Update on IFRS Disclosure Requirements for Supplier Finance Arrangements

Following on from our April 2020 post (where we discussed the call from certain accounting firms and others for guidance from the Financial Accounting Standards Board (“FASB”) on the treatment of trade payables programs) and our October 2020 post (where we provided an update on the FASB’s proposals in response), on June 23, 2021, the IFRS International Accounting Standards Board (“IASB”) tentatively agreed to add a narrow-scope standard-setting project in respect of “supplier finance arrangements” to its work plan with the intention of amending certain IFRS and IAS standards to include additional disclosure requirements and clarifications in respect of “supplier finance arrangements.”

What instigated this?

The project was instigated following calls from Moody’s Investor Services (Moody’s) in January 2020 for clarity on (i) how an entity should present liabilities for goods and services received when the related invoices are part of a supply chain finance (or reverse factoring) arrangement and (ii) what information about reverse factoring arrangements an entity must disclose in its financial statements.

What will the project cover?

The IASB has said that the project will be limited to what it calls “supplier finance arrangements”—broadly, those arrangements used by an entity to fund payables due to its suppliers—not the arrangements that an entity uses to fund its receivables (e.g., factoring and invoice discounting). The IASB has stated its intention is not to define “supplier finance arrangements” but instead to provide explanations of the type of arrangements that will fall within the scope of that term so as to avoid creating a definition that is too restrictive. It is clear that the IASB’s intention is to not limit “supplier finance arrangements” to reverse discounting programs only but to include products that have the same economic effect.

In brief, the IASB is proposing to amend:[1]

• IAS 7 to include (i) an overall disclosure objective regarding supplier finance arrangements to help users of financial statements understand the nature, timing and uncertainty of cash flows arising from supplier finance arrangements and (ii) specific disclosure objectives providing quantitative information to help users of financial statements understand the risks that arise from supplier finance arrangements; and
• the liquidity risks disclosure requirements within IFRS 7 to include supplier finance arrangements as an example (due to the fact that supplier finance arrangements can result in an entity’s trade payables all being paid to a single financier and often such arrangements can be terminated with short notice periods).

What will the project not cover?

It appears that the IASB does not intend to look at the first of Moody’s requested clarifications, i.e., how an entity should present in their financial statements liabilities for goods and services received when the related invoices are part of a supply chain finance (or reverse factoring) arrangement.

What’s the next step?

The IASB will prepare an exposure draft for public comment in Q4 2021.

[1] IFRS – Supplier Finance Arrangements

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