Be ready for enhanced transparency on supplier finance arrangements

Supplier finance arrangements, commonly referred to as supply chain finance (SCF), trade payable financing, reverse factoring, or structured payable transactions, have increasingly emerged as a popular mechanism to accelerate payment of supplier invoices. The term ‘supplier finance arrangement’ is not defined and it is typically identified through its characteristics. A key characteristic of the arrangement is that three parties (viz., a buyer, a supplier and a finance provider) are interacting to achieve a financing objective for at least one of the parties. In such an arrangement, generally a financial intermediary, viz., a bank, agrees to make upfront payment for amounts owed by the buyer to its suppliers and the buyer will make payment to the bank when payment to the suppliers is due or at the end of extended credit period. Given below is pictorial presentation of typical supplier finance arrangements:

Terms and conditions of the supplier finance arrangement may vary significantly. A key accounting question arising from such arrangements is whether the buyer should present amount payable under the arrangement as a trade payable or as a debt-like liability. This determination could have a significant impact on the purchaser’s financial position, particularly its leverage and/ or gearing ratios. Despite the importance, there is no single Ind AS which deals with accounting/presentation of such arrangements. Rather, there are multiple requirements which need to be considered. In the January 2024 edition of Assurance EYe, we highlighted key accounting considerations for supplier finance arrangements, including their presentation in the balance and the statement of cash flows

What is changing?

The MCA has notified the Companies (Indian Accounting Standards) Second Amendment Rules, 2025, whereby it has, among other Ind AS, amended Ind AS 7 Statement of Cash Flows and Ind AS 107 Financial Instruments: Disclosures to strengthen disclosure requirements for the supplier financial arrangements. These amendments aim to give stakeholders clearer insights into how supplier finance arrangements affect an entity’s liabilities, cash flows and liquidity risk. In this article, we discuss the scope of disclosures required and key disclosures.

The MCA has amended Ind AS 7 and Ind AS 107 to strengthen disclosure requirements for the supplier financial arrangements. These amendments do not change accounting considerations for such arrangements, i.e., considerations discussed in the January 2024 edition of Assurance EYe will continue to apply. However, the amendments will require significantly additional disclosures.

Scope of the disclosure requirements

As stated above, Ind AS (including amendments) do not define supplier finance arrangements. However, they explain key characteristics. In accordance with Ind AS 7 (paragraph 44G), key features of supplier finance arrangements can be summarized as follows:

a) One or more finance providers offer to pay amounts an entity owes its suppliers.

b) The entity agrees to pay to the finance provider according to the terms and conditions of the arrangements at the same date as, or a date later than, suppliers are paid.

c) These arrangements provide the entity with extended payment terms, or the entity’s suppliers with early payment terms, compared to the related invoice payment due date.

We believe that entities may need to exercise judgment when assessing applicability of the new disclosure requirements. To illustrate, consider one scenario where the supplier factors its receivables to a bank, and the purchasing company, being aware of this arrangement, settles the amount directly with that bank. In this case, a question may arise whether the purchasing company still needs to make the disclosures required for supplier finance arrangement, even though it was not directly involved in the factoring arrangement? In this context, the following guidance are relevant:

a) The wording used in paragraph 44F of Ind AS 7 states that it requires an entity to ‘disclose information about its supplier finance arrangements.’ This suggests that the disclosures are required only for the arrangements in which the entity itself is a party and not for direct financing transactions entered into between the supplier and the finance provider

b) Paragraph 44F of Ind AS 7 also states that disclosures should help users assess the impact of supplier finance arrangements on an entity’s liabilities, cash flows, and liquidity risk. Based on the wording used, one may argue that disclosures have a wider scope, potentially including arrangements not directly entered into by the entity.

However, in this context, reference is also drawn to the Basis for Conclusions of IAS 7 which clarifies that scope is limited to the arrangements which provide either the entity with extended payment terms or suppliers with early payment terms, compared with the related invoice due date. Further, the Basis for Conclusion to IAS 7 paragraph 32(c) also confirms that entities are not required to consider financing actions taken independently by suppliers, such as factoring of receivables.

