Changes to supplier finance disclosures

The International Accounting Standards Board has rolled out fresh disclosure mandates to address the murkiness surrounding supplier finance arrangements. Companies are now required to clearly detail these payables on their balance sheets.

The aim is to give investors a clear view of how these arrangements affect cashflows and overall financial stability.

The new disclosure objectives for IAS 7, Statement of Cash Flows, are to clarify wide-ranging payment due dates, to detail terms of finance arrangements and to separate them if different; and at reporting start and end:

• display liabilities’ value and balance sheet location
• highlight which liabilities finance providers have settled
• state due date ranges for financed and similar non-financed payables
• note non-cash changes, such as mergers or currency shifts.

The updated disclosure requirements for IFRS 7, Financial Instruments: Disclosures, are to:

• detail liquidity risk management strategies
• note if supplier finance alters payment terms
• disclose hidden risk concentrations
• understand risks when liabilities consolidate with few finance providers.

Entities must adopt the revised standards from 1 January 2024. Early adoption is allowed, but changes to IFRS 7 and IAS 7 must be synchronised. Some flexibility is given for past data and interim details.

Illustrative example

Let’s see how they can be applied using the following case study.

Stellar Manufacturing Co (SMC) specialises in producing high-quality electronics. This year, due to increasing competition and tight margins, SMC initiated a supplier finance arrangement with its primary supplier, ElectroParts Ltd, and BankFlex, a leading financial institution.

Under this arrangement, when SMC receives goods from ElectroParts, the invoice is uploaded to a platform managed by BankFlex. SMC then approves the invoice for payment on its due date, and BankFlex pays ElectroParts immediately after discounting a small finance charge. SMC settles the amount with BankFlex on the due date.

The financial information this year is as follows:

Invoice amount from ElectroParts: $500,000

• Dr Inventory $500,000
• Cr Accounts Payable (ElectroParts) $500,000

Payment to ElectroParts by BankFlex:

• Dr Accounts Payable (ElectroParts) $500,000
• Cr Liability to BankFlex $500,000

Discounted finance charge by BankFlex: 2% of the invoice amount ($10,000)

• Dr Finance Expense $10,000
• Cr Accounts Payable (Finance Charge to BankFlex) $10,000

Payment due date: 90 days from the invoice date

• Dr Liability to BankFlex $510,000
• Cr Cash/Bank $510,000 pay to BankFlex on the due date.

Under the new disclosure requirements, the new note would look as follows:

Note 1: Stellar Manufacturing Co has established a supplier finance arrangement in collaboration with its primary supplier, ElectroParts Ltd, and a financial entity, BankFlex. The specifics of this arrangement entail:

Terms and conditions:

• Once Stellar Manufacturing Co approves an invoice, BankFlex takes on the responsibility of paying ElectroParts Ltd. However, this payment is made after a finance charge is discounted from the invoice amount.
• On the due date of the invoice, Stellar Manufacturing Co ensures the amount is settled with BankFlex.

Liquidity risk information:

• The supplier finance arrangement introduces certain liquidity risks for Stellar Manufacturing Co. A significant concentration of the company’s liabilities rests with BankFlex. If for any reason BankFlex chooses to withdraw or alter this arrangement – particularly during financially challenging times – it could strain Stellar Manufacturing Co’s cashflows. This strain may subsequently affect the company’s ability to timely address its liabilities.

Carrying values:

• As of the current reporting date, liabilities presented within trade and other payables amount to $500,000, showing an increase from the previous year’s figure of $450,000 (assumed amount). It’s noteworthy that the entire amount has been paid to suppliers.
• Liabilities presented within finance payables stand at $510,000 for this year, a rise from the $461,250 (assumed amount) reported last year. Again, the entire sum has been settled with suppliers.

Range of payment due dates:

• For liabilities included in the supplier finance arrangement, the payment is due 90 days post the invoice date, a slight increase from the 85 days (assumed amount) reported in the prior year. As for trade payables that are not a part of this arrangement, there are none to report.

Non-cash changes:

• An amount of $10,000 has been non-cash transferred from trade payables to finance payables this year, compared to $11,250 (assumed amount) in the previous year.

Non-cash transfer activities for the current year:

• When ElectroParts raises an invoice, a trade payable of $500,000 is created on Stellar Manufacturing Co’s balance sheet. Given the nature of this transaction, no cashflow is recorded.
• Subsequently, when the trade payable is derecognised and a finance payable is acknowledged, the balance sheet reflects a decrease of $500,000 in trade payables. Simultaneously, there’s an increase in the operating cash inflows of $500,000. The finance payable, which includes the finance charge, is recorded at $510,000.
• Upon the payment of the finance payable, the balance sheet indicates a decrease of $510,000 in finance payables. This activity corresponds to a financing cash outflow of $510,000.

Transparency

This case study makes clear the importance and applicability of these changes, and the greater transparency they bring to supplier finance disclosures. As the financial landscape evolves, businesses and stakeholders alike must adapt, ensuring their financial statements remain clear and trustworthy.