More disclosures proposed for supplier finance arrangements
In our April 2021 edition of Accounting News, we explained the IFRS Interpretations Committee agenda decision on how to account for reverse factoring/supply chain financing arrangements and related disclosures.
In order to complement the requirements in IFRS Standards regarding reverse factoring and other similar arrangements (as outlined in the agenda decision), the International Accounting Standards Board (IASB) is proposing to add additional disclosure requirements to IAS 7 Statement of Cash flows and IFRS 7 Financial Instruments: Disclosures. ED/2021/10 Supplier Finance Arrangements – Proposed amendments to IAS 7 and IFRS 7 (ED 317 in Australia) aims to provide users of financial statements with information that enables them to assess the effects of supplier finance arrangements on the entity’s liabilities and cash flows, as well as on liquidity and risk management.
Who will be affected?
Any entities that, as a buyer, enters into one or more supplier finance arrangements will be affected by these proposals.
What is a ‘supplier finance arrangement’?
As ‘supplier finance arrangements’ may evolve over time, the term has not been defined in either IAS 7 or IFRS 7 because there is a risk of it becoming outdated as new practices and arrangements develop. Instead, the proposals in ED/2021/10 describe the characteristics of a ‘supplier finance arrangement’ in proposed paragraph 44G to IAS 7 as follows:
- One or more finance providers offer to pay amounts an entity owes its suppliers
- The entity agrees to pay the finance providers at the same date, or a later date, than suppliers are usually paid
- Entity gets extended payment terms, or supplier gets early repayment terms, compared to the invoice payment due date
- Often referred to as ‘supply chain finance’, ‘payables finance’ or ‘reverse factoring arrangements’.
Under the proposals, supplier finance arrangements include situations where the entity (customer) is seeking to extend repayment terms, as well as those where the supplier is seeking to be paid earlier than its usual repayment terms.
New IAS 7 disclosures
Proposed new IAS 7 disclosures include:
- Reconciliation of changes in liabilities from financing activities – non-cash changes from supplier finance arrangements to be shown separately
- Terms and conditions of each supplier finance arrangement (such as extended payment terms and security or guarantees provided)
- For each supplier finance arrangement – as at the beginning and the end of the reporting period:
- The carrying amount of financial liabilities that are part of the supplier finance arrangement
- The line item where it appears in the balance sheet
- The carrying amount for which suppliers have already received payment from finance providers
- The range of payment due dates (e.g. 30 to 40 days after invoice date)
- At the beginning and end of the reporting period, the range of payment due dates of trade payables that are not part of a supplier finance arrangement.
Amendments to IFRS 7 disclosures
The proposals note that the entity also needs to consider supplier finance arrangements when:
- Describing how the entity manages liquidity risk
- Quantifying concentrations of credit risk.
Do comparatives need to be restated?
Yes. The proposed additional disclosures apply retrospectively, therefore information must be provided for all new disclosures in the comparative period.
The Australian Accounting Standards Board is seeking comments by 3 February 2022 and the IASB by 28 March 2022.
For more information on the accounting and disclosure requirements for supplier finance arrangements, please refer to our Accounting News article and eLearning module.