How Supplier Financing Arrangements (Reverse Factoring) Are Presented in Financial Statements under IFRS and US GAAP

Supplier financing, also called reverse factoring or supply chain finance (SCF), allows suppliers to receive early payment for approved invoices from a financial intermediary, while the buyer settles with the intermediary later. The arrangement enhances liquidity for suppliers but creates classification and disclosure challenges for buyers. Under IFRS (IAS 1, IFRS 7, and IFRIC guidance) and US GAAP (ASC 405-50, ASU 2022-04), entities must determine whether these liabilities remain trade payables or become financial debt, and disclose their terms transparently.

Reverse factoring has grown rapidly in manufacturing, retail, and energy sectors. Accounting consistency ensures that investors can assess working capital, leverage, and liquidity risk without distortion from hidden financing.

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How supplier financing works

In a typical SCF program:

1. A supplier delivers goods and invoices the buyer.

2. The buyer approves the invoice and shares it with a bank or SCF platform.

3. The bank pays the supplier early (often at a small discount).

4. The buyer pays the bank at a later, extended date.

From the buyer’s perspective, the liability’s legal form may remain “payable to supplier,” but economically, it can resemble borrowed funds if extended payment terms or financing fees arise.

Example:A supplier’s invoice for 1,000,000 due in 30 days is paid early by a bank at 990,000. The buyer pays the bank 1,000,000 in 90 days.→ Supplier receives liquidity; buyer gains 60 extra days to pay.→ The issue: should the buyer classify this as trade payable or short-term borrowing

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IFRS treatment — IAS 1, IFRS 7, and interpretive guidance

No specific IFRS standard addresses reverse factoring directly, but principles from IAS 1 (Presentation of Financial Statements), IFRS 7 (Financial Instruments: Disclosures), and IFRS 9 (Financial Instruments) apply.

Key assessment:

• If the substance of the transaction changes from trade credit to financing, the liability should be presented as financial debt, not as trade payable.

• Consider:

  • Whether the supplier has been paid and the buyer owes the bank.

  • Whether payment terms exceed normal credit periods.

  • Whether the interest or fee paid reflects financing rather than trade terms.

If these conditions hold, reclassification to borrowings is appropriate. Otherwise, remain in trade payables.

Presentation guidance (IAS 1.69–77):

• Trade payables and financial liabilities must be presented separately on the face of the balance sheet if material.

• Changes in classification (from payable to borrowing) require disclosure of reason, impact, and amount.

Journal example:

If initially treated as trade payable:

• Debit: Purchases / Inventory 1,000,000

• Credit: Trade Payable 1,000,000

Upon supplier payment by bank and extension of buyer payment terms:

• Debit: Trade Payable 1,000,000

• Credit: Short-Term Borrowing 1,000,000

Interest accruing on the extended term:

• Debit: Finance Expense xx

• Credit: Accrued Interest xx

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US GAAP treatment — ASC 405-50 and ASU 2022-04

To address opacity in supplier finance, the FASB issued ASU 2022-04, adding disclosure requirements but not changing classification rules.

• Entities assess whether the payable remains a trade payable or should be reclassified as debt using existing guidance (ASC 470 and ASC 405).

• Judgment depends on whether the buyer has a direct obligation to the finance provider and whether terms are substantially extended beyond standard supplier credit.

Disclosure requirements (mandatory from FY2023):

• Key terms of supplier finance programs.

• Outstanding confirmed obligations as of period-end.

• Where obligations are presented in the balance sheet (e.g., accounts payable or borrowings).

• Cash flow statement classification (usually within operating activities unless debt-like).

• Roll-forward of activity: opening balance, additions, payments, and other changes.

Illustrative GAAP journal entries:

• Debit: Inventory 1,000,000

• Credit: Accounts Payable (SCF program) 1,000,000

If later deemed borrowing due to significant extension:

• Debit: Accounts Payable 1,000,000

• Credit: Short-Term Debt 1,000,000

Interest during extension:

• Debit: Interest Expense xx

• Credit: Accrued Interest xx

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Comparative framework — IFRS vs US GAAP

Topic	IFRS (IAS 1, IFRS 7, IFRS 9)	US GAAP (ASC 405-50 / ASU 2022-04)
Specific guidance	No dedicated standard; rely on substance and IAS 1/IFRS 7	ASU 2022-04 adds disclosure requirements
Classification basis	Substance over form; reclassify if financing in substance	Remains payable unless clearly debt-like
Presentation	Separate from trade payables if material	Disclosure of classification location required
Interest recognition	As finance cost if reclassified	As finance cost if debt-like
Cash flow presentation	Operating or financing depending on nature	Operating (default), financing if reclassified
Disclosure emphasis	Terms, risks, and liquidity concentration	Roll-forward and key term disclosures

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Disclosure examples

IFRS-style liquidity disclosure (IFRS 7):

As at 31 December 2025, the Group maintained supplier financing arrangements with total confirmed obligations of €42.5 million, of which €31.2 million were presented in Trade and Other Payables and €11.3 million in Borrowings. The weighted-average extension of payment terms was 45 days beyond standard supplier credit.

US GAAP ASU 2022-04 roll-forward example:

Supplier Finance Obligation (USD)	Amount
Opening balance (1 Jan 2025)	25,800,000
Additions during year	12,400,000
Payments made	(10,700,000)
Reclassifications to Borrowings	(3,100,000)
Closing balance (31 Dec 2025)	24,400,000

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Journal entries summary

1) Purchase of goods:

• Dr Inventory / Expense xx

• Cr Trade Payables xx

2) Supplier financing arrangement activation:

• Dr Trade Payables xx

• Cr SCF Payable / Short-Term Borrowing xx

3) Early payment by bank to supplier (no buyer entry unless notified):No immediate accounting until liability novated or terms modified.

4) Interest during extension:

• Dr Finance Expense xx

• Cr SCF Payable xx

5) Payment to bank:

• Dr SCF Payable xx

• Cr Cash xx

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Impact on financial performance and ratios

• Working capital: Extended payment terms inflate operating cash flow temporarily but may distort liquidity analysis.

• Leverage ratios: If obligations are reclassified as borrowings, debt-to-equity and interest coverage ratios worsen.

• Operating cash flow vs financing cash flow: Proper classification affects analysts’ view of cash generation.

• Interest expense: Recognition of financing cost may reduce profit margins compared with traditional trade payables.

Investors and auditors increasingly scrutinize SCF programs because they can mask true leverage and artificially enhance cash flow metrics.

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Operational considerations

• Establish clear policy distinguishing trade credit from financing.

• Maintain documentation of contractual terms, payment timing, and third-party relationships.

• Monitor compliance with covenants if reclassification increases borrowings.

• Disclose aggregate exposure, average extension, and cash flow presentation clearly.

• Engage treasury and procurement to align commercial and accounting perspectives.

Transparent classification and disclosure of supplier financing ensure that financial statements reflect true funding sources and working capital performance—avoiding the appearance of hidden leverage under both IFRS and US GAAP.

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