Supplier financing arrangements under FRS 102
In March 2024, the Financial Reporting Council (FRC) issued its final amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, Section 7 Statement of Cash Flows. This amendment was finalised at the same time as the periodic review amendments (but was subject to a separate consultation so did not form part of the overall periodic review amendments).
The amendments to Section 7 require additional disclosures where an entity enters into supplier finance arrangements. These sorts of agreements arise between the company (as the buyer), the supplier and a bank (or other finance provider) which can serve several purposes, primarily to extend the buyer’s payment terms so it has a payment date to the bank later than the original due date of the supplier’s invoice.
Supplier finance arrangements are also known as:
- Reverse factoring
- Supply chain finance
- Payables (creditors) finance
However, it is important to emphasise that the arrangement is identified through its characteristics (substance) rather than what it is called. A key characteristic in the identification of a supplier finance arrangement is that there must be three parties:
- A buyer
- A supplier
- A finance provider
FRS 102, Section 7 Statement of Cash Flows, para 7.20B states:
| Supplier finance arrangements are characterised by one or more finance providers offering to pay amounts an entity owes its suppliers and the entity agreeing to pay according to the terms and conditions of the arrangements at the same date, or a date later than, suppliers are paid. 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. Supplier finance arrangements are often referred to as supply chain finance, payables finance or reverse factoring arrangements. Arrangements that are solely credit enhancements for the entity (eg financial guarantee contracts) or instruments used to settle directly with a supplier the amounts owed (eg credit cards) are not supplier finance arrangements. |
A typical supplier finance arrangement will involve the following stages:
Step 1
The supplier delivers the goods or renders the services. This creates a trade creditor for the buyer and a trade debtor for the supplier.
Step 2
The buyer confirms the amount, due date and the fact that the goods have been delivered, or the services rendered and/or that it will pay the trade creditor by the agreed date with the finance provider (e.g. the bank).
Step 3
The supplier’s trade debtor is assigned or novated to the bank in exchange for the buyer committing to pay the bank.
Step 4
The supplier receives payment from the bank (either at the original due date or earlier depending on the terms of the agreement).
Step 5
The buyer pays the bank, typically on or after the due date of the invoice.
Arrangements that are NOT supplier finance arrangements
There are some arrangements that, while appearing to have characteristics of a supplier finance arrangements, would not have all the characteristics of one. The most common types of arrangements that an entity may enter into which would NOT be deemed a supplier finance arrangement are as follows:
- Arrangements that finance an entity’s debtors or inventory (stock and work in progress). Keep in mind that one of the key characteristics of a supplier finance arrangement, according to FRS 102, para 7.20B, is that they finance ‘… amounts an entity owes its suppliers’.
- Arrangements that are solely credit enhancements for the buyer, or instruments used by the buyer to settle directly with a supplier the amounts owed, such as:
- Financial guarantee contracts: these include letters of credit used as guarantees; and
- Credit cards used to directly settle the amount owed to a supplier.
- Some commodity intermediation agreements under which a financial institution purchases and obtains control of commodities and sells those commodities as a principle to a company as needed.
Impact on the cash flow statement
FRS 102, Section 7 does not provide guidance on how an entity determines whether a cash flow has occurred for the buyer in circumstances that another party makes a payment on the entity’s behalf.
In addition, cash flows are often regarded as movements within the entity’s bank account. This is not necessarily always the case. An entity could incur a cash flow even though no cash flows through the bank account, such as when an entity directs another party to transfer the cash on its behalf. In the case of a supplier finance arrangement, professional judgement will be needed when making this assessment.
It is therefore important to contrast this principle with a non-cash transaction. In a non-cash transaction, there is clearly no cash flow and hence there should be no impact on the cash flow statement. In a supplier finance arrangement, there is a cash flow which is the payment from the bank to the supplier. The buyer must make a judgement as to whether it is a party to that cash flow; in other words, whether a cash flow has taken place for the buyer. Consider the following situations:
| Example – Impact on balance sheet and cash flow statement | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| On 1 March 2025, Philbin Industries Ltd (the buyer) receives goods from its supplier, King Enterprises Ltd (the supplier) for £275,000. At that point, the buyer records a trade creditor. No cash flow has arisen on this date. The invoice is due to be paid on 31 May 2025.
On 1 April 2025, the trade payable becomes part of a supplier finance arrangement. The buyer reclassifies the trade creditor as a short-term loan in its balance sheet. On 31 May 2025, the bank pays the supplier as agreed. On 31 July 2025, the buyer pays the bank as agreed. The balance sheet date is 31 August 2025.
Scenario 1: If Philbin concludes that it has incurred cash flows at the point the bank pays the supplier, the impact on the cash flow statement is as follows:
Scenario 2: If Philbin concludes that it has not incurred cash flows at the point in time the bank pays the supplier, and the accounting policy is to present the cash outflow as financing cash flows (other approaches may be acceptable), the effect on the cash flow statement is as follows:
You will note that the timing of the derecognition of the trade creditor and recognition of a short-term loan is different from the occurrence of the cash flows in the cash flow statement. Generally, in practice, the entity may record a cash flow in the cash flow statement at the same date as derecognition of the trade creditor takes place and the recognition of a short-term loan. |
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Disclosures in the cash flow statement
Following the amendment to FRS 102, Section 7, for accounting periods commencing on or after 1 January 2025, an entity is required to disclose the following in respect of its supplier finance arrangements:
- Key terms and conditions of the arrangements. Note, where terms and conditions are dissimilar, they should be disclosed separately.
- At the end of the reporting period:
- carrying amounts and associated line items presented in the balance sheet of the financial liabilities that are part of a supplier finance arrangement;
- the range of payment due dates (e.g. 30 days from invoice date) for both the financial liabilities disclosed under i above and comparable trade creditors that are not part of a supplier finance arrangement. (Comparable trade creditors are, for example, trade creditors of the entity within the same line of business or jurisdiction as the financial liabilities disclosed in i above. If ranges of payment due dates are wide, an explanatory information disclosure about those (additional) ranges (e.g. stratified ranges) are disclosed.
| Example – Qualitative disclosure information |
| The company participates in a supply chain financing arrangement. Under the terms of this arrangement, the bank agrees to pay amounts to a participating supplier in respect of invoices owed by the company and receives settlement from the company at a later date. The primary purpose of this arrangement is to facilitate efficient payment processing and to enable the willing suppliers to receive payments from the bank prior to the invoice settlement date. |
| Example – Quantitative disclosure information | |||||||||||||||||||||||||||||||||||||||||||||
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FRS 102, para 7.20C(c) also requires the type and effect of non-cash changes in the carrying amounts of the financial liabilities relating to supplier finance arrangements at the end of the reporting period. Examples include:
- The impact of business combinations, such as when the acquiree has supplier finance arrangements.
- Exchange differences, such as when financial liabilities are subject to supplier finance arrangements denominated in a foreign currency.
- Other transactions that do not require the use of cash or cash equivalents.
| Example disclosure – Impact of non-cash changes |
| There were no material business combinations or foreign exchange differences or other non-cash transfers relating to the carrying amount of liabilities subject to supplier finance arrangements. |
Category: Accounting and standards
