ASU 2022-04: Supplier Finance Program Disclosures

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-04 to increase the transparency of arrangements known as supplier finance programs. These programs, also called reverse factoring, involve a three-party arrangement between a company (the buyer), its supplier, and a finance provider. In these programs, the buyer confirms its invoices with the finance provider, which then offers the supplier the option to be paid early, often for a small discount. The buyer then pays the finance provider on the invoice’s original due date.

This structure can impact a company’s working capital and cash flows, but before this update, there were no explicit disclosure requirements in U.S. GAAP for these programs. The new guidance, codified in Subtopic 405-50, aims to provide investors with the information needed to understand how these financing arrangements affect a company’s liquidity and obligations.

Scope of the Standard

The guidance in ASU 2022-04 applies to any company that acts as the buyer in a supplier finance program to purchase goods and services. The FASB defines a supplier finance program as an arrangement that has specific characteristics that distinguish it from other payment or trade payable arrangements.

The standard allows companies that use multiple supplier finance programs to group the disclosures. This aggregation is permissible only if it does not hide useful information by combining programs that have substantially different characteristics.

Required Annual Disclosures

For annual reporting periods, ASU 2022-04 requires companies to provide both qualitative and quantitative information about their supplier finance programs. These disclosures are meant to be presented in the notes to the financial statements for each year a balance sheet is presented.

On the qualitative side, a company must disclose the terms of the program. This includes a description of the payment terms, such as how payment timing is determined, and any assets the company has pledged as security for the payments. If the company has provided other forms of guarantees to the finance provider, those must also be described. For example, a company might disclose that confirmed invoices are due within 90 days and that the agreement can be terminated with 90 days’ notice.

Quantitatively, the focus is on the obligations that the buyer has confirmed as valid under the program. The company must disclose the total amount of these obligations that remains outstanding at the end of the reporting period. It is also required to describe where these outstanding obligations are presented on the balance sheet. If the amounts are included in more than one balance sheet line item, the company must disclose the amount within each line item.

An annual requirement is the disclosure of a rollforward of the program obligations. This reconciliation must show the following:

• The amount of obligations outstanding at the beginning of the year
• The amount of new obligations confirmed during the year
• The amount of obligations paid during the year
• The final outstanding balance at the end of the year

Required Interim Disclosures

For interim periods, such as quarterly reports, companies must disclose the amount of obligations outstanding at the end of the period. This provides investors with timely information about the program’s magnitude without repeating all the details required in annual disclosures.

Effective Date and Transition

The new rules have specific effective dates for implementation. For both public and private business entities, the standard is effective for fiscal years beginning after December 15, 2022. The guidance applies to interim periods within those fiscal years as well. Early adoption of the standard is permitted.

There is a specific exception for one part of the rule. The requirement to provide the rollforward information is effective for fiscal years beginning after December 15, 2023.

The transition requirements mandate that the disclosures be applied retrospectively. This means a company must provide the required disclosures for each period presented in its financial statements, allowing for comparison across years. The one exception to this retrospective application is for the rollforward information, which can be applied prospectively.