Supplier finance arrangements – tell us what to disclose!

The IASB has issued for comment Supplier Finance Arrangements, an exposure draft of proposed amendments to IAS 7 and IFRS 7, with comments to be received by March 28, 2022.

The exposure draft describes a supplier finance arrangement as “characterized by one or more finance providers offering to pay amounts an entity owes its suppliers and the entity agreeing to pay the finance providers at the same date as, or a date later than, suppliers are paid. These arrangements provide the entity with extended payment terms, or the entity’s suppliers with early payment terms, compared to the related invoice payment due date. Supplier finance arrangements are often referred to as supply chain finance, payables finance or reverse factoring arrangements.” It provides a few examples of such arrangements:

  • the entity does not obtain an extension of credit from the finance providers—the entity settles invoices that are part of the arrangement on the due date as negotiated with its suppliers. However, suppliers (that are part of the arrangement) can choose to be paid earlier than the invoice due date by the finance providers, at a discount. It may (or may not) be that the entity has negotiated extended payment terms with its suppliers in the light of the supplier finance arrangement being in place.
  • the entity obtains extended credit from the finance providers—the entity pays the finance providers at a date later than the invoice due date for an amount that is more than the invoice amount; the finance providers pay suppliers the amounts they are owed by the entity on the invoice due date.

IAS 7 currently requires that an entity “shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes,” and sets out various items to be disclosed to the extent necessary to satisfy that requirement, including changes arising from obtaining or losing control of subsidiaries or other businesses, from changes in foreign exchange rates, and others. The exposure draft proposes adding a new disclosure item: non-cash changes arising from supplier finance arrangements, for example when future cash outflows will be classified as cash flows from financing activities. It supplements this with a requirement to disclose “information about its supplier finance arrangements that enables users of financial statements to assess the effects of those arrangements on the entity’s liabilities and cash flows.” This includes:

  • (a) the terms and conditions of each supplier finance arrangement (including, for example, extended payment terms and security or guarantees provided);
  • (b) for each supplier finance arrangement, as at the beginning and end of the reporting period:
    • (i) the carrying amount of financial liabilities recognized in the entity’s statement of financial position that are part of the arrangement and the line item(s) in which those financial liabilities are presented;
    • (ii) the carrying amount of financial liabilities disclosed under (i) for which suppliers have already received payment from the finance providers; and
    • (iii) the range of payment due dates (for example, 30 to 40 days after the invoice date) of financial liabilities disclosed under (i); and
  • (c) as 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.

The exposure draft also makes a couple of changes to IFRS 7, explained as follows:

  • Users of financial statements need information to help them assess the effect of supplier finance arrangements on an entity’s exposure to liquidity risk and risk management. The liquidity risk disclosure requirements in IFRS 7—which apply to recognized and unrecognized financial instruments—are already comprehensive, and the Board is of the view that there is no need to add to them as part of this project. Nonetheless, the Board decided to add supplier finance arrangements as an example within the liquidity risk disclosure requirements in IFRS 7 to highlight the importance of providing liquidity risk information about these arrangements.

As we covered here, this area was previously covered to some extent by an IFRIC agenda decision. According to the exposure draft though, the Board was informed that “without targeted amendments to the current disclosure requirements, users of financial statements may be unable to obtain from financial statements some of the information they need to understand the effects of the arrangements and may, therefore, be hindered in comparing one entity with another.” There may be something of an implied rebuke there, directed at users of such arrangements who surely could adequately disclose their extent and impact under current standards if they wanted to (should such an exposure draft really have been necessary?), but who for whatever reason won’t do it in the absence of explicit requirements. Yet again, it’s not always easy being principle-based…

The opinions expressed are solely those of the author.

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