How supplier financing arrangements are presented under IFRS and US GAAP

Supplier financing, also called reverse factoring or supply chain finance, allows a company’s suppliers to receive early payment from a third-party financier while the buyer extends its own payment terms. These arrangements blur the line between trade payables and borrowings, raising questions about classification, disclosure, and liquidity presentation.

Under IFRS (IAS 1, IFRS 7, IFRS 9) and US GAAP (ASC 405-50), the focus is whether the buyer retains a trade payable or whether the arrangement represents a financial liability to the financier. In recent years, regulators and standard setters have issued guidance clarifying when such arrangements require reclassification and enhanced disclosures to ensure transparency in working capital reporting.

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How supplier financing arrangements work

In a typical setup:

1. The buyer approves supplier invoices as usual.

2. The supplier sells those invoices to a financing institution at a discount for early cash.

3. The buyer pays the financier later, often at an extended maturity.

While the economic outcome resembles extended credit, classification depends on whether the nature of the obligation has changed—from a trade payable to a financial debt.

Example:A company purchases goods worth €1,000,000, payable in 90 days. A supplier financing program allows the supplier to receive payment immediately from a bank, and the buyer pays the bank after 120 days.

• For the buyer, the key question is whether the liability remains a trade payable or becomes debt.

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IFRS presentation and classification

1. Assessing the nature of the liability

Under IAS 1.69 and IFRS 9, classification depends on substance:

• If the buyer’s obligation to the supplier is replaced by an obligation to a financial intermediary, the payable may be derecognized and replaced with a financial liability.

• If the buyer still pays under the original terms (and the intermediary acts only as an agent), the payable remains a trade payable.

Indicators of a financial liability (debt) include:

• Buyer’s payment terms are substantially extended beyond normal trade credit.

• Buyer negotiates directly with the financier.

• Supplier’s involvement effectively ends at the time of financing.

• Buyer pays interest or financing fees to the financier.

Journal entries (buyer’s books):

• Upon purchase:

  • Dr Inventory 1,000,000

  • Cr Trade Payables 1,000,000

• When the obligation is transferred to the financier:

  • Dr Trade Payables 1,000,000

  • Cr Financial Liability – Supplier Finance 1,000,000

• Upon final payment to financier:

  • Dr Financial Liability 1,000,000

  • Cr Cash 1,000,000

If the liability remains a trade payable, only the disclosure changes (no reclassification).

2. Disclosure requirements under IFRS

Following recent updates (IFRS 7 and IAS 7 amendments effective 2024):

Entities must disclose:

• Terms and conditions of supplier finance programs.

• Carrying amount of payables under such programs.

• Line items in which they are presented (trade payables, borrowings, etc.).

• Liquidity risk exposure and maturity profile.

• Changes in liabilities arising from financing cash flows (IAS 7).

Example note (IFRS):

At December 31, 2025, the Group had €68 million outstanding under supplier finance programs presented within trade payables. The weighted average payment term under these programs was 120 days (prior year 95 days).

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US GAAP presentation and disclosure (ASC 405-50)

In 2022, the FASB introduced ASC 405-50 specifically to improve transparency around supplier finance obligations.

1. Presentation

ASC 405-50 does not mandate reclassification but requires that entities disclose key information so that users can understand the nature and magnitude of these programs. The liability remains in accounts payable unless the buyer has entered a new borrowing arrangement that substantively changes the obligation.

Indicators suggesting debt-like treatment:

• Buyer agrees to pay the financial institution under different terms than the supplier invoice.

• Buyer pays interest or program fees directly to the financier.

• The supplier is no longer involved after invoice approval.

When these indicators are met, the company may classify the obligation as short-term debt.

2. Disclosure requirements

Under ASC 405-50-50, disclosures must include:

• A description of the program and its key terms.

• The outstanding amount of obligations confirmed to the financier at the end of the period.

• The line items in the balance sheet where such obligations are presented.

• The rollforward of the program’s balance (opening, additions, payments).

Example note (US GAAP):

At December 31, 2025, the Company had $82 million of outstanding obligations under supply chain financing programs classified in accounts payable. The amount confirmed to participating financial institutions increased by $9 million during the year.

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Comparative framework — IFRS vs US GAAP

Topic	IFRS (IAS 1, IFRS 7, IFRS 9)	US GAAP (ASC 405-50)
Classification rule	Based on substance — reclassify if debt characteristics exist	Based on substance — remains trade payable unless new borrowing arises
Reclassification triggers	Extended payment terms, new counterparty, financing cost	Same, but requires stronger evidence of new borrowing
Disclosure	Mandatory — nature, balance, maturity, liquidity	Mandatory — nature, confirmed amounts, balance rollforward
Effective date of disclosure amendments	2024 (IFRS 7/IAS 7 amendments)	2023 (ASC 405-50)
Liquidity presentation	Reclassified to borrowings if financing in substance	Usually remains in current liabilities

Both frameworks converge in requiring robust disclosure even when classification differs.

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Worked example — extended payment program

Facts:

• Supplier invoice: €2,000,000 due in 90 days.

• Buyer enters into supplier finance program with payment to bank in 180 days.

• Supplier paid immediately by bank at a 2% discount.

Under IFRS:

• The buyer’s payment obligation now includes extended terms and is owed to a financial institution, not the supplier → financial liability.

Entry:

• Dr Trade Payables 2,000,000

• Cr Financial Liability – Supplier Finance 2,000,000

At 180 days:

• Dr Financial Liability 2,000,000

• Cr Cash 2,000,000

Under US GAAP:

• Remains accounts payable unless the buyer renegotiates terms directly with the bank beyond typical trade parameters.

• Disclosure in ASC 405-50 note with balance and key terms.

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Journal entries summary

IFRS

1. On supplier invoice:

   • Dr Inventory / Expense xx

   • Cr Trade Payables xx

2. When obligation transferred to financier:

   • Dr Trade Payables xx

   • Cr Financial Liability – Supplier Finance xx

3. On payment:

   • Dr Financial Liability xx

   • Cr Cash xx

US GAAP

1. On supplier invoice:

   • Dr Inventory / Expense xx

   • Cr Accounts Payable xx

2. On payment:

   • Dr Accounts Payable xx

   • Cr Cash xx

(Disclosure distinguishes between supplier-finance and normal payables.)

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Impact on financial performance and ratios

• Leverage: Reclassification to borrowings increases debt and impacts gearing ratios under IFRS.

• Working capital: Reclassification reduces accounts payable, affecting operating cash flow metrics.

• Liquidity ratios: Extended terms may improve reported cash position but require disclosure to maintain transparency.

• Interest coverage: If financing costs are borne by the buyer, they reduce interest coverage ratios.

Regulators have emphasized that supplier financing should not obscure leverage or distort working capital measures; disclosures are critical for comparability.

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Operational considerations

• Maintain a register of all supplier financing programs, with payment terms, financiers, and balances.

• Align classification policies with IFRS 9 derecognition and ASC 405-50 guidance.

• Review treasury and procurement contracts jointly to identify arrangements that extend credit terms.

• Ensure the cash flow statement presents payments consistently — as operating or financing depending on classification.

• Provide quantitative disclosures that reconcile supplier-finance obligations to total payables.

Transparent classification and disclosure of supplier financing prevent misinterpretation of a company’s liquidity, ensuring fair presentation of financial leverage and operational cash flow dynamics.

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