Companies that use supply chain finance (SCF) products will be required to disclose them in financial statements under new standards being prepared by a global accounting standards body. 

The International Accounting Standards Board (IASB), which sets accounting standards broadly followed by more than 140 countries, decided at a board meeting last week to create new standards for SCF because of concerns from investors and regulators who say they are unable to gain a clear picture of a company’s finances when such arrangements are not reported.  

Though SCF programmes vary, they typically involve a financial intermediary paying suppliers’ invoices early – generally at a discount – while granting the buyer extended payment terms, maximising working capital. When initiated by the buyer, that model is also known as reverse factoring.

Scrutiny of SCF, a long-established form of trade finance, has grown after the collapse of industry giant Greensill in March this year, the 2018 demise of Carillion in the UK, and wider concerns that smaller suppliers are being forced to agree to the practice by some big buyers.  

The changes, if approved, will amend the IASB-governed International Financial Reporting Standards (IFRS) standards which are used in most European, South American, Middle Eastern and Sub-Saharan African countries, in addition to Australia, Canada and some Asia Pacific nations. 

The generally accepted accounting principles (GAAP) set of rules, which are used mainly in the US, are also poised to require SCF disclosures after the body that sets them began a similar project to examine the issue in October last year. 

Under the IASB’s proposed changes, reporting entities will be required to reveal the “key terms and conditions of a supplier finance arrangement” and aggregate amounts of payables for SCF arrangements, the payables “for which suppliers have already received payment from the finance provider” and information about the length of payment terms.  

The organisation’s examination of SCF followed a January 2020 submission by the investor services division of ratings agency Moody’s, which asked for clarification on how entities should present liabilities to pay for goods or services received when the invoices are part of an SCF arrangement and how SCF should be disclosed in financial statements. 

A June 2020 IFRS staff paper prepared for the IASB board says SCF programmes could have a material effect on companies that initiate them if payment terms have been extended, particularly beyond industry norms, and because of the risk of facilities being withdrawn in times of stress, possibly endangering liquidity.

According to the paper, investors and analysts told the IASB in submissions that they struggle to compare financial statements between users and non-users of SCF, and that the arrangements can obscure total borrowings and make it difficult to parse cash flow. 

“You can end up with a situation where two companies’ balance sheets look identical and one has entered into one of these arrangements and the other one hasn’t. You just can’t tell from the way that the accounting works,” Sue Lloyd, the IASB board’s vice-chair, said at last week’s board meeting.  

“You can still have the trade payables on your balance sheet when actually the money you owe is to a bank and you can’t tell that just by looking at the accounts stand-alone.” 

The UK Financial Reporting Council, which regulates auditors and accountants, said in a submission to the IASB last year that “good reporting in this area is rare”.  

“Our research suggests that reverse factoring is a significant funding alternative for certain industry sectors. Nevertheless, we find a gap between the apparent prevalence of these transactions and the information disclosed in financial statements.” 

Several board members warned during their meeting that the standards would need to be worded broadly so that firms cannot structure their arrangements to avoid disclosure. 

It is unclear how long the standards will take to be finalised and approved. 


The IASB board’s June 23 decision comes only six months after the body’s interpretations committee said, following almost a year of consideration, that new standards on supply chain finance were not needed.

In December 2020, after considering the issue for almost a year, the committee published an “agenda decision” explaining how companies can use the existing standards and principles to understand how to include SCF arrangements in financial statements. 

A spokesperson for the IASB did not respond to written questions from GTR, including on what prompted the reversal of the December decision. 

The June 23 statement uses the term “supplier finance”, which the IASB says are “all arrangements that are economically similar to reverse factoring arrangements” but excluding “arrangements related to receivables and inventories”. 

While last week’s vote was passed by all but one of the present board members, two said they were frustrated that the December 2020 decision was not being given a chance to filter through to accounting practitioners.

“I think the words that are going to be used will create loopholes… and will detract in fact people from the excellent job that has been done with the [December 2020] decision,” board member Françoise Flores told the meeting. 

“I totally agree with the objective that we are pursuing but I think we are not confident enough in the power of the agenda decision to bring the necessary benefits.”

Lloyd said “a little piece of me dies every time we do this” because producing new standards whenever auditors or investors are uncertain can undermine the IASB principles, but agreed that specific guidance is required for SCF. 

Industry “very pleased”

Industry bodies that represent SCF users and providers have previously lent support to the creation of disclosure rules by accounting bodies. 

“We are very pleased that that level of disclosure is now being mandated,” says Sean Edwards, chairman of the International Trade and Forfaiting Association (ITFA).

The biggest problems arise when a company is overly dependent on one programme, Edwards tells GTR, which is a “very significant piece of information for lenders and investors” and will be exposed under the proposed changes.  

“There might be people on the fringes, banks, certainly some lenders and certain borrowers, who might get affected. But we think all the legitimate and proper business will remain – and probably grow – so there we don’t have any concerns at all.” 

Some major SCF users, such as UK supermarkets, are already disclosing their programmes in broadly the same way as envisaged by the proposed standards, he says.

One sticking point which has not yet been resolved is ratings agencies’ view that payments expected beyond what is considered the industry norm – generally 90 days – should be classified as bank debt.  

“I think that will still be an interesting area in which there can still be discussion and interpretation,” Edwards says.