How supplier finance and reverse factoring are presented and disclosed under IFRS and US GAAP

Supplier-finance programs (also called reverse factoring or SCF—Supply-Chain Finance) let a buyer extend payment terms with suppliers while a finance provider pays suppliers earlier at a discount. These programs alter liquidity, working capital optics, and potentially debt-like exposures. Accounting focuses on (1) classification—is the liability still trade payables or a borrowing—(2) cash-flow presentation, and (3) expanded disclosures so users can understand size, terms, and liquidity risk. Under IFRS, presentation is based on substance with new disclosure requirements in the statement of cash flows and notes; under US GAAP, classification also follows substance while specific SCF disclosures are now required for obligations outstanding in supplier-finance programs.

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How supplier finance works and why classification can change.

In a typical arrangement, the supplier invoices the buyer on standard trade terms (e.g., 60 days). The buyer uploads approved invoices to a platform operated by a bank or fintech. The supplier can elect early payment from the finance provider (at a discount) and the buyer settles the invoice later with the finance provider, sometimes on extended terms (e.g., 120–180 days). Economically, the buyer’s obligation might begin as trade payables, but if terms, legal form, or recourse shift credit risk and financing to a lender, the liability may be viewed as borrowings.

Key determinants include:

• Term extension beyond normal trade cycle for the buyer’s industry.

• Refinancing element (novation of the payable to a bank; buyer pays the bank).

• Security/guarantees, interest-like fees paid by the buyer, or covenants that resemble debt.

• Supplier optionality and whether the buyer can unilaterally defer settlement vis-à-vis the finance provider.

Substance over form governs presentation; platform mechanics do not by themselves force reclassification.

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IFRS presentation and when a payable becomes a borrowing.

Under IFRS, the buyer assesses whether the trade payable has been extinguished and replaced by a new financing liability, or whether it remains a trade payable with modified settlement mechanics.

Indicators supporting “trade payable” classification:

• Terms consistent with ordinary course (e.g., 60–90 days) and no material extension vs historic practice.

• Supplier bears the discount; buyer pays the original invoice amount on original terms; no debt-like fees.

• No novation or legal substitution of creditor; the bank acts as payment agent.

Indicators supporting “borrowing” classification:

• Substantial term extension (e.g., 120–270 days) with consideration similar to interest borne by the buyer.

• Novation of the obligation to the finance provider or new contractual terms that mirror loan features.

• Security/covenants, minimum liquidity clauses, or cross-defaults in the SCF agreement.

Balance-sheet effect: If substance indicates financing, reclassify from Trade and other payables to Borrowings/financial liabilities. If not, retain in Trade payables.

Cash-flow statement: Payments to a finance provider that represent principal and interest-like consideration are generally financing cash flows; routine trade payable settlements remain operating. Judgment is required when fees are embedded in price vs explicit.

Disclosures (IFRS): Buyers must provide qualitative and quantitative information about supplier-finance arrangements, including program terms, carrying amounts of obligations under the programs by line item, and liquidity risk information (maturity analysis). Users should be able to reconcile changes period-over-period and understand where cash flows are presented.

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US GAAP presentation and the supplier-finance disclosure framework.

Under US GAAP, classification similarly depends on substance—obligations that function as trade payables remain in Accounts payable; those that create financing to the buyer are presented in Debt or other financing liabilities. The analysis emphasizes:

• Whether the buyer’s obligation to the supplier has been legally settled and replaced with an obligation to the finance provider.

• Economic compulsion and term extensions that make the arrangement debt-like.

• Whether payments include interest-like amounts owed by the buyer to the finance provider.

Cash-flow presentation: Settlements that are in substance financings are typically financing cash outflows; otherwise, operating.

Specific SCF disclosures (US GAAP): Entities must disclose, at a minimum:

• The key terms of supplier-finance programs (including payment timing and any assets pledged).

• The amount of obligations outstanding under these programs at the reporting date, presented by balance-sheet line item.

• A rollforward or activity disclosure of obligations (e.g., beginning balance, additions, settlements) if material.

The objective is transparency around size, liquidity exposure, and payment timing.

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Comparative framework — IFRS vs US GAAP at a glance.

