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Supply chain financing arrangements — Reverse factoring

Date recorded:

Agenda Paper 2

Background

In its April 2020 meeting, the staff presented its research performed on supply chain financing ("SCF") arrangements submitted. 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 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. This summary provided 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. In the meeting, the Committee members echoed the findings set out in the submission and suggested different ways of how financial reporting might be improved.

The staff have now analysed the application of IFRS Standards to the reverse factoring arrangements in the statement of financial position, statement of cash flows and notes to the financial statements.

Staff analysis

In the statement of financial position, when determining where to present liabilities that are part of the reverse factoring arrangement applying IAS 1, the entity would assess whether the size, nature or function of those liabilities are dissimilar to other items in trade and other payables, which would require separate presentation. To be presented as part of “trade and other payables”, the liabilities would need to be part of the working capital used in the entity’s normal operating cycle. If existing trade payables are part of the arrangement, the derecognition requirements in IFRS 9 should be applied to determine whether to derecognise those trade payables and recognise new financial liabilities.

In the statement of cash flows, the cash flows of such liabilities would follow their presentation in the statement of financial position. If an entity presents the liability as trade payable, the cash flows to settle the liability would be operating cash flows. If such liability is not a trade payable, cash outflows would be presented in financing activities.

In the notes to the financial statements, various disclosures would be required. These include the liquidity risk arising from such an arrangement applying IFRS 7, information enabling users to evaluate changes in liabilities to the extent it classifies such cash flows as financing cash flows applying IAS 7, the significant judgements that management has made in the process of applying the entity’s accounting policies and additional information about the arrangement that is relevant to an understanding of financial statements applying IAS 1.

Staff recommendation

After considering the relevant criteria, the staff recommended issuing a tentative agenda decision on the classification of liabilities and on disclosures about liquidity risks arising from such arrangements. The tentative agenda decision would outline how IFRS Standards are applied to different aspects of accounting for those arrangements. However, for arrangements entered in to fund payables to suppliers, a narrow-scope standard-setting project is proposed with a view to develop disclosure requirements.

Discussion

There was a long and lively discussion on the various aspects of the application of IFRS Standards to reverse factoring arrangements. The Committee members generally agreed with the flow of the analysis but raised a number of concerns on the conclusion and the staff’s suggestion for clarification or amendments.

For the presentation of the liabilities on the statement of financial position, some would like to have a clarification on the possible classification of the new financial liability as trade payable, other payable or borrowing when the original trade payable meets the derecognition criteria as a result of entering into the reverse factoring arrangement. In the current analysis presented in the tentative agenda decision, only trade and other payable and borrowings are mentioned. Some would like a trade payable to be clearly defined in IAS 1 in order to distinguish trade payables from other payables. Some Committee members were concerned that an entity may argue that the new borrowing, which is to repay the payable for the purchase of goods and services, is still considered part of the working capital of an entity and should not be classified as "borrowing". It would be better to emphasise that the new lender is a bank/financial institution. Such nature could not be part of the daily operating activity and should be presented as "borrowing".

In relation to the two factors for consideration of derecognition set out in the tentative agenda decision, some raised concerns that these are not directly quoted from the Standards and are not the only factors to consider. Citing these may create more questions than it intended to respond to. Others considered that it is helpful to be included in the agenda decision as guidance for the assessment for derecognition but suggested amending the wording to reflect a more generic description of the substantial changes in credit terms without referring to the exact number of days.

A number of Committee members disagreed with the staff conclusion that the presentation in the cash flow statement should follow that of the statement of financial position. They considered that the nature of the cash flows should be considered in accordance with IAS 7 instead and that judgement is involved. The presentation in the statement of financial position is just one of the factors to consider and may be helpful in the assessment rather than an absolute answer to the question of how to present cash flows. One Committee member gave the view that even though the liability is considered a borrowing, it may still be possible that such cash flows are presented in operating activities if they are ultimately payments for purchase of goods and services. Another Committee member quoted the US standard as a reference, saying that the presentation of the payments for the purchasing of inventories as financing may not depict the nature of the cash flows because the bank/financial institution may merely be a payment agent. In response to these comments, the staff suggested to amend the wording in the tentative agenda decision to state that the presentation of the liability in the statement of financial position may help to answer the question of how to classify the cash flows.

A few Committee members considered the analysis related to "disaggregation" in presentation is unclear and suggested to quote IAS 1:55 in the tentative agenda decision. In view of the nature of such reverse factoring arrangements, it would be useful to present the liability, even if it is still considered as trade and other payable, as an additional line item to help the readers of the financial statements to understand the entity's financial position. The staff agreed with this and suggested adding this to the tentative agenda decision.

The Committee decided, by a vote of 9:5, not to add the classification of liability and cash flows to the Committee’s standard-setting agenda, and instead to publish a tentative agenda decision. In view of COVID-19, the end of comment period is proposed to be extended from the end of July to the end of September 2020 to allow the respondents to digest the matters.

Regarding the narrow-scope standard-setting project to develop disclosure requirements for arrangements entered in to fund payables to suppliers, some considered it a useful project but it should expand to other types of supply chain financing arrangements instead of just the reverse factoring arrangement. One suggested to discuss the disclosure requirements for the suppliers as well. Others considered the existing Standards already provide sufficient requirements for disclosures and it is therefore not necessary to start a narrow-scope project. The staff responded that the narrow-scope project is actually aimed at discussing supply chain financing as a whole and that reverse factoring is just quoted as an example.

The Committee did not decide on starting a narrow-scope project. Instead, that topic will be discussed again at a future meeting.

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