Following the publication of the IFRS IC's agenda decision on uncertainty regarding the accounting treatment of reverse factoring transactions ("Supply Chain Financing Arrangements-Reverse Factoring") in December 2020, the IASB published additional requirements for disclosures in the Notes ("Supplier Finance Arrangements - Amendments to IAS 7 and IFRS 7") in May 2023. These requirements are the result of a survey of users of financial statements carried out by the IASB and address the need for more transparency in annual reports.
In drafting the requirements, the IASB considered various types of reverse factoring. Typically, these are characterized by the fact that a factor settles trade payables to suppliers on behalf of the company. This may involve a longer payment term to the factor and/or early receipt of payment by the supplier compared to the original payment terms, depending on the structure. Arrangements that merely improve creditworthiness (e.g. financial guarantees) or make direct payments to the supplier (e.g. credit card programs) are excluded from the scope1.
The specific amendments relate to IAS 7 "Statement of Cash Flows" and IFRS 7 "Financial Instruments: Disclosures". They are designed to enable users of financial statements to understand the effects of reverse factoring agreements on a company's financial statements and draw comparisons with other companies. This applies in particular to the effects on liabilities, cash flows and liquidity risk. The amendments can be summarized as follows:
Description of the contractual terms2
It is necessary to state in qualitative terms which material conditions a reverse factoring program contains and for what purpose it is used. For instance, this may include an extension of payment terms or the provision of additional collateral.
Disclosure of the level of liabilities3
Both at the beginning and end of the reporting period, the carrying amount of the liabilities including the allocation to the balance sheet item affected by the reverse factoring agreement must be disclosed in quantitative terms. It is also required to disclose the portion for which payments have already been made by the factor to the suppliers.
Disclosure of the range of payment terms4
Both at the beginning and end of the reporting period, the carrying amount of the liabilities including the allocation to the balance sheet item affected by the reverse factoring agreement must be disclosed in quantitative terms. It is also required to disclose the portion for which payments have already been made by the factor to the suppliers.
Disclosure of the range of payment terms5
Where liabilities under reverse factoring agreements no longer meet the requirements of a trade liability and are subsequently derecognized in accordance with IFRS 9 and recognized as a financial liability, this may result in a non-cash transfer within the cash flow statement (operating cash inflow when the liability arises vs. financial cash outflow when the financial liability is settled). Any such effect must be described in the Notes so that, for example, operating cash flows can be analyzed correctly.
Disclosures on liquidity risk management6
For an assessment of the impact of reverse factoring programs on the company's liquidity risk, it is necessary to specify how the risk is managed. Through the use of a reverse factoring program, part of the liabilities could be concentrated with one factor instead of with a large number of suppliers. In the event that the factor terminates the program at short notice, this would have an impact on liquidity planning and thus possibly on short-term solvency when the liabilities become due.
Such disclosures are mandatory for financial years beginning on or after 1 January 2024. This obligation will apply to companies applying EU-IFRS only after the corresponding EU endorsement. There is no requirement for disclosures in interim financial statements in the first year of application. As a general rule, the IASB has clarified that the disclosures must be made in aggregated form and not at the level of individual programs, as long as these contain comparable conditions. In addition, the IDW recently released a draft revision of the IAS 1-M1 module for the German profession ("IFRS Module Announcement (IDW RS FAB 50): IAS 1-M1 n.F.: Uncertainties in the accounting treatment of reverse factoring transactions"), which takes into account the amendment to the IASB amendment presented here.
When it comes to implementing the amendment, companies must face the particular challenge of determining and preparing the necessary data from their systems. This is where our KPMG specialists can assist you – do not hesitate to get in touch.
Source: KPMG Corporate Treasury News, Edition 144, June 2024
Authors:
Ralph Schilling, CFA, Partner, Head of Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Jan Frederik Richter, Manager, Finance and Treas-ury Management, Treasury Accounting & Commodity Trading, KPMG AG
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1 IAS 7.44G
2 IAS 7.44H (a)
3 IAS 7.44H (b) (i)-(ii)
4 IAS 7.44H (b) (iii)
5 IAS 7.44H (c)
6 IFRS 7.B11 (j) in conj. with IFRS 7.IG18A (a) (iv)
