I’ve been waiting to publish this for quite a while, I know, but I think it’s an important issue. For smaller shippers and carriers, like small independent trucking firms, cash flow is extremely important. Factoring invoices can be a way to insure that the bulk of the money for a bill comes in at a known time, allowing plans for use of the money to be made. It’s also a way for the payer of an invoice, the shipper, to set payment dates at known times, so their cash flow can be managed.
According to the article, there have been recent changes to how factoring is reported on accounting records. In fact, firms did not need to disclose that they were using factoring until the new FASB rule went into effect after Dec 15, 2022.
What this means is that for fiscal years that begin after Dec 15, 2022, the key terms of any supplier finance programs must be disclosed, FASB regulations say: “The key terms of the supplier finance program, including a description of the payment terms (including payment timing and basis for its determination) and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary”.
This includes the amount outstanding that remains unpaid by the buyer at the end of the annual period, a description of where these commitments are shown in the balance sheet, and a “rollforward” including the amount of obligations confirmed and the amount subsequently paid.
These are important rules, because a part of the firm’s activity will be disclosed. It’s always possible to fool around with accounts receivable or payable to make figures look as you wish— that’s usually where delinquent payables or receivables are displayed. But disclosing the amount and timing of the actual obligations at least annually is a good start, especially when factoring is used to help a company running close to the margins maintain a regular cash flow.
It’s also important when you are planning to acquire a small firm. Investigate how the small firm is handling its receivables; are they factoring them? And if so, what is the nature of the deals being contracted. Small firms may not have to fully comply with FASB standards, since they aren’t public companies. Having a firm’s bookkeeper prepare the information required by FASB on supplier financing would be an excellent start. Make sure you fully understand the potential risk in your investment.
Todd Maiden·Saturday, January 07, 2023
How changes in supply chain finance disclosure could impact shippers – FreightWaves
Bryan Strickland, September 30, 2022
FASB updates reporting standard for supplier finance programs
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Supply Chain and Logistics 