Trends and Technology
Increased Disclosure Will be Positive for Supply Chain Finance
August 4, 2021 |
With new reporting guidelines expected to be enacted by several major accounting regulators in the coming months, now is the time to ensure your company is well prepared to meet enhanced disclosure requirements.
As supply chain finance (SCF) has grown increasingly important to enterprises worldwide, so too has the need for increased clarity and transparency. With no set reporting guidelines, many companies are either not fully disclosing their supply chain financing programs or simply not providing any details at all which could be distorting their liquidity and free cash flow positions.
Against this backdrop, investors, accountants and other parties have been clamouring for enhanced insight and guidance from regulators. In response, both the International Accounting Standards Board (IASB) and The Financial Accounting Standards Board (FASB) plan to establish new disclosure standards that will provide stakeholders with a clearer and more transparent view into company finances.
While disclosure requirements are not often welcomed, we believe that these standards will provide outsized benefits moving forward and be a positive development for responsible companies, investors and the industry at large.
Fundamentally, disclosure requirements will bring about enhanced transparency and offer a level playing field for any bank and provider. These established, uniform standards will help investors further understand your business, while providing clear and concrete guidelines that will help you better meet stakeholder expectations.
Clearly, not everyone is going to be excited about the need for disclosures. Some entities that have used the solution to artificially inflate their balance sheets will need to take a hard look at their respective finances and policies, and determine whether SCF is right for their needs moving forward.
Nonetheless, we are confident the upcoming changes will be beneficial for your company and the industry overall.
What disclosure requirements can you expect?
Both the IASB and FASB have indicated plans to establish their respective disclosure guidelines in the coming months. While the specific requirements have yet to be finalised, and will be dependent on the accounting standards your company follows, we expect both bodies to create similar guidelines and can safely assume that details of your SCF programs will soon be required in your financial statements.
IASB recently shared its approach and key considerations to supplier finance arrangements, providing us with a better understanding of what new standards we can expect. Developed to increase investor understanding of a company’s finances, IASB is considering a number of necessary disclosures, including “the key terms and conditions of a supplier finance relationship.”
IASB’s recently published paper provides an overview of what to expect moving forward. We encourage you to read IASB’s document for more details.
FASB has also indicated that companies will have to release key terms of their financing programs. According to an article from The Wall Street Journal, under the proposed standards companies would “have to release key terms of their financing programs,” which could include “the company’s role in the arrangement between the supplier and the finance provider.” The article further notes that FASB “wants companies to provide the value of invoices that they make available to suppliers to receive their payments early,” giving investors “a sense of the size of supply chain programs by comparing it to companies’ total payables.”
What do these requirements mean for you?
If you have already been disclosing details about your SCF arrangements, then you should be in great shape. For those who may be a bit behind, now is the time to prepare your operations.
We do not expect that meeting these disclosure standards will require excessive time or resources on your part. Nonetheless, as with any new guidelines, it will be important to ensure you have a plan in place to build on your existing disclosure processes.
Overall, these new disclosure standards will require you to expand the review process a bit further than you may be accustomed to. As figures will be public, it will be important to ensure that your investor relations and corporate communications teams understand the details behind your arrangements and how they impact your financial statements.
You may also consider involving other departments, such as legal, to ensure proper alignment. Investor relations, corporate communications and legal departments are well versed in working together to develop compelling and clear messaging on financial and earnings-related topics, so you can easily add this step to the established review process.
Transparency is key to a strong relationship between you and your investors, suppliers and customers. These upcoming industry standards will go a long way in furthering the trust you have developed with your stakeholders and enable your company to have better and more insightful conversations with investors. Ultimately, updated disclosures will ensure that SCF is used effectively and as intended: to responsibly improve cash flow.
We are here to help you throughout the process, answer any questions you may have and work with you to determine if and how your supply chain financing needs may change moving forward.