Supply Chain Finance (SCF)
Faster payments for suppliers and better deals and reliable deliveries for buyers. It's a win-win situation. By seeking proper guidance from our team at VKR Global, companies can leverage SCF's potential while mitigating risks and ensuring accurate financial reporting.
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A common process flow for supply chain finance is as follows:
The Business BUYS goods or services from a supplier
The Supplier issues to the buyer an INVOICE with payment terms outlining when it needs to be paid
The Buyer approves the invoice and uploads it to a supply chain finance platform
The Supplier uses the SCF platform to request early payment of the invoice
The Lender sends the payment to the supplier, minus a fee which is based on the credit rating of the buying business
The Buyer pays the Lender (finance company providing the supply chain finance) when the invoice payment is due according to the payment terms.
Supply Chain Finance Example
Source | www.accaglobal.com
SCF offers valuable tools for optimizing supply chains, but careful consideration of IFRS concerns is essential for responsible and transparent implementation. By seeking proper guidance and adhering to relevant standards, companies can leverage SCF's potential while mitigating risks and ensuring accurate financial reporting.
Key points include:
1. Derecognition of Trade Payables | SCF arrangements like reverse factoring can lead to the legal transfer of trade payables to financial institutions. This raises questions about whether the entity can derecognize the liability from its balance sheet. IFRS guidance requires careful assessment of the substance of the transaction and the transfer of risks and rewards associated with the payable.
2. Financial vs. Operating Liabilities | The classification of SCF liabilities as financial or operating can significantly impact financial ratios and profitability metrics. Determining the dominant intent behind the arrangement (financing or early settlement) is crucial for proper classification.
3. Disclosures | Recent amendments to IFRS 7 (effective January 2024) aim to improve transparency around SCF arrangements. Companies must now disclose details like terms and conditions, amounts involved, impact on cash flows, and liquidity risks. This level of disclosure is crucial for investors and stakeholders to accurately assess the financial implications of SCF usage.
4. Implementation and Costs | Accounting Complexity: Implementing and adhering to IFRS requirements for SCF can be complex, requiring specialized accounting expertise and potentially involving technology upgrades. These complexities can translate into additional costs for companies.
5. Substance over Form | There's a concern that SCF arrangements could be structured solely for accounting benefits, not genuine economic substance. IFRS emphasizes the importance of substance over form, requiring companies to demonstrate the genuine economic purpose of their SCF arrangements.
