steps include talking to industry participants and putting forth a proposal, soliciting public comments and presenting a final standard, though there is no guaranteed outcome.

Write to Julie Steinberg at [email protected]

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