Background

The Committee received a submission about supply chain financing ("SCF") arrangements. The submitter is concerned that such arrangements are widespread while the relevant disclosures in the financial statements are inadequate. Accordingly, the submitter requested the Committee to give guidance on the disclosure requirements and classification of such liabilities. In view of this, the staff performed research and outreach and prepared a summary of it. The research summary provides the Committee with a summary of the prevalence of SCF arrangements, the key terms of reverse factoring arrangements, which are a type of SCF arrangement and the accounting for such arrangements.

Staff analysis

Based on outreach and the staff's research, it was found that "reverse factoring" is the most common type of the SCF arrangement and is common in Australia, Brazil, China, Malaysia, Singapore, South Africa and South Korea but not in Japan. Under such arrangements, three parties are involved, an entity that purchases a good or service, a supplier providing those goods or services and a financial institution. The arrangement either enables an entity's suppliers to receive payment for their trade receivables before the due date or enables an entity to settle trade payables later than the due date. The relevant information is typically exchanged through the use of a platform offered by financial institutions.

In determining whether to derecognise the trade payables in the statement of financial position, an entity considers the requirements for derecognition of financial liabilities in IFRS 9:3.3.1 & 3.3.2. For arrangements which enable a supplier to receive payment later, respondents said that an entity typically does not derecognise its trade payable because its obligation is not extinguished and there is no change in the nature or the credit terms of the trade payables, i.e. there is no substantial modification. Only in the circumstance when the reverse factoring arrangement legally novates the payable to the financial institution, the entity derecognises trade payables and recognises other financial liabilities. On the other hand, for arrangements which enable an entity to settle payments later, entities typically reclassify trade payables as other financial liabilities.

For the presentation in the statement of cash flows, respondents said entities typically follow the classification of the liability in the statement of financial position, i.e. the cash outflows on settlements are included in the operating activities if the trade payables are not derecognised while the cash outflows are included in financing acitivities if other financial liabilities are recognised. For entities which present the cash outflows as financing activities, they normally disclose a non-cash transaction at the timing of entering into the reverse factory or gross up the cash flows by presenting a cash outflow from operating activities and a cash inflow from financing activities when the invoice is factored and a cash outflow from financing activities when they are settled.

Respondents said entities often do not disclose the existence of reverse factoring arrangements in the financial statements. Entities disclose the relevant information more frequently when the liabilities are classified as other liabilities than those continuing to classify them as trade payables.

Question for the Committee

The staff asked if the Committee had any questions or comments on the information provided.

Discussion

Most of the Committee members agreed that there is diversity in accounting for SCF arrangements and the relevant presentation is currently not transparent. They considered it would be helpful for the Committee to provide guidance on the presentation in the statement of financial position and in the cash flow statement.  The disclosure requirements (including those in IFRS 7 and IAS 7) should also be highlighted because judgement is involved and those disclosures provide useful information for readers of the financial statements to gain more details of such arrangements.

Some Committee members commented that it is difficult to distinguish payables and debt in SCF arrangements. However, this is critical for the relevant disclosures. The disclosures of the SCF would depend on whether the liabilities are “operating” or “financing” in nature.

The staff suggested that the upcoming agenda paper could start by analysing whether the trade payables should be derecognised or not. If the existing Standards are not clear about this, standard-setting may be required. However, some Committee members pointed out that on initial recognition, the liabilities might not be “trade payables”. If, based on the arrangement between an entity and its supplier, it is already a financing arrangement, it would be necessary to distinguish payables and debts when they are originated. Again, the upcoming agenda paper may assess if the guidance in the current Standards helps to clearly distinguish these. No decisions were made.