IFRS disclosure

January 2022

More companies are recognizing the benefits of supply chain finance (also known as reverse factoring or SCF) for themselves and their suppliers and have successfully implemented the instrument. Consequently, market participants’ need for more comprehensive and precise information on the use of such instruments and programs has grown. In addition, the insolvencies of corporates such as Abengoa, Carrilion and NMC Health – which had heavily relied on SCF for financing and provided little or no disclosure – , reinforced previous calls by rating agencies, auditors and equity analysts for clean disclosure of SCF programs. Big Four accounting firms had already in 2019 written a letter to Financial Accounting Standard Board (FASB) calling for appropriate disclosure rules. Accelerated work is already underway by accounting standard setters FASB in the U.S. and IASB in Europe. Finally, following Greensill’s spectacular collapse and subsequent events last year, it was only a matter of time before standard setters formulated specific proposals for the SCF disclosure.

The IASB published a new IFRS Exposure Draft (ED/2021/10) on supplier finance arrangements in November, inviting market participants to provide feedback. The emphasis is not on accounting classification of SCF programs (a topic we have already covered here) but instead on the presentation, disclosure and detailing of supplier finance in corporate financial reporting. In the United States, FASB is well along with a similar push, and an exposure draft is expected soon.

The accounting standard setters essentially want the new explicit disclosure rules to quantify and present certain risk aspects of SCF in a more transparent manner. Users of financial statements would be able to obtain information from financial statements that enable them to assess the effects of supplier finance arrangements on an entity’s liabilities and cash flows, as well as on its liquidity risk and risk management. This has an impact on IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosure, among other various areas of reporting. For example, according to the draft of paragraph 44H of IAS 7, the following shall be disclosed:

  • the terms of the SCF programs used,
  • the payment terms with and without SCF,
  • the category under which the liabilities in question are reported, and
  • the program’s size and the amount of supplier financing drawn down or outstanding.

The exposure draft does not define what constitutes supply chain finance and, as a result, what needs to be disclosed. It does, however, describe such instruments in terms of their characteristics. The Board’s approach of explaining rather than defining the arrangements in scope enables the proposals to be framed in a manner that captures the characteristics of such arrangements that give rise to particular information needs of users of financial statements. By doing so, the IASB hopes to capture the potential evolution of SCF products and counteract so-called "form-over-substance approaches”. The main feature is the ability for suppliers to have their invoices financed by third parties (e.g. banks) before the agreed due date or the option for customers to settle invoices paid by a third party to suppliers after the actual invoice due date. Thus, so-called paying agency models and virtual credit card structures clearly fall within the scope of the new regulations. "All arrangements with the characteristics of supplier finance arrangements (as described in paragraph 44G of IAS 7) are, therefore, subject to the proposed new disclosure requirements, irrespective of where and how an entity presents and classifies the related liabilities and cash flows in its statements of financial position and cash flows."

Although meeting these disclosure requirements may incur additional costs for companies, the IASB is convinced that the added value of transparency is greater and thus desirable. For some users of reverse factoring, this transition implies not only outward-looking reporting but also the more technical requirement of accurately preparing the relevant data. Buyer companies should therefore ensure that the relevant SCF provider has a flexible Business Intelligence (BI) infrastructure that allows for smooth and reliable fulfilment of quantitative reporting requirements when selecting their SCF providers.

The Exposure Draft specifically emphasises the requirement for a transparent quantitative presentation of liquidity risk in connection with SCF. This is the aim of the IFRS 7 adapted wording. The concentration risk under an SCF program is thereby the main focus: "For example, concentrations of liquidity risk may arise from the repayment terms of financial liabilities, sources of borrowing facilities, or reliance on a particular market in which to realize liquid assets, or supplier finance arrangements (as described in paragraph 44G of IAS 7) resulting in the entity concentrating with finance providers a portion of its financial liabilities originally owed to suppliers."

According to the IAS Board, the purpose of the additional risk reporting concerning SCF is to enable users of financial statements to assess the possible adverse effects of a potential loss of available SCF liquidity. A deterioration in the buyer company’s credit profile, for example, could result in a cost increase or even a loss of SCF liquidity. If, in such a case, suppliers were to demand and enforce the shortening of payment terms, this would result in liquidity outflows that would have to be compensated through other sources of liquidity.

In line with the disclosure of credit risks required under IFRS 7, material concentrations should also be addressed in the presentation of liquidity risk. Even if disclosing the financier (typically a bank) in connection with an SCF program was not necessary, it would be reasonable to assume that a dependency on a few or a single financier should be mentioned. Marketplace solutions provide an obvious advantage in this context, both in terms of reporting and risk itself. With competition among banks, the supplier’s finance cost could reduce significantly. More importantly, it helps diversify the financing base, which reduces the dependencies on SCF and the liquidity risk. Approximately 50 international financing partners (both banks and institutional investors) are active in SCF programs on the CRX Marketplace. Depending on the program size, CRX Markets, in collaboration with the buyer company, assembles a diverse and stable pool of financing partners that best reflects the customer’s requirements while lowering the soon-to-be-disclosed liquidity risk.

Companies and other market participants have until March 28, 2022 to comment on the IFRS Exposure Draft. While details are expected to be adjusted based on the comments received, it is reasonable to assume that the new requirements formulated by the IASB for the disclosure of SCF instruments will be implemented in principle. Accordingly, in addition to reporting from the implementation date, companies will be required to provide comparative information for previous reporting periods.

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