Topic	IFRS	US GAAP
Core classification	Substance: trade payable vs borrowing	Substance: A/P vs debt/financing
Key indicators	Term extension, novation, interest-like fees, covenants	Same indicators; legal form plus economics
Cash-flow presentation	Operating if trade payable; financing if borrowing	Operating if A/P; financing if debt-like
Required disclosures	Program nature, carrying amounts by line item, liquidity risk/maturity	Program terms, obligations outstanding, line-item location, activity
Supplier election effects	Supplier’s early payment choice doesn’t decide classification	Same; buyer-side economics drive presentation

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Decision flow for classification and cash-flow mapping (buyer view).

1. Has the payable been novated or legally replaced by an obligation to the finance provider?

2. Yes: treat as borrowing unless facts indicate mere payment agency.

3. No: go to step 2.

4. Are payment terms debt-like (extended beyond normal cycle) with interest-like consideration borne by the buyer?

5. Yes: borrowing; finance cash outflows.

6. No: trade payable; operating cash outflows.

7. Disclose the program’s size and terms regardless of classification if material; separately identify obligations outstanding under SCF.

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Journal entries and illustrations.

A) Program remains trade payable (no novation; normal terms)

At invoice approval:

• Dr Inventory / COGS / Expense xx

• Cr Trade Payables xx

At settlement via platform (bank pays supplier day 10; buyer pays bank day 60 at same face):

• Dr Trade Payables xx

• Cr Cash xx

(Operating cash flow; disclose program terms and obligations outstanding.)

B) Program becomes financing (novation and 180-day extension; buyer pays discount/fee)

At novation/settlement with supplier:

• Dr Trade Payables xx

• Cr Borrowings – SCF Liability xx

Recognition of explicit fee (interest-like):

• Dr Finance Cost xx

• Cr Borrowings (or Accrued Interest) xx

At payment to finance provider (day 180):

• Dr Borrowings – SCF Liability xx

• Dr Accrued Interest xx

• Cr Cash xx

(Cash flow: financing outflow for principal; interest per policy.)

C) Transition within a program (some invoices finance, others don’t)

Maintain separate subledgers: A/P vs SCF liability, with clear aging and maturity for liquidity disclosures.

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Worked example — boundary case with partial extension.

Facts:

• Historic terms: Net 60.

• SCF program allows suppliers to take early payment; buyer commits to pay finance provider at Net 120 beginning this year.

• Buyer pays a 0.6% per month fee on extended days; no novation stated, but contract grants the finance provider direct recourse to buyer on approved invoices.

Assessment (buyer):

• The combination of extended terms, interest-like fees, and direct recourse indicates financing in substance for approved invoices.

Accounting:

• Reclassify approved invoices from A/P to Borrowings – SCF at approval.

• Recognize finance cost over the extension period.

• Present settlement cash flows as financing for principal.

Disclose: program terms, period-end SCF liability, and maturity analysis.

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Disclosure package that avoids surprises.

• Nature and terms: payment timing, early payment options, who bears discounts/fees, existence of recourse, novation, security/covenants.

• Carrying amounts: obligations outstanding under SCF by balance-sheet line (e.g., A/P vs borrowings) and aging.

• Cash-flow mapping: policy for operating vs financing and any changes in presentation.

• Activity/rollforward: opening balance, invoices approved into the program, settlements, and non-cash movements (reclasses).

• Concentrations of liquidity risk: dependency on single finance providers; triggers allowing withdrawal or term changes.

• Supplier impacts (if material): changes to average days payable outstanding (DPO) and rationale.

Clear disclosures allow readers to reconcile DPO and net debt and understand whether improved working capital stems from operations or financing.

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Impact on ratios and analytics.

• DPO and cash conversion cycle: SCF can inflate DPO; analysts may adjust to exclude debt-like extensions.

• Net debt / leverage: Reclassification to borrowings increases debt-like metrics.

• Operating vs financing cash flows: Re-mapping can alter operating cash flow trends without changing economics.

• Covenants: Some agreements treat SCF liabilities as indebtedness—monitor headroom.

• Interest coverage: Buyer-borne fees behave like interest, affecting coverage metrics.

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Operational considerations for finance teams.

• Build a policy memo with bright-line indicators for reclassification and consistent cash-flow presentation.

• Tag approved invoices in the ERP and maintain separate SCF subledger.

• Enhance aging and maturity disclosures specific to SCF obligations.

• Stress-test liquidity for provider withdrawal and covenant triggers.

• Align treasury, procurement, accounting, and legal on term changes; avoid inadvertent debt-like features if presentation as trade payables is desired.

• Educate stakeholders: SCF is a liquidity tool, not organic improvement in payables discipline.

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