Accounting and Auditing Update - December 2021

Accounting and Auditing Update - January 2022 Foreword | Chapter 1 | Chapter 2 | Chapter 3

Chapter 2
Introduction in November 2021, proposed amendments to IAS • The company is provided with extended payment

Supplier Globally, there has been an increase in the usage

of supplier financing arrangements1 as a means to
improve working capital position. However, currently,
7, Statement of Cash Flows and IFRS 7, Financial
Instruments: Disclosures. The proposals add
disclosure requirements related to supplier finance
terms or suppliers benefit from early payment
terms, compared with the related invoice payment
due date.

finance there is no explicit guidance on accounting for

supplier finance arrangements. In this regard, the
IFRS Interpretations Committee (IFRIC) received a
arrangements in order to meet the user information
needs in a way that complements the current
requirements in IFRS standards. The comment
This arrangement is depicted in figure 1 below:
Figure 1: Supply finance arrangement

arrangements:
period for this Exposure Draft ends on 28 March
request regarding the information which is required
2022.
to be provided in financial statements about supply
chain finance (reverse factoring) arrangements. In this article, we aim to provide an overview of the

Proposed In response to this, in December 2020, IFRIC

through an agenda decision2 concluded that the
accounting provisions applicable to supplier finance
arrangements and disclosures proposed by IASB in
its Exposure Draft.
Supplier

amendments
IFRS standards already provide adequate basis Goods and Services
to determine the presentation of liabilities and Understanding supplier finance
associated cash flows that meet some of the arrangements
information needs of users of financial statements

to IAS 7 and
Finance
An entity may enter into supplier finance
with respect to reverse factoring arrangements. provider
arrangements for different reasons, such as to pays the
However, based on the several suggestions and improve working capital position, assist the entity’s supplier

IFRS 7
inputs received from investors, analysts and users suppliers through alternative and more affordable Company
of financial statements, the International Accounting financing, etc. The IASB’s proposals apply to supplier
Agrees to pay finance
Standards Board (IASB) opined that without finance arrangement, which have the following provider at a later date*
targeted amendments to the current disclosure characteristics:
requirements, users of financial statements might
This article aims to: • The finance provider3 pays amounts a company
not be able to obtain some of the information they
Expound the amendments proposed (the buyer) owes its suppliers
need to understand the effects of the supplier
by IASB on disclosures required for finance arrangements and may, therefore, face • The company agrees to pay the finance provider
supplier finance arrangements. challenge in comparing one entity with another. at the same date as, or a date later than, suppliers Finance Provider
Thus, the IASB through an Exposure Draft: Supplier are paid, and
*At the same date as, or a date later than, suppliers are paid
Finance Arrangement (the Exposure Draft) issued (Source: Exposure Draft on Supplier Finance Arrangement issued by IASB in November 2021)

1. Also referred to as supply chain finance, payables finance or reverse factoring arrangement.
2. Agenda Decision, Supply Chain Financing Arrangements-Reverse Factoring.
3. Also referred to as ‘factor’.

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Accounting and Auditing Update - January 2022 Foreword | Chapter 1 | Chapter 2 | Chapter 3

