Hidden Debt Revealed by new FASB Rules

New Financial Accounting Standards Board (FASB) rules, issued in September 2022, have revealed some S&P 500 companies’ extensive use of supplier finance, which consists of relying on leverage (debt) to finance their supply chain operations.

Such companies included O’Reilly Automotive Inc., Keurig Dr Pepper Inc., and NextEra energy Inc., where this type of financing made up over 50% of their Accounts Payable.

According to Bloomberg Tax, such practice has greatly increased among firms, consisting of roughly over $100 billion in 2015 to around $700 Billion in 2021.

Benefits of using this type of financing include extra time to meet supply chain dues, as well as providing extra cash in hand for the buyer company in some cases. However, complications, such as unable to meet obligations or deteriorating credit ratings, could arise in the case that the company relies heavily on this type of financing.

Another concern of using such tactic is the deceiving impression about a company’s liquidity. Additionally, the new FASB rules that disclosed such “hidden” debt has analysts and investors concerned and unsatisfied, since the rules don’t enforce the disclosure of the details concerning the use of such debt.

How Supplier Finance Works? (AKA. Reverse factoring or Supply Chain Finance).

-Suppliers sends goods to the buyer along with an invoice listing the payments due (usually in 30 days).

- A financial institution finances the purchase, extending the payment period for the buyer.