Supplier / Supply Chain Finance Arrangements - Disclosure that Reflect Investor Needs

Effective Date: January 1, 2024

In response to investors' need for information related to "Supplier Finance Arrangements (SFA)" in several companies, the IASB issued disclosure requirements that can enhance the transparency and have an impact on liabilities, cash flows and liquidity risk exposure.

Supplier finance arrangements (SFA) are often referred to as supply chain finance, trade payables finance or reverse factoring arrangements [IFRS.org].

Supplier Finance Arrangements (SFA)

In an SFA, one or more finance providers offering to pay amounts an entity owes its suppliers and the entity agreeing to pay according to the terms and conditions of the arrangements at the same date as, or a date later than, suppliers are paid.

SFA are arrangements whereby a financial institution (FI) pays the liabilities of a company (act as the buyer) in advance to the supplier. These arrangements provide the company with extended payment terms, or the company's suppliers with early payment terms, compared to the related invoice payment due date.

A simple illustration of SFA is depicted in the figure below:

(1) Company A as a buyer makes a credit purchase of goods/services provided by Supplier B,

(2) Then, Company A enters into an agreement with a Financial Institution (FI) / finance provider, where FI will first pay A's debt to Supplier B,

(3) FI pays (A's liabilities) to the Supplier B,

(4) A agrees to pay the FI at the same date as, or a date later than, the supplier is paid.

Note:

Arrangements that are solely credit enhancements (Letter of Credit, L/C) or used to settle directly with a supplier the amount owed (Credit Card) is not an SFA.

What are the new disclosure requirements?

The amendments supplement requirements already in IFRS Accounting Standards and require a company to disclose (IFRS.org, May 2023):

1. the terms and conditions (T&C) of each supplier finance arrangements,
2. the amount of the liabilities that are part of the arrangements, breaking out the amounts for which the suppliers have already received payment from the finance providers, and stating where the liabilities sit on the balance sheet,
3. ranges of payment due dates; and
4. liquidity risk information.

For each SFA, as at the beginning and end of the reporting period:

(i) the carrying amount (CA) of financial liabilities recognized in the company’s balance sheet that are part of the arrangement and the line item(s) in which those financial liabilities are presented,

(ii) the CA of the financial liabilities disclosed under (i) for which suppliers have already received payment from the finance providers,

(iii) the range of payment due dates (for example, 30 to 40 days after the invoice date) of financial liabilities disclosed under (i).

As at the beginning and end of the reporting period, the range of payment due dates of trade payables that are not part of an SFA.

Example Disclosure related Supplier Finance Arrangements (Quantitative)

Objective of disclosure: Liabilities, cash flow and exposure to liquidity risk

Presentation Requirement:

[IAS 1 and IAS 37] Entities are also required to present balance sheet liabilities that are part of supplier finance arrangements. Specifically, the presentation of liabilities refers to IAS 1 Para. 29, 54, and 55.

[IAS 7] The impact of SFA on the cash flow (CF) statements (IFRS.org, Nov. 21):

(1) a CF benefit in operating activities when the trade payable is recognized,

(2) a non-cash transfer in CF from financing activities when the trade payable is derecognized, and a new class of financial liability is recognized; and

(3) a cash outflow in financing activities when the new liability is settled with the finance provider.

Accounting Entries Illustration - SFA

When FI pays (A's liabilities) to Supplier B, A reclassify the liability from trade/other payable to finance payable (a non-cash transfer).

Why is this reclassification information useful for investors? Because the presentation of liabilities originating from trade/other payables are from operating activities. While finance liabilities are part of the financing activities.

Example Disclosure SFA: UNVR (PT Unilever Indonesia Tbk., September 2024)

Effective Date and Transition

For periods prior to January 1, 2024, entities are not required to disclose comparative information related to SFA. Entities apply this amendment (first annual reporting date) to disclose SFA information as of December 31, 2024.

Reference:

1. IFRS - Supplier Finance Arrangements
2. IFRS - IASB increases transparency of companies’ supplier finance
3. Ikatan Akuntan Indonesia (IAI) Public Hearing, Nov. 23
4. IDX (UNVR Financial Statements Q3)
5. Author Note