All arrangements with the characteristics of supplier supplier finance arrangements and the cash flows are need to assess the substance of supplier finance in determining whether the related cash flows arise
finance arrangements (as mentioned above) are evaluated as under: arrangements. Where the terms of the liabilities from operating or financing activities. For example, if
subject to the proposed disclosure requirements. (including the nature and function of the liabilities) the entity considers the related liability as a trade or
Presentation in the balance sheet
However, the terms and conditions of supplier entered into are similar to the terms of an entity’s other payable, the entity presents cash outflows to
finance arrangements can range from simple to Derecognition of trade payables trade payables5 (for example, when those liabilities settle the liability as arising from operating activities
highly complex and arrangements can vary in form Entities would need to evaluate the arrangement are part of the working capital used in the entity’s in its statement of cash flows. Where the related
and how they are labelled. entered into to determine whether it results in normal operating cycle), they would be classified as a liability represents borrowings, the entity presents
derecognition of a trade payable to a supplier and trade payable. Other factors should also be assessed, cash outflows to settle the liability arising from
The Exposure Draft specifies that the proposals do
recognition of a new financial lability to a financial for example, where an entity provides additional financing activities in its statement of cash flows.
not apply to arrangements for financing receivables
institution, applying the derecognition provisions security as part of the supplier finance arrangement,
or inventory. Where entities determine that the liability arising
prescribed in IFRS 9, Financial Instruments. In such that would not have been provided without the
from the supplier finance arrangement results in a
IFRIC Agenda Decision - Accounting for a case, the entity should refer to IAS 1, Presentation arrangement, then the liability would not represent
borrowing, it would result in a non-cash transfer of
supplier finance arrangements – an overview of Financial Statements for disclosure of the new trade payables. Further, entities may determine to
liabilities within the balance sheet. IAS 7 requires
liability in the balance sheet. disclose these liabilities separately in the balance
After entering into a supplier finance arrangement, an entity to provide disclosures that enable users of
sheet, when the size, nature or function of such
careful consideration is required to determine Presentation in balance sheet financial statements to evaluate changes in liabilities
liabilities make separate presentation relevant to an
whether the financial liability should be presented as (both, cash and non-cash changes) arising from
As per IAS 1, an entity is required to evaluate understanding of the entity’s financial position.
a trade payable or whether it should be presented as financing activities.
part of borrowings. Determining this aspect is critical whether to present liabilities that are part of a reverse Companies are required to disclose the accounting
factoring arrangement: Exposure Draft - Key requirements
as it could impact key performance ratios and user’s policy they apply to the liabilities arising from or
understanding of the purchaser’s financial position • Within trade and other payables affected by supplier finance arrangements. The Exposure Draft proposes to introduce as a new
and cash flows. disclosure objective in IAS 7 for a company to provide
• Within other financial liabilities, or Presentation in the statement of cash flows
information about its supplier finance arrangements.
IFRIC, in its agenda decision specified that the IFRS IAS 7 does not provide specific guidance on supplier
• As a line item separate from other items in its This would enable users (investors) to assess the
standards provide adequate guidance to determine finance arrangements, however, IFRIC observed
statement of financial position4. effects of these arrangements on the company’s
presentation of liabilities and cash flows in the that an entity’s assessment of the nature of the liabilities and cash flows.
financial statements. Thus, the presentation of the In making this determination, entities would
liabilities that are part of the arrangement may help

4. As per IAS 1, an entity will present additional line items (including by disaggregating line items in the balance sheet) when such presentation is relevant to an understanding of the entity’s financial position.
5. As per IAS 37, Provisions, Contingent Liabilities and Contingent Assets, trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier.

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Accounting and Auditing Update - January 2022 Foreword | Chapter 1 | Chapter 2 | Chapter 3

Disclosure requirements proposed by the Exposure Draft

The amendments proposed in the Exposure Draft require entities to disclose additional information in the notes to the financial statements about those arrangements that would enable users to assess the effects of these
arrangements on the company’s financial statements. These are given as under:
Amendments to IAS 7
Following are an illustrative set of additional disclosures that an entity would now be required to provide as per IAS 7.

Example: Supplier finance arrangement with Finance Provider A

Qualitative information

[Disclosure of terms and conditions (e.g., extended payment terms and security or guarantees provided.)]

