Spotlight on accounting for complex supplier arrangements
The FRC has urged reporting entities to clarify the accounting treatment of complex supplier arrangements, which include supply chain finance and ‘pay to stay’ fees.
At the beginning of December the Financial Reporting Council (FRC) called retailers, suppliers and other businesses to include in their financial statements sufficient information on their accounting policies, judgements and estimates arising from their complex supplier arrangements.
The FRC noted that the amounts involved in such arrangements are often significant in aggregate to the operating margins and other performance indicators of various entities and that therefore investors need to receive enough clear and relevant information to be able to evaluate a company’s performance and financial position.
For such purpose the FRC expects to see high quality disclosures for such arrangements in the next annual reports and accounts and it will focus on this area of the financial statements when conducting its reviews of audits and accounts in 2015. The FRC’s focus is likely to be on large retailers, such as supermarket and clothing chains, which appear to be heavily involved in complex supplier arrangements.
Complex supplier arrangements Complex supplier arrangements is a broad category that includes a number of regular features of supplier contracts in different industry sectors, including retail, such as fees, contributions, discounts, multiple offers and volume rebates.
An example of a similar arrangement are the so-called ‘pay to stay’, or ‘slotting’, fees, where existing suppliers of a large retailer are required to pay a fee to have their products placed on the retailer’s shelves or to be kept on its list of suppliers.
Another type of arrangement, which is likely to generate substantial inconsistency in accounting practice, is supply chain finance (SCF). The term supply chain finance includes a number of possible financial arrangements but it is commonly identified with the most popular and most widely used, which is reverse factoring.
SCF/reverse factoring is, in simple terms, a type of arrangement which is initiated by the buyer, who, upon receiving an invoice from a supplier, is asked to approve it. Once the invoice is approved, the supplier can sell it to a finance provider who advances discounted finance to the supplier based on the period between the cash advanced and the settlement of the account payable. As the supplier relies on the creditworthiness of the buyer, normally a larger entity, its cost of finance is lower than it would otherwise be if it raised the finance in its own right, for instance by using traditional invoice discounting.
SCF is supposed to improve the working capital requirements of the supplier by allowing earlier access to cash. On the other end the buyer is capable of benefiting by extending the term for the settlement of accounts payable and therefore improving its working capital requirements.
The adoption of SCF as an alternative finance option for SMEs and mid-market companies is supported by the UK government and a report commissioned by the ACCA in 2014 showed how the benefits of SCF are normally shared between both buyers and suppliers.
It has to be noticed that the Federation of Small Businesses (FSB) has also recently expressed concern in respect of some complex supplier arrangements, which in their opinion have been forced upon smaller suppliers to the extent of being tantamount to ‘supply chain bullying’.
Dubious accounting treatment As pointed out by the FRC, there is no single standard within IFRS which addresses the required accounting and disclosures for complex supplier arrangements. Additionally, in the absence of well-known industry norms, it is likely that the accountancy practice in respect of arrangements that are substantially the same may differ from one entity to the other.
Therefore the inclusion in the financial statements of information about the accounting treatment for such arrangements, and about material judgements and significant estimates underlying it, is essential for the users of the financial statements to allow understanding and comparability of a company’s performance and financial position.