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Companies Could Be Required to Reveal Complex Financing Details (1)

Oct. 21, 2020, 3:55 PMUpdated: Oct. 21, 2020, 8:23 PM

All U.S. companies may have to disclose the same kinds of details securities regulators forced the likes of Coca Cola Co., The Boeing Co. and Procter & Gamble Co. to reveal about increasingly common—and complex—financing tools.

The Financial Accounting Standards Board voted 5-2 on Wednesday to draw up potential requirements for companies to disclose the terms of their supply chain financing programs. Such arrangements help companies stretch out the payments they make to their suppliers but businesses rarely say they use the programs, despite how much they rely on them.

“We know there’s a lot more entities using these programs than are providing disclosures about them and that users have concerns about that and are finding it’s making it more difficult for them to make good investment decisions,” FASB member Christine Botosan said.

Supply chain financing typically involves companies negotiating more time to pay suppliers by having their banks or another party, for a fee, pay the supplier first. This can stretch out their payments to 180 or 210 days, or even up to a year, compared with 60 to 90 days under standard arrangements.

Investors and analysts don’t raise their eyebrows if a well-capitalized company uses these programs. But for companies with shakier credit, the prolonged payback terms can mask problems by flattering the appearance of their cash flows.

Another problem is that companies are not required to disclose whether they use these financing techniques and there are no accounting rules about how to classify the transactions, leaving investors in the dark. The Big Four audit firms last year asked FASB to provide clarity.

Still, FASB has to figure out what companies should disclose. That’s a problem, said two FASB members who opposed adding it to the board’s agenda.

FASB Vice Chairman James Kroeker noted that, in many cases, companies themselves don’t know all the details about the programs because they’re arranged by third parties. Requiring disclosure of their “awareness” of the programs would make for challenging audits, he said.

“I can’t even think of the internal controls one might need to have around ‘awareness,’” Kroeker said.

FASB member Marsha Hunt, the former controller of engine maker Cummins Inc., said that as the Securities and Exchange Commission increases scrutiny of companies using the programs, more businesses could voluntarily supply the information.

“We’re seeing some improvements,” Hunt said. “We’re starting to get some best practices from some of the disclosures that have been enhanced in 2020.”

The Securities and Exchange Commission has shot off letters over the past year to several large, multinational companies, asking them to reveal the basic terms of their supply chain financing arrangements.

The regulator asked Keurig-Dr. Pepper, Boeing Co, Coca Cola, Procter & Gamble Co., and others to explain whether they use supply chain financing and to share the basic terms of the arrangements. SEC officials also have signaled in speeches that companies need to give more details.

Adam Dener, managing director at Fermat Capital, an outfit that invests in supply chain finance assets, said he supported requiring companies to make thoughtful disclosures about these arrangements.

“At a minimum, companies should be describing whether or not they authorize these types of facilities,” Dener said.

(Update starting in second to last paragraph to include comment from Adam Dener.)

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@bloombergtax.com; David Jolly at djolly@bloombergindustry.com