Quantitative information

Nature of disclosure End of reporting period 31 December 20X1 Beginning of reporting period 1 January 20X1

For each supplier finance arrangement,

i. The carrying amount of financial liabilities recognised in the entity’s balance sheet
that are part of the arrangement and the line item(s) in which those financial 2,000 (disclosed under trade and other payables) 1,500 (disclosed under trade and other payables)
liabilities are presented, together with the entity’s accounting policies
ii. The carrying amount of financial liabilities disclosed under (i) for which suppliers
1,500 1,100
have already received payment from the finance providers
iii. The range of payment due dates of financial liabilities disclosed under (i) XX-YY days after invoice date YY-ZZ days after invoice date
The range of payment due dates of trade payables that are not part of a supplier finance
AA-BB days after invoice date CC-DD days after invoice date
arrangement as at the beginning and end of the reporting period

(Note: An entity would be permitted to aggregate the information provided for different arrangements only when the terms and conditions of those arrangements are similar.)
(Source: KPMG in India’s analysis, 2022 read with Disclosure of supplier finance arrangements, issued by KPMG IFRG Limited, 2021)

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Accounting and Auditing Update - January 2022 Foreword | Chapter 1 | Chapter 2 | Chapter 3

Amendments to IFRS 7 to make certain quantitative disclosures in

order to disclose the nature and extent of
Reverse factoring arrangements often give
rise to liquidity risk. By entering into such an
arrangement, an entity concentrates a portion
risks arising from financial instruments. A key
disclosure under these quantitative disclosures
Next steps
is disclosure of liquidity risk. As a part of the With supplier finance arrangements becoming a According to IASB, additional information that is now
of its liabilities with one or a few finance
proposed amendments, supplier finance more prevalent source of financing in recent years, required to be disclosed is already readily available
providers. Consequently, if the arrangement
arrangements have been added as an expectations of the users of financial statements with the entities and consequently, application of
gets withdrawn during times of stress, it could
example within the liquidity risk disclosure with respect to a more detailed and transparent the new requirements would not result in significant
increase pressure on an entity’s cash flows
requirements6. disclosure of information of such arrangements have costs for the entities affected. However, for some
and affect its ability to settle liabilities when
they are due. In another situation, suppliers Transition also increased many fold. Without detailed disclosure supplier finance arrangements, the information
may be inclined to renegotiate payment of information about an entity’s supplier finance a company might need to meet certain of the
Entities already applying IFRS standards arrangements, users face a stern challenge in: new disclosure requirements may not always
terms with customers in times of stress,
however finance providers, subject to capital IAS 8, Accounting Policies, Changes in be readily available, it should thus obtain this
a. Analysing the total amount and terms of an entity’s
requirements may not be inclined to be as Accounting Estimates and Errors requires an information from its finance providers.
debt,
flexible. entity to initially apply an IFRS Standard (or The Indian Accounting Standards (Ind
amendments to it) retrospectively, except to b. Identifying operating and financing cash flows
Thus, users of financial statements need AS) are based on the IFRS standards
the extent it is impracticable to do so. arising from supplier finance arrangements,
information to help them assess the effect issued by IASB, thus amendments
of supplier finance arrangements on an entity’s Thus, IASB has decided that entities would be c. Understanding the effect supplier finance to IFRS will be adopted (with or without
exposure to liquidity risk and risk management. required to apply the proposed amendments arrangements have on an entity’s exposure to modification) within Ind AS. On that account,
As a part of the Agenda Decision, IFRIC retrospectively in accordance with IAS 8. liquidity risk; and entities in India, that would be impacted by
was of the opinion that the liquidity risk However, the effective date would be decided d. Comparing the financial statements of an entity that the proposals issued by IASB are encouraged
disclosure requirements in IFRS 7 were after the deadline of the exposure draft. Earlier uses supplier finance arrangements with those of to raise their concerns or provide their
comprehensive enough to meet the application would be permitted. If an entity an entity that does not. suggestions to the IASB.
information needs of the users of financial applies the amendments for an earlier period,
statements. Under the existing set of it would be required to disclose that fact.
requirements of IFRS 7, an entity is required

6. These provisions have been added under para B11F of IFRS 7 which provides the factors that an entity might consider in providing the disclosure required in para 39(c) (i.e., description of how it manages the liquidity risk inherent in the maturity analysis of non-derivative and derivative financial liabilities).

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