When I first saw the references to “supply chain financing” in Corp Fin’s COVID-19 guidance, I wasn’t really sure what the big deal was. I’m guessing that some others were also a little surprised to see how prominently supply chain financing was featured in that guidance — and in recent Staff comment letters.
If you’re wondering where this all came from, check out the Jim Hamilton blog, which discusses the history of Staff concerns about accounting and disclosure issues surrounding supply chain financing, and says they can be traced all the way back to 2003. The basic issue is the appropriate classification of the obligation that arises when a purchaser gets financing from a lender to pay its vendors. The trouble is, as the Big 4 pointed out in a 2019 letter to FASB, U.S. GAAP currently offers little guidance on the question of how to account for these arrangements.
The blog reviews the accounting issues involved and the comment letters that the SEC has issued addressing supply chain financing disclosure. This excerpt summarizes the results of that comment letter review:
SEC staff have engaged in some comment letter dialogs with companies regarding supply chain financing. The theme of these dialogs is that SEC staff saw something unusual in the company’s filings, the company replies that the supply chain issue is nonmaterial, and the SEC accepts the companies’ promises of additional disclosure in future filings.
As Liz noted in her recent blog on this topic, the Staff’s interest pre-dates the pandemic because it began issuing comments on supply chain financing in mid-2019. Perhaps it’s not a coincidence that the Big 4 reached out to FASB looking for guidance on the topic at around the same time.
-John Jenkins, TheCorporateCounsel.net September 11, 2020
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