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Cash Flow Tool Favored by P&G, Boeing to See ‘Light of Day’ (1)

Sept. 29, 2022, 7:12 PMUpdated: Sept. 29, 2022, 8:24 PM

A popular form of financing—which boosts the cash flows of large companies by letting them stretch out payments to suppliers—has largely been hidden from investors and analysts. Until now.

US accounting rulemakers on Thursday published rules that will next year compel companies to reveal in their financial statement footnotes that they use supply chain financing and how much of it is at stake every reporting period.

The requirements follow almost three years of requests from investors and the Big Four accounting firms, as well as increased scrutiny of the financing by Wall Street’s top regulator. The Securities and Exchange Commission since 2020 has called out Coca-Cola Co., Procter & Gamble Co., The Boeing Co., and others to reveal in their financial statements that they use this type of financing.

“I’m just glad it’s actually seeing light of day,” said Shripad Joshi, senior director at S&P Global Ratings.

Companies will have to disclose the key terms of their arrangements, including a description of the payment terms, payment timing, and assets pledged or other forms of guarantees. The rules go into effect for the first reporting period after Dec. 15, 2022, which will be 2023 for calendar-year companies. Privately held companies do not get extra time. All companies also will have to share the balance every reporting period and how it changes from period to period.

This marks a change from the draft plan released in December, which only compelled companies to share details every 12 months if the arrangements hadn’t materially changed. Investors balked, saying they couldn’t wait for year-end reports to get vital information about short-term arrangements.

Supply chain financing, sometimes called reverse factoring, involves companies making arrangements with banks or other lenders to pay bills for anything from cardboard to car parts quickly. A company pays the bank back later, sometimes by 90 days or more. A supplier, which otherwise might have to wait months to get paid for its widgets, accepts immediate cash from the financial intermediary at a slightly discounted rate.

Credit Risks

Transactions between investment-grade companies and their suppliers are considered to carry low risk. Ratings agencies and investors become more concerned about companies on shakier financial footing. If credit tightens, the cash source could dry up.

The majority of the market focuses on deals with companies with good credit, but it’s hard to know the extent of transactions for companies with lower credit, said Bob Kramer, managing partner of Capgenta LLC, a supply chain finance consulting firm. Prior to FASB’s new rules, there were no disclosure requirements.

As companies battle with rising interest rates and higher prices, the popularity of supply chain financing is expected to grow, Kramer said.

“There’s more reasons for companies to want to inject low-cost liquidity into the supply chain today,” he said.

Disclosures become vital for investors such as insurance companies, hunting for low-risk investment opportunities. Insurershave for years invested in supply-chain-financing transactions, said Mike Monahan, senior director of accounting policy at the American Council of Life Insurers.

More Sunshine on Transactions

“The more transparency, the more sunshine on a transaction, the better it is for everybody,” Monahan said.

In addition to a transaction’s “key terms,” companies must disclose the amount of money outstanding that is unpaid at the end of the annual period. They also have to describe where obligations are presented on their balance sheets, FASB said.

Investors and analysts, which asked FASB for more specifics, consider the disclosures a start. But the basic requirements put the onus on companies to voluntarily disclose more numbers. The disclosure requirements also don’t touch on how companies should recognize and measure these arrangements or how they need to be classified in their statements of cash flows—clarity the largest audit firms sought in a rare joint request to FASB in October 2019.

“It’s a disappointing outcome,” said Adam Dener, managing director at Fermat Capital Management. “The requirements don’t really enable users of financial statements to interpret what’s going on with these programs.”

(Updates starting in paragraph three to add more details.)

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; David Jolly at djolly@bloombergindustry.com