The Big Four accounting firms this month sent a joint letter to the Financial Accounting Standards Board (FASB) seeking guidance on how companies are to disclose reverse factoring and other types of supplier financing arrangements.
Companies use supplier financing arrangements to manage their trade payables, and although the arrangements can help maximize cash, reduce late payments and earn early-payment discounts, they can also represent a form of debt liability that typically goes undisclosed in financial reports. Only about 5% of these types of arrangements are disclosed as debt.
- One form of supplier financing, reverse factoring, can expose cash-strapped companies to financial problems if the arrangement ends before a company can come up with cash or secure alternative payment arrangements.
Reverse factoring differs from regular factoring by the source of the arrangement. In regular factoring, the supplier arranges payments with a bank, which works with the buyer to secure payment. In reverse factoring, the buyer negotiates the supplier payments with the bank.
The accounting firms told FASB the absence of guidance on how arrangements of this type are disclosed on company balance sheets is a problem for investors, because the liability can have a material impact on liquidity if the company runs into financial trouble or if the arrangement is curtailed.
Lack of consistent disclosure rules are a concern for equity analysts, too.
In a comment released Monday, Moody's Investor Services called on FASB to address the issue at its next meeting.
"We believe that requiring these disclosures, as suggested in the [Big Four accounting firms'] letter, can short-cut a long discussion on how to create guidance on classification of these agreements," Moody's said. "This information could be combined with company-specific qualitative information, which would enable investors to apply analytical judgment as to whether these arrangements are similar to trade payables or to that of a debt-like financing arrangement."
FASB's next board meeting is Oct. 30.