IASB approves changes to the accounting for supplier finance arrangements
IASB approves changes to the accounting for supplier finance arrangements
In our April 2021 article, we explained the IFRS Interpretations Committee agenda decision on how to account for reverse factoring/supply chain financing arrangements and related disclosures.
On 25 May 2023, the International Accounting Standards Board (IASB) amended IAS 7 Statement of Cash flows and IFRS 7 Financial Instruments: Disclosures to increase the level of disclosure and transparency about companies’ supplier finance arrangements. The changes are intended to enable users of financial statements to get the information they need to understand the effect of supplier finance arrangements on an entity’s financial statements, as well as to compare one entity with another.
Objectives of the new disclosures
The objectives of the new disclosures are to provide users of financial statements with information to enable them to:
- Assess how supplier finance arrangements affect an entity’s liabilities and cash flows
- Understand the effect of supplier finance arrangements on an entity’s exposure to liquidity risk and how the entity could be affected if the arrangements were no longer available to the entity.
What is a ‘supplier finance arrangement’?
The amendments do not define a ‘supplier finance arrangement’ but rather describe the characteristics of a ‘supplier finance arrangement’ in 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 provider(s) according to the terms and conditions of the arrangement at the same date, or a later date, than suppliers are 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’
- Do not include arrangements that are solely credit enhancements for the entity (for example, financial guarantees including letters of credit used as guarantees)
- Do not include instruments used for by the entity to settle amounts owed directly with a supplier (for example, credit cards).
New IAS 7 disclosures
IAS 7, paragraph 44H contains the following new disclosures in aggregate for its supplier finance arrangements:
If ranges of payment due dates are wide, the entity must disclose explanatory information about those ranges or disclose additional ranges (for example, stratified ranges)
- The terms and conditions of supplier finance arrangements including, for example, details of extended payment terms, and security or guarantees provided. However, separate disclosure is required about the terms and conditions of arrangements that have dissimilar terms and conditions
- At the beginning and the end of the reporting period:
- The carrying amount of financial liabilities that are part of the supplier finance arrangement, and the line item where it appears in the balance sheet
- The carrying amount of financial liabilities and the associated line item in the balance sheet disclosed under (i) above 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) for both:
- Items disclosed under (i) above
- Comparable trade payables that are not part of supplier finance arrangements (for example, those within the same line of business or jurisdiction as financial liabilities disclosed under (i) above)
- The type and effect of non-cash changes in the carrying amounts of financial liabilities disclosed under (i) above (for example, business combinations, exchange differences, etc.).
Effective date and transition
The new IAS 7 disclosures are effective for annual periods beginning on or after 1 January 2024, but can be adopted early. However, the following transitional exemptions apply:
- Comparative information is not required in the first year. For example, if the entity applies the amendments for the first time to 31 December 2024 year-ends, it need not provide comparative disclosures for the year ending 31 December 2023, or any prior periods presented
- The information required as shown in (ii) and (iii) above is not required at the beginning of the first annual reporting period to which these amendments apply (i.e. 1 January 2024 for a 31 December 2024 year-end).
- In the first annual period to which the amendments apply, the new disclosures are not required for any interim period presented within that annual period.
New IFRS 7 disclosures
Under IFRS 7, paragraph 39(c), entities must disclose a narrative description of how they manage liquidity risk inherent in the quantitative maturity analysis.
The amendments to IFRS 7, paragraph B11F clarify that entities making this disclosure might consider whether the entity has accessed, or has access to, facilities under supplier finance arrangements that provide the entity with extended payment terms or the entity’s suppliers with early repayment terms.
IFRS 7, paragraph 34(c) also requires disclosure of concentrations of risk if not apparent from the quantitative disclosures regarding exposure to credit, liquidity and market risks.
Effective date and transition
The amendments to IFRS 7 apply when an entity first applies the amendments to IAS 7. The amendments to IAS 7 first apply to annual periods beginning on or after 1 January 2024. Therefore, the IFRS 7 amendments must be applied to annual periods beginning on or after 1 January 2024, but must be adopted earlier if the entity adopts the IAS 7 amendments for an earlier period.
More information
Please refer to our International Financial Reporting Bulletin on these amendments, and to our article and eLearning module for more information on the accounting and disclosure requirements for supplier finance arrangements.and eLearning module for more information on the accounting and disclosure requirements for supplier finance arrangements.