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Maintenance and consistent application

Date recorded:

Supplier Financing Arrangements—Whether to undertake narrow-scope standard-setting (Agenda Paper 12A)

The IFRS Interpretations Committee (Committee) received a submission about supply chain finance arrangements in January 2020. That submission asked:

  • How an entity presents liabilities to pay for goods or services received when the related invoices are part of a supply chain finance (or reverse factoring) arrangement
  • What information about reverse factoring arrangements an entity is required to disclose in its financial statements

In response to that submission, the Committee published the Agenda Decision Supply Chain Financing Arrangements—Reverse Factoring in December 2020.

The submitter (Moody’s) said in the submission that fewer than 5% of entities it rates disclose information about the use of supply chain finance arrangements and their effects, and yet reports on the use of such arrangements would imply that a much higher percentage of entities are using these arrangements.

Moody’s noted the challenge in comparing entities that do not disclose the existence and use of supply chain finance arrangements. Other investors and analysts—both in comment letters (in response to the tentative agenda decision) and in outreach meetings—also informed the staff of a lack of information in financial statements about supply chain finance arrangements and the need for further information to perform their analyses.

In this session, the Board discussed feedback and input received from investors and analysts, the Committee and others about investor information needs related to supply chain finance arrangements and will decide whether to add a standard-setting project on this topic.

Staff recommendation

The staff recommended that the Board add a narrow-scope standard-setting project on supplier finance arrangements to the work plan. This project would:

  • Explain the type of arrangements within its scope, rather than include specific definitions
  • Add qualitative and quantitative disclosure requirements to IAS 7
  • Add ‘sign-posts’ to existing disclosure requirements in IFRS 7

Board discussion

Most Board members supported the staff’s recommendation to instigate standard-setting on this topic, with one Board member stating that this issue was currently the most important to investors. However, one Board member stated that the agenda decision published with regard to supplier financing works well and the Board cannot solve every specific issue that arises in practice. The Vice-Chair echoed these concerns about undermining the principles in the standards by prescribing disclosure requirements for every item for which users are missing information. However, she thinks in this case standard-setting is warranted as preparers can interpret information needs differently.

Board members agreed with the approach of describing supplier financing rather than defining it. There are many arrangements in practice that the Board wants to capture with these amendments. Therefore, the description of these arrangements needs to be sufficiently broad. The requirements cannot be limited to certain labels.

With regard to the amendments to IAS 7, Board members warned of scope creep and asked the staff to be sufficiently narrow when drafting the amendment. There are many issues around IAS 7, but not all of them can be solved through this amendment.

Some Board members said that illustrative examples would help understand the amendment.

  • When called to vote, 11 Board members (1 absent) supported the staff recommendation.

Classification of Debt with Covenants as Current or Non-current (IAS 1)—Background and report from the Committee (Agenda Paper 12B)

In January 2020, the Board issued Classification of Liabilities as Current or Non-current, which amended IAS 1. The amendments clarified how an entity classifies debt and other financial liabilities as current or non-current in particular circumstances. The amendments are effective for annual reporting periods beginning on or after 1 January 2023, with earlier application permitted.

In December 2020, the Committee published a tentative agenda decision in response to informal feedback and enquiries about how an entity applies the amendments to particular fact patterns.

Before finalising the agenda decision, the Committee decided to report to the Board its technical analysis and conclusions on the matter, and respondents’ comments on the outcomes and potential consequences of applying the amendments, highlighting those that might provide information the Board did not consider when developing the amendments.

Most respondents agreed (or did not disagree) with the Committee’s technical analysis of all cases discussed in the tentative agenda decision—i.e. applying the amendments to the three fact patterns presented in the tentative agenda decision, the entity classifies the liability as current at the end of the reporting period. However, almost all respondents expressed concerns about the outcomes of applying the amendments.

Most respondents said the outcomes of applying the amendments do not faithfully represent the entity’s financial position at the reporting date, particularly in Cases 2 and 3 of the tentative agenda decision. They said that the amendments therefore do not provide users of financial statements with useful information—in their view, the outcomes do not reflect the contractual rights and obligations of the parties or the intention behind the contract and its design.

Some respondents also expressed concerns about potential consequences and practical challenges of applying the amendments and commented on other aspects of the amendments. Most respondents suggested that the Committee not finalise the agenda decision but instead refer the matter to the Board. Some suggested that the Board reconsider the amendments before they become effective.

Board discussion

One Board member asked what the status of the Committee’s work on this issue was. The staff confirmed that the Committee had issued a tentative agenda decision on the topic, but given the comments received on that was hesitant to finalise, although a majority of Committee members agreed with the technical analysis in the agenda decision. The Committee instead decided to get insights from the Board and see if the Board wants to undertake standard-setting. If the Board should decide not to undertake standard-setting, the Committee would finalise the agenda decision.

