After the agenda resolution adopted by the IFRS IC on questions of doubt regarding the accounting treatment of reverse factoring transactions ("Supply Chain Financing Arrangements-Reverse Factoring") was published 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 are the result of a survey of users of financial statements by the IASB and address the need for greater transparency in annual reports.
When developing the requirements, the IASB considered various types of reverse factoring. These are characterised by the fact that a factor settles trade payables to suppliers on behalf of the company. Depending on the structure, this can mean a longer payment term to the factor and/or early receipt of payment for the supplier compared to the original payment terms. Excluded from the scope are agreements that merely improve creditworthiness (e.g. financial guarantees) or make direct payments to the supplier (e.g. credit card programmes)2.
The targeted amendments relate to IAS 7 "Statement of Cash Flows" and IFRS 7 "Financial Instruments: Disclosures". These are intended to enable users of financial statements to understand the effects of reverse factoring agreements on a company's financial statements and to compare them with other companies. This relates in particular to the effects on liabilities, cash flows and liquidity risk. The amendments can be summarised as follows:
Description of the contract terms3
It must be stated qualitatively which key conditions a reverse factoring programme contains and for what purpose it is used. This may include, for example, an extension of payment terms or the provision of additional collateral.
Indication of the amount of liabilities4
Es ist quantitativ jeweils zu Beginn und Ende der Berichtsperiode der Buchwert der Verbindlichkeiten inklusive der Zuordnung zum Bilanzposten anzugeben, der von der Reverse-Factoring-Vereinbarung betroffen ist. Zusätzlich muss der Anteil dargestellt werden, für den bereits Zahlungen durch den Factor an die Lieferanten geleistet wurden.
Indication of the range of payment terms5
The range of payment targets for liabilities within reverse factoring programmes must be disclosed quantitatively at the beginning and end of the reporting period. In addition, this must also be stated for comparison for similar liabilities that are not part of the programme.
Description of non-cash changes6
If liabilities under reverse factoring agreements no longer meet the requirements of a trade liability and are subsequently derecognised in accordance with IFRS 9 and recognised as a financial liability, this can lead to 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). This effect must be described in the notes in order to be able to correctly analyse operating cash flows, for example.
Disclosures on liquidity risk management7
In order to assess the impact of reverse factoring programmes on the company's liquidity risk, it is necessary to specify how the risk is managed. By using a reverse factoring programme, part of the liabilities can be concentrated with one factor instead of with a large number of suppliers. If the factor were to terminate the programme at short notice, this would have an impact on liquidity planning and thus possibly on the short-term solvency when the liabilities fall due.
The disclosures are mandatory for financial years beginning on or after 1 January 2024. For companies applying EU-IFRS, this obligation only applies after the corresponding EU endorsement. No disclosures are required in interim financial statements in the first year of application. In general, the IASB clarifies that the disclosures are to be made in aggregated form and not at the level of individual programmes, provided they contain comparable conditions. In addition, the IDW recently published a draft of the revised version of the IAS 1-M1 module for the German profession ("IFRS Module Announcement (IDW RS FAB 50): IAS 1-M1 n.F.: Zweifelsfragen bei der bilanziellen Abbildung von Reverse-Factoring-Transaktionen"), which takes into account the amendment to the IASB amendment presented here.
During implementation, companies must face the particular challenge of determining and preparing the necessary data from the systems. Our KPMG specialists will be happy to help you with this - please contact us.
Source: KPMG Corporate Treasury News, Issue 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 Treasury 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)
4IAS 7.44H (b) (iii)
5 IAS 7.44H (c)
6 IFRS 7.B11 (j) i.V.m IFRS 7.IG18A (a) (iv)