Accordingly, judgment may still be needed to determine whether specific arrangements fall within the scope of Ind AS 7 disclosure requirements. Key factors requiring consideration include (a) purpose and structure of the arrangement with the finance provider, (b) who initiated it, (c) whether it is offered to all customers under the supplier’s standard terms or only to the entity, and (d) what specific benefits the entity receives. This assessment should also consider the disclosure objective prescribed under Ind AS 7, viz., to provide users of financial statements with information that helps them understand the impact of supplier finance arrangements on the entity’s liabilities, cash flows, and liquidity risk, as well as the potential consequences if such arrangements were no longer available.

How we see it

Determining whether an arrangement falls within the scope of the new requirements may require significant judgment. If material, entities may need to disclose the judgment used along with the related material accounting policy as per Ind AS 1

The following example shows how disclosure requirements may apply in three different scenarios.

Example – Scope of supplier finance arrangements disclosures

An entity purchases goods from a supplier at a cost of INR1,000. Normal industry terms for the purchase would be payment within three months from the invoice date. As a result of the supplier entering into and maintaining a factoring arrangement with a bank, the entity is required to settle the debt directly with the bank and is required to provide certain information (for example, half-year reports and annual financial statements) which would allow the bank to assess the credit risk attached to the entity to appropriately tailor the terms of the arrangement.

Is the purchasing entity (the entity) required to provide the supplier finance arrangement disclosures in the scenarios given below?

Scenario 1

Entity is aware that the supplier is factoring its debtors

The entity is aware that the supplier is factoring its debtors to a bank, and consequently, the entity will be required to settle the outstanding balance with the bank directly. The entity is required to settle the invoice of INR1,000 within the normal industry terms of three months.

Analysis – Scenario 1

In the absence of other relevant facts or contractual terms, an entity could reasonably conclude that it is not required to provide supply chain financing disclosures since it is neither a party to the arrangement nor deriving any benefit from it. In this case, the arrangement merely represents a supplier’s own financing activity with the bank (for example, factoring of receivables). As stated earlier, the disclosure requirements apply only to the arrangements that finance amounts an entity owes to its suppliers, and not to independent actions taken by suppliers to finance their receivables. Also, the disclosure objective is to provide users of financial statements with the information on how supplier finance arrangement affects the entity’s liabilities, cash flows and liquidity risk. In this scenario, no such impact exists

Scenario 2

Entity obtains payment terms of six months by virtue of the supplier’s arrangement

The entity is aware that the supplier is factoring its debtors to a bank, and consequently, the entity will be required to settle the outstanding balance with the bank directly. The entity obtains payment terms of six months by virtue of the supplier’s arrangement with the bank. The invoiced amount is INR1,050 to compensate for finance charges.

Analysis – Scenario 2

In this type of scenario, if no other facts or contractual conditions exist, it may be reasonable and consistent with the disclosure objective for the entity to conclude that the arrangement is part of the entity’s supplier finance arrangements and disclosure requirements will apply. This is because the entity is allowed to pay an amount greater than the invoice amount, at a date later than the related invoice date.

Scenario 3

Entity can opt for the extended terms

The purchase agreement between the entity and its supplier includes different payment term options and related costs. At the inception of each purchase, the supplier informs the entity about the possibility of receiving an extension of the due date (from three months to six months), should the supplier still have the financing facilities available to it through its pre-arranged factoring agreement with the bank finance provider. If the entity opts for the extended terms, the supplier will issue an invoice for INR1,050 and six-month payment terms. If the entity does not opt in, the supplier issues an invoice for INR1,000 and three-month payment terms

Analysis – Scenario 3

In the absence of other relevant facts or contractual terms, it would be reasonable and consistent with the disclosure objective, to treat such an arrangement as part of the entity’s supplier finance arrangements. This is because the extended payment terms and related costs offered to the entity are directly tied to the supplier’s factoring arrangement with a third-party finance provider. When the entity opts for these extended terms, it effectively enters into an arrangement where the supplier is paid earlier by the bank, while the entity settles its obligation at a later date. If the supplier’s agreement with the bank were discontinued, the purchasing entity’s liquidity could be impacted

