By Dominic Capolongo, Chief Revenue Officer of LiquidX
Over the past decade, supply chain finance has gained in popularity. Despite this, the solution has remained relatively opaque to the many in the financial community. This lack of broader market familiarity has fostered speculation among equity investors, debtholders and even the rating agencies about what exactly supply chain finance is and who it benefits.
At the same time, there has been no effort to standardize how or even if sponsoring companies report these programs. Some companies disclose full details of their programs in their financial statements, while others simply state they have a program in place with no other information. Many companies don’t disclose their programs at all. For those looking at these programs from an outsider’s perspective, the lack of standardization serves only to increase their confusion.
A few weeks ago, the Financial Accounting Standards Board (FASB) voted to approve new disclosure requirements for supply chain finance programs. This new rule will standardize how public and private companies report on their programs, providing more clarity to the general public so they can ask smarter questions and truly understand the value of supply chain finance.
Under the new regulation, which is set to go into effect next year, companies running supply chain finance programs would be required to disclose details of their programs in their financial statements, including:
- The amount outstanding (that is, the amount that remains unpaid by the buyer) as of the end of the period (the outstanding confirmed amount)
- A description of where that amount is presented in the balance sheet
- Changes in that amount during the period, including the amount of obligations confirmed and the amount subsequently paid
Disclosure Creates Stronger, More Sustainable Supply Chain Finance For All
It’s important to note the driving force behind FASB’s decision to move forward with new disclosure requirements. The change is much more focused on increasing transparency for investors and stakeholders rather than as a reaction to bad actors. In the December 2021 proposal, FASB explains that the move will help bring clarity to “the effect of [the] programs on an entity’s working capital, liquidity, and cash flows.”
Enhanced visibility into the mechanics of supply chain finance is a positive step for the industry. This will not only increase the public’s trust in supply chain finance, but it will also bolster businesses’ confidence in the solution’s accounting treatment as it removes some of the longstanding lack of certainty around how to report these programs on the balance sheet.
As an added bonus, disclosure can actually help improve a company’s creditworthiness. There have been instances where disclosure to stakeholders improved credit ratings because it enabled the reviewer to properly evaluate the company’s standing and financial performance.
LiquidX Technology is Well Poised to Support New Disclosure Requirements
Since FASB released the proposal late last year, some companies have objected to the new disclosure rules, citing they would have to amp up IT spending to cover the cost of a process they deem expensive and time-consuming.
Luckily, LiquidX’s advanced suite of technology makes gathering the necessary information for disclosure a seamless and simple process. LiquidX allows companies to better track and report on their program metrics, while providing granular control over allocation, validation, calculations, and more.
The platform’s customized user interface and powerful insights tool empowers businesses to:
- Aggregate and analyze historical and projected risk using the LiquidX Position & Risk Monitor
- Integrate existing data and positions into the Position & Risk Monitor (platform agnostic)
- Leverage the comprehensive real-time Business Intelligence and transaction reporting capabilities
- Deploy custom dashboards quickly and easily using transaction and risk data to better monitor the business
FASB’s new guidance helps usher the supply chain finance industry toward increased visibility for companies, stakeholders, investors, and the general public. This will eliminate confusion both for the broader market as well as for program sponsors in terms of how to properly disclose and evaluate these programs – which will subsequently improve transparency and confidence in supply chain finance overall.
No matter what evolution the industry experiences, LiquidX is here to support clients and partners every step of the way. Our solutions are purpose built to grow and adapt alongside our customers, and our experts maintain a pulse on the latest developments so we can keep our network informed. We will continue to monitor for updates.
Interested in learning more about LiquidX’s solutions? Contact us.