No decisions were made on this paper.

Classification of Debt with Covenants as Current or Non-current (IAS 1)— Staff analysis of feedback and possible standard-setting (Agenda Paper 12C)

The agenda paper provided a summary of comments from respondents to the Committee’s tentative agenda decision about the outcomes of applying the amendments, requests for standard-setting and other comments related to the amendments, together with the staff’s analysis of those comments. A detailed summary of the comments, staff’s analysis of the comments and the Committee’s discussion of the comments is available on IAS Plus.

Staff recommendation

Based on the staff’s analysis of the comments, they recommended that the Board amend IAS 1 to:

  • Specify that, if the right to defer settlement for at least twelve months is subject to an entity complying with conditions after the reporting period, then those conditions do not affect whether the right to defer settlement exists at the end of the reporting period (the reporting date) for the purposes of classifying a liability as current or non-current
  • For non-current liabilities subject to conditions, require an entity to disclose information about:
    • The conditions (for example, the nature of the condition and when it must be complied with)
    • Whether the entity would comply with the conditions based on its circumstances at the reporting date
    • Whether and how the entity expects to comply with the conditions by the date on which they are contractually required to be tested
  • Require that an entity presents separately, in its statement of financial position, ‘non-current liabilities subject to conditions’. This line item would include liabilities classified as non-current for which the right to defer settlement for at least twelve months is subject to the entity complying with conditions after the reporting date
  • Clarify that an entity does not have a right to defer settlement at the reporting date when the related liability could become repayable within twelve months:
    • At the discretion of the counterparty or a third party (for example, when a loan is callable by the lender at any time without cause)
    • If an uncertain future event occurs (or does not occur) and the event’s occurrence (or non-occurrence) is unaffected by the entity’s future actions (for example, when the liability is a financial guarantee or insurance contract liability)

The staff also recommended deferring the effective date of the 2020 amendments. This would avoid entities having to change the classification of liabilities applying the 2020 amendments and then shortly thereafter potentially change the classification of liabilities again to reflect any new amendments.

Board discussion

Many Board members expressed support for the staff recommendation to propose an amendment. Some of them said that an agenda decision would not be enough to solve the issue, especially in light of users demanding more information. However, some Board members struggled with the recommendation to require a separate line item in the balance sheet for non-current liabilities subject to conditions. This would give those liabilities undue prominence. They thought that the general requirements in IAS 1 to disaggregate line items if necessary to understand the entity’s financial position would capture this without a specific requirement. Those Board members suggested to refer to the general requirements in IAS 1 in the Basis for Conclusions to the amendment. Other Board members welcomed the separate presentation as it would solve the problem of the binary current/non-current classification, by introducing a third class.

One Board member asked whether the separate line item, if the Board should require it, should be named “non-current liabilities subject to conditions that need to be met within one year”, as those were the only conditions that were relevant for classification. This was echoed by other Board members and the staff confirmed that this had been the intention. The staff recommendation should be understood to include this suggestion. Also, it was asked whether the separate presentation or disclosure would still have to be made when the condition was met between the balance sheet date and the reporting date as this would be easier for preparers and there was no loss of information. This will be taken into consideration by staff during the drafting of the amendment.

Board decision

12 of the 13 Board members voted in favour of amending the requirements in IAS 1 with respect to classification of liabilities subject to conditions that need to be met within one year and disclosure of information about such conditions.

10 Board members voted in favour of presenting those liabilities separately in the statement of financial position.

12 Board members voted in favour of amending IAS 1 with respect to whether an entity has a right to defer settlement when that right is not subject to conditions with which the entity must comply.

All Board members agreed to defer the effective date of the 2020 amendments by at least one year to annual reporting periods beginning no earlier than 1 January 2024.

Costs Necessary to Sell Inventories (IAS 2)—Finalisation of agenda decision (Agenda Paper 12D)

At its June 2021 meeting, the Committee decided not to add a standard-setting project to the work plan in response to a submission on IAS 2. The Committee instead decided to finalise an agenda decision that would include material explaining how the applicable principles and requirements in IFRS Standards apply to the fact pattern described in the submission.

The purpose of this session was to ask Board members whether they object to the agenda decision.

There was no discussion on this paper. No Board member objected to the publication of the agenda decision.

Preparation of Financial Statements when an Entity is No Longer a Going Concern (IAS 10)—Finalisation of agenda decision (Agenda Paper 12E)

At its June 2021 meeting, the Committee decided not to add a standard-setting project to the work plan in response to a submission about the accounting applied by an entity that is no longer a going concern. The Committee instead decided to finalise an agenda decision.

The purpose of this meeting was to ask Board members whether they object to the agenda decision.

There was no discussion on this paper. No Board member objected to the publication of the agenda decision.

Correction list for hyphenation

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