New requirements are coming which aim to improve the information entities disclose about their management of working capital via the use of payment arrangements with suppliers that involve financial intermediaries. Such arrangements generally offer the involved parties more beneficial payment terms than could be possible without the intermediary. They also impact an entity’s cash flows, financial liabilities and liquidity risk, and the inconsistent way entities were accounting and disclosing them has seen users of financial statements globally call for improved reporting.

Initially, in 2020 the IASB issued an IFRIC agenda decision which demonstrated its view of how existing standards should be applied to the key issues of what is a trade payable and when it is appropriate to derecognise a trade payable and recognise a financial liability. Nevertheless, global users remained of the view that more disclosure was needed about the use of these arrangements and the risks associated with them.

What’s now changed?

In response, the IASB has issued changes to IFRS 7 Financial Instruments Disclosures and IAS 7 Cash Flow Statements that apply for financial years beginning on or after 1 January 2024. The revisions do not define the term “supplier finance arrangement” but identify the key characteristics of such an arrangement and require new disclosures that more clearly explain how an entity is using them. These new disclosures are to be provided on an aggregated basis, except where arrangements have dissimilar terms and conditions.

The required disclosures are:

• Details of the terms and conditions of these arrangements,
• The amounts involved and the line items in the financial statements where they are disclosed,
• The line items in the balance sheet where they are included, and
• Details about the payment terms that apply to the entity both within and outside these arrangements.

In addition, disclosure is required of amounts where suppliers have already been paid by the third party, which may require entities to obtain additional information from their financier. The disclosures will be required at the beginning and the end of each reporting period, but transition relief means information at the beginning of the reporting period is not required in the first year of adoption.

In Australia, these changes have been incorporated into AASB 7 Financial Instruments: Disclosures and AASB 107 Cash Flow Statements via amending standard AASB 2023-1 Amendments to Australian Accounting Standards – Supplier Finance Arrangements with corresponding changes to AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities made via AASB 2024-1 Amendments to Australian Accounting Standards – Supplier Finance Arrangements: Tier 2 Disclosures. This means in Australia the requirements apply to both Tier 1 and Tier 2 entities, given the importance to users of understanding cash flow and liquidity.

Equivalent changes to NZ IAS 7 Cash Flow Statements and NZ IFRS 7 Financial Instruments: Disclosures have been made in New Zealand via an amending standard and apply to Tier 1 for-profit entities. However, separate RDR amendments issued in November 2023 did not apply the new disclosures to Tier 2 for-profit entities on the basis that the XRB considered that existing disclosures in both NZ IAS 7 and NZ IFRS 7 for Tier 2 were sufficient.

What do I need to do now?

While comparative information is not required, now is a good time to begin the adoption process by identifying any existing supplier finance arrangements and ensuring that their classification and disclosure in the financial statements is consistent with the existing recognition and measurement requirements. The IFRIC agenda decision explains the relevant requirements and how they should be applied.

Where such arrangements are identified, it will then be necessary to ensure you can access the additional information required to provide the disclosures – it may involve changing financial agreements so that you can access the necessary information about suppliers that have already been paid by the finance provider.

Where can I find more information?

Additional information can be found at the following:

• IASB project page, including a webcast and several Investor Perspective series articles written in November 2021, May 2023 and October 2023
• KPMG Reporting update 24RU – 05 which includes some illustrative disclosures
• BDO article on supplier finance arrangements
• PwC supplier financing arrangements which includes some illustrative disclosures