From Trade Payables to Financial Liabilities: Ind AS Disclosure Reforms for Supply Chain Finance arrangements

Dayita Kanodia | finserv@vinodkothari.com

The amendments in Ind AS 7 emanate from similar amendments in IAS 7 by the IASB, made in May 2023, which itself is the culmination of a project that was initiated in 2020.

The amendments related to Supply Chain Financing (SCF) or reverse factoring arrangements. Globally, the SCF volumes increased by 8% to USD 2,462bn by the end of 2024.

Read our article explaining the Supply Chain Finance here.

The key features of a supply chain finance arrangement to require specific disclosure under the revised Standard are:

• The trade payables of the entity are paid by a financial institution; the entity then pays to the financial institution.
• The entity either gets extended payment terms, or the suppliers get earlier payment terms, than the terms as contained in the relevant supply invoices/agreements.
  • Examples: X Ltd acquires goods/services from vendors with a 90 days’ credit. It organises a supply chain financing arrangement where Bank A discounts the receivables and pays off the vendor within 30 days, whereas the Bank will collect payment from X on 90 days of the invoice. The arrangement is covered.
  • Same facts as above; but X is required to pay to the Bank in 180 days, whereas the Vendor is paid in 90 days. The arrangement is covered.
  • If the due date of payment to the Bank is the same as the due date of payment to the vendor, the arrangement has no economic value, and does not impact either party’s cashflows – hence, does not require any specific disclosures.
• Note that the amendments do not affect asset side financing arrangements, that is to say, receivables financing or forward factoring.

Amendments in Ind AS 7:

The amendments become effective for annual reporting periods beginning on or after the 1st April 2025.

Related amendments have also been introduced in Ind AS 107. Such amendments are to be applied by an entity when it applies the amendment under Ind AS 7.

Key issue

As discussed, under an SCF arrangement, a financial institution settles the trade payables of an entity with the supplier, while the entity benefits from extended payment terms. What was a trade payable is now essentially a payment to a financial institution, and therefore, acquires the nature of a financing arrangement. If these financing arrangements continue to be shown as trade payables, the extent of financing availed by the entity is not reflected properly.

Therefore, the amendment requires trade payables to be shown as financial liability.

Therefore, amendments have been proposed under Ind AS 7, which warrant certain disclosures in the financial statements for arrangements under SCF. 

What if the arrangement is covered by Ind AS changes?

The following disclosures are required to be made under Ind AS 7 for SCF arrangements:

1. The terms and conditions of the arrangements – These would include disclosures on the payment terms, the security furnished etc, under the SCF arrangement. It may be noted that disclosures are required to be provided in aggregate for all SCF arrangements. Therefore, if two or more arrangements have similar terms, disclosures can be made in aggregate. However, for arrangements with dissimilar terms and conditions, separate disclosures are required to be made.
2. The carrying amounts and associated line items presented in the entity’s balance sheet, of the financial liabilities.
   1. Also, disclose which suppliers have already received payment from the finance providers. Entities may face challenges in obtaining this information from the financial institutions.
   2. The range of payment due dates. An entity is also required to disclose comparable due dates for trade payables that are not a part of the SCF arrangements. Further, in case the ranges of payment due dates are wide, an entity shall disclose explanatory information about those ranges.           

The type and effect of non-cash changes in the carrying amounts of the financial liabilities disclosed under (b). This will include the changes caused due to exchange differences.

Exemptions for the first year of adoption

When applying these amendments for the first time, an entity gets some exemptions from disclosure:

1. Comparatives not needed – No need to present comparative disclosure for prior periods (before the year of first application).
2. Opening balance disclosure not needed – As of the beginning of the first year of application, the entity need not disclose certain specific details (those in para 44H(b)(ii)–(iii), e.g., carrying amounts of liabilities and line items affected).
3. Interim periods not covered – Within the first year of adoption, interim financial statements do not need to include disclosures under 44F–44H.

Amendments under Ind AS 107 for management of liquidity risk

Para 39 of Ind AS 107 requires entities to disclose the manner in which it manages the liquidity risk. An amendment has now been introduced under para B11F of Ind As 107, as per which SCF arrangements that provide the entity with extended payment terms or the entity’s suppliers with early payment terms will also be considered while making such disclosure.

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Our other Resources:

1. Omnibus use vs know-its-use: Is Supply Chain Financing a revolving line of credit?

2. Unlocking Working Capital: An Overview of Supply Chain Finance