IASB Issues Disclosure Rules to Boost Transparency around Terms of Supplier Finance Arrangements
May 26, 2023
The International Accounting Standards Board (IASB) on May 25, 2023, issued a package of disclosure rules to boost transparency around the use of supplier finance arrangements—a swift response to investors who were spooked when a series of bankruptcies took place in the U.K. and Europe involving those types of payment plans.
The changes take effect on Jan. 1, 2024.
“The biggest one is around liquidity risk which is covered by general requirements that say ‘is there any significant dependences from liquidity?’ you should be identifying those,” IASB member Zachary Gast told Thomson Reuters.
Investors also want to know exactly where on the balance sheet some of the payables associated with supplier finance arrangements stand, said Gast. “We included those two data points for trade payables and for things that had moved down into what we’re generically calling financing payables but they can actually be under several different names,” he said. “Investors wanted to know both the amount that was just in the program and the amount that had already been financed, because the latter in particular was what a lot of investors associated with a liquidity risk, how much is actually being drawn down by the suppliers.”
The provisions come at a time when use of supplier finance arrangements – also known as supplier chain finance, payables finance or reverse factoring arrangements – have increased as businesses that are still reeling from the effects of the COVID-19 pandemic want to have more cash in reserves amid the current economic environment.
Supplier finance agreements are popular because they provide a company with extended payment terms or the company’s suppliers with early payment terms compared to the related invoice payment due date. Users of financial statements, including credit analysts have said, however, that they get little transparency from companies in their financial reports about the terms and risks of such arrangements.
The new rules amend International Accounting Standard (IAS) 7, Statement of Cash Flows, and International Financial Reporting Standard (IFRS) 7, Financial Instruments: Disclosures, to introduce provisions aimed at enabling investors to understand the effect of supplier finance arrangements on a company’s liabilities and cash flows and exposure to liquidity risk. This is an increase to the disclosures companies provide now.
Although narrow, the changes are targeted, requiring a business to reveal the amount of financial liabilities that are part of the arrangement; the effects on financial statements; exposure to liquidity risk; and the impacts to its operations if the arrangements are no longer available to the company.
The provisions will incur a one-time cost for companies because it will require them to get and provide new information – and thus some systems changes are needed.
“We did hear concerns about the costs,” said Gast. “And I think that’s when we started investigating what exactly the costs would be and for me personally the fact that they tended to be one-time costs rather than significant ongoing costs weighed on my considerations especially relative to the benefit users said they would get from using that information.”
Under the main tenets of the amendments, a company must disclose:
- the terms and conditions of its supplier finance arrangements. Although these are required in aggregate, a company must now disclose the separate terms and conditions for arrangements that are dissimilar.
- the carrying amounts and associated line items, i.e., the financial liabilities that are part of a supplier financial arrangements. The disclosure will show the size of the company’s supplier finance arrangements and allow users of financial information to connect the information in the footnote back to the face of the balance sheet.
- a range of payment due dates for the first financial liabilities that are part of a supplier finance arrangement and to comparable trade payables to the company that are not part of such an arrangement.
- explanatory information about these ranges of payment due dates or additional ranges (if these ranges of due dates are made).
- the type and effect of non-cash changes and the carrying amounts to the financial liabilities that are part of the supplier finance arrangement.
- liquidity risk information about its supplier finance arrangements so that users can understand if a company’s use of supplier finance arrangements has concentrated the company’s liabilities with one or a few finance providers. Investors have said, for example, “that if finance providers withdraw one or more arrangements during times of financial stress, which could occur at short notice, that withdrawal could increase pressure on the company’s cash flows and affect its ability to settle liabilities when they are due.”