1. Terms and conditions of the arrangements
2. As at the beginning and end of the reporting period:
   1. The carrying amounts of supplier finance arrangement financial liabilities and the line items in which those liabilities are presented.
   2. The carrying amounts of financial liabilities and the line items for which the finance providers have already settled the corresponding trade payables.
   3. The range of payment due dates for financial liabilities owed to the finance providers and for comparable trade payables that are not part of those arrangements
3. The type and effect of non-cash changes in the carrying amounts of supplier finance arrangement financial liabilities, which prevent the carrying amounts of the financial liabilities from being comparable.

The amendments typically require entities to provide aggregated information about supplier finance arrangements. However, where arrangements include unusual or unique terms and conditions that are not comparable, entities may need to disaggregate the information and present it separately. These terms may include extended payment periods, security or guarantees provided, or any other conditions relevant to the disclosure objective

Given below is sample disclosure for supplier finance arrangements under Ind AS 7:

Sample disclosure

The Group participates in a supply chain financing (SCF) arrangement with a bank. Under this arrangement, the bank pays amounts to participating suppliers on behalf of the Group in respect of invoices raised and subsequently recovers the settlement from the Group at a later date.

The arrangement was initiated by the Group with the objective of supporting its working capital management. As part of the arrangement, the Group is able to avail an extended credit period of up to six months, compared to the normal contractual credit period of three months agreed with suppliers. In return for this extended credit period, the Group bears an interest cost payable to the finance provider

Accordingly, the arrangement is considered in substance similar to a borrowing. Accordingly, the related liabilities are presented under Borrowings, separately from trade payables, and the corresponding interest expense is recognized in the statement of profit and loss under finance cost.

Effective date and transitional arrangements

The amendments are effective for financial year beginning on or after 1 April 2025. In accordance with transition reliefs, an entity is not required to disclose the following in the first year of application:

1. Comparative information
2. Information stated at (b)(ii) and (iii) above as at the beginning of the financial year, and
3. Information for any interim periods presented within the annual reporting period

How we see it

Ind AS 34 Interim Finance Reporting has not been consequentially amended, and thus, new disclosure requirements in Ind AS 7 and Ind AS 107 will not necessarily apply in the context of condensed interim financial statements. However, under Ind AS 34, judgment needs to be exercised to ensure that information that is significant to an understanding of the changes since the end of the last financial year is disclosed. Thus, entities may consider the new requirements in Ind AS 7 and Ind AS 107 relevant for condensed interim financial statements also. The relief provided for interim reporting in the first annual reporting period in which the amendments apply may, in these cases, be helpful

Disclosures in restated financial statements

The new disclosure requirements constitute a change in accounting policy under Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors. It may be noted that the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (as amended) (the ‘SEBI ICDR’) require that the Restated Financial Information (including for the stub period if applicable) should be restated to ensure consistency of presentation, disclosures and the accounting policies for all the periods presented in line with that of the latest financial year/ stub period. Unlike transitional provisions in Ind AS, the SEBI ICDR do not give any option of using different accounting policies, presentation or disclosures in the earlier/ comparative periods vis-à-vis those used in the current period.

Rather, there is a need to ensure consistency of accounting policies, presentation and disclosure for all periods presented. Thus, transitional provisions/ reliefs will not apply when preparing restated financial information in accordance with the SEBI ICDR and disclosures for all periods presented will be required.

How we see it

Compliance with the new disclosure requirements will require the management to strengthen internal systems and undertake internal benchmarking to capture the necessary data. As some disclosures may involve commercially sensitive information, it is important for the management and auditors to engage early and agree on a practical approach that ensures compliance while managing disclosure sensitivities

Considering enhanced transparency and focus, entities may also need to reconsider presentation of the amount covered under the supplier finance arrangements in line with the January 2024 edition of the Assurance EYe. Though disclosure requirements apply only at year-end for statutory financial statements, it will be appropriate for entities impacted to have a re-look at the presentation of supplier finance arrangements in the balance sheet immediately