Enhancing Transparency by Unveiling Disclosures on Supplier Finance Arrangements
1. Background & Transaction Mechanics
Supplier finance arrangements represent a mutually beneficial structure:
- Suppliers receive faster payments at lower financing costs.
- Entities defer cash outflows while enabling supply chain stability.
- Financial Institutions / Banks settle payments directly to suppliers and hold a consequential claim against the entity on the due date.
Historically, amounts owed by entities to banks under these arrangements often continued to be classified strictly as trade payables or capital payables rather than explicit borrowings. Consequently, significant liquidity risks and credit challenges remained masked within general working capital.
Transaction Flow in Supplier Financing Arrangements
2. Scope of the Amendments
The International Accounting Standards Board (IASB) issued targeted amendments to IAS 7 (Ind AS 7) 'Statement of Cash Flows' and IFRS 7 (Ind AS 107) 'Financial Instruments: Disclosures'.
- Applicability: First-time disclosures required for annual reporting periods beginning on or after 01.01.2024 (proposed 01.04.2024 under Ind AS).
- Inclusions: All arrangements where a finance provider pays amounts an entity owes to its suppliers, regardless of the nomenclature (e.g., supply chain finance, reverse factoring, payables financing).
- Exclusions: Arrangements specifically linked to financing inventories, trade receivables, or corporate credit cards fall outside this scope.
3. Presentation in Financial Statements
Statement of Financial Position [IAS 1 / Ind AS 1]
Management must evaluate whether liabilities under supplier financing qualify as 'trade and other payables' or 'other financial liabilities (borrowings)'. If the legal nature, payment terms, or credit period of the liability change substantially, derecognition criteria under IFRS 9 (Ind AS 109) apply, requiring reclassification to borrowings.
Statement of Cash Flows [IAS 7 / Ind AS 7]
Classification depends on whether the underlying liability is categorized as a trade payable (operating cash flows) or borrowing (financing cash flows). Where liabilities are presented as borrowings, two main presentation methodologies exist:
| Particulars (INR) | Methodology 1 (Agent Approach) | Methodology 2 (Direct Settlement) |
|---|---|---|
| Cash flow from operating activities (When Bank pays supplier on behalf of entity) | (-) 100 | No cash flow to the entity |
| Cash flow from financing activities (When Bank pays supplier on behalf of entity) | (+) 100 | No cash flow to the entity (resulted in non-cash increase in borrowings) |
| Cash flow from financing activities (When entity makes payment to Bank on due date) | (-) 100 | (-) 100 |
Note: Since cash flows typically record actual movements in the entity's bank account, Methodology 2 is generally considered an appropriate presentation, provided non-cash borrowing increases are explicitly disclosed in the reconciliation.
4. Required Disclosures in Notes to Financial Statements
Entities must aggregate disclosures for supplier finance arrangements to enable investors to assess liquidity risk and financial impact:
- Terms and Conditions: Detailed qualitative description of arrangement terms (dissimilar terms must be disclosed separately).
- Carrying Amounts & Line Items: Carrying values of liabilities, associated balance sheet line items, and specific identification of amounts for which suppliers have already received payment from finance providers.
- Payment Due Date Ranges: Comparison of payment due date ranges for supplier finance liabilities versus non-participating trade payables.
- Non-Cash Changes: Quantitative details regarding non-cash changes in carrying amounts (e.g., transfers from trade payables to borrowings, foreign exchange adjustments).
5. Illustrative Financial Statement Disclosures
Table 2: Carrying Amount of Liabilities and Due Date Ranges
| Particulars | 31-XX-2024 (INR) | 31-XX-2023 (INR) |
|---|---|---|
| Presented within trade and other payables | 2,000 | 1,500 |
| Of which suppliers received payment | 1,800 | 1,450 |
| Presented within borrowings | 1,400 | 1,100 |
| Of which suppliers received payment | 1,400 | 1,100 |
| Range of payment due dates: | ||
| Liabilities that are part of arrangement | 30 to 90 days from invoice date | 30 to 100 days from invoice date |
| Comparable trade payables not part of arrangement | 15 to 60 days from invoice date | 15 to 70 days from invoice date |
Table 3: Reconciliation of Financing Liabilities (Non-Cash Movement)
| Particulars | 31-XX-2024 (INR) | 31-XX-2023 (INR) |
|---|---|---|
| Opening Balance | ||
| Long term borrowings | 8,035 | 10,000 |
| Short term borrowings | 2,500 | 2,000 |
| Liability for supplier financing | 1,100 | - |
| Total Opening Balance | 11,635 | 12,000 |
| Cash Flows during the year | ||
| Long term borrowings | (-) 1,500 | (-) 2,000 |
| Short term borrowings | (-) 250 | 500 |
| Liability for supplier financing | (-) 1,200 | - |
| Total Cash Flows | (-) 2,950 | (-) 1,500 |
| Non-Cash Changes | ||
| Forex fluctuation / Fair value change | (-) 10 | 35 |
| Transfers from Trade payables to Borrowings | 1,500 | 1,100 |
| Total Non-Cash Changes | 1,490 | 1,135 |
| Closing Balance | ||
| Long term borrowings | 6,525 | 8,035 |
| Short term borrowings | 2,250 | 2,500 |
| Liability for supplier financing | 1,400 | 1,100 |
| Total Closing Balance | 10,175 | 11,635 |
6. Effective Date & Transition Reliefs
- Comparative Relief: Entities are not required to provide comparative information for periods before January 1, 2024 (April 1, 2024 under Ind AS).
- Opening Balance Exemption: Disclosures on supplier payment amounts and due date ranges as of the beginning of the annual reporting period are exempt.
- Interim Relief: No disclosures are mandatory for interim financial reports during FY 2024 (FY 2024-25 under Ind AS).
- Mandatory First Reporting Date: Annual period ending 31.12.2024 (or 31.03.2025 under Ind AS).
Conclusion
These enhanced disclosure requirements bridge a critical reporting gap, ensuring investors gain full visibility over debt obligations, liquidity exposure, leverage ratios, and key working capital metrics.