Analyst insight: As more companies turn to supply-chain finance to strengthen their businesses, a need is emerging for clearer regulatory guidance. 

The number of businesses using supply-chain finance has exploded in recent years, especially among publicly-traded companies eager to improve cash flow, pay down debt, increase investment and deliver more value to shareholders. However, many are asking for clearer guidance on what they should disclose about supply-chain finance programs in their financial statements — as illustrated in a recent industry letter to the Financial Accounting Standards Board (FASB).

Part of what’s driving confusion is interest from the U.S. Securities and Exchange Commission. As more companies use supply-chain finance tools, the federal agency must understand how they operate and what — if any — information should be publicly filed. 

As FASB and the SEC decide how to account for these tools, classifying supply-chain finance programs remains a grey area. That may have been tolerable a decade ago when programs were few and far between, but at a time when the majority of industry-leading enterprises now use supply-chain finance in one form or another to improve their working capital, the need for clearer guidance has become imperative.  

Meanwhile, companies will need to make sure their supply-chain finance providers and partners are clear on established best practices for governing program disclosure. 

Here are a few examples:

• Managing programs in a manner that doesn’t invite SEC scrutiny and errs on the side of conservatism;
• Applying proper accounting treatment to make sure supply-chain finance rolls up under trade payables and operating cash flows;
• Making sure there is no direct relationship between a company sponsoring the supply-chain finance program and the financial institution or funder.

Outlook

The next year will bring greater transparency to supply-chain finance, which is good news for all parties involved. Supply-chain finance is instrumental to navigating the dual pressures of economic uncertainty and transformation, and those pressures aren’t abating anytime soon. More clarity around best practices for proper accounting treatment and financial disclosure will ultimately benefit suppliers and buyers.

David Quillian is chief legal officer at PrimeRevenue.