Audit and Assurance update: Supplier finance arrangements

FRED 84 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Supplier finance arrangements was issued at the end of September 2023 by the Financial Reporting Council (FRC).

The FRC is requesting comments on FRED 84 by 31 December 2023.

In May 2023, Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7) was published and provides guidance for those applying international financial reporting standards. The FRC have therefore considered whether similar proposals should be brought into FRS 102.

Supplier finance arrangements are those made with finance providers for them to pay the amounts an entity owes its suppliers. An entity correspondingly agrees to pay its finance providers at the same date as, or a date later than, suppliers are paid.

These arrangements provide an entity with extended payment terms, or an entity’s suppliers with early payment terms, compared to the related invoice payment due date.

Without mandated disclosure requirements included in FRS 102, users of financial statements are likely not to have sufficient awareness of an entity’s use of supplier finance arrangements and the effect of these arrangements on the entity’s financial position and cash flows.

FRED 84, therefore addresses this and proposes to adopt certain guidance from the May 2023 publication, Supplier Finance Arrangements.

FRED 84 proposes the following amendments to Section 7 of FRS 102, Statement of Cash Flows, concerning disclosure of supplier finance arrangements:

  1. The terms and conditions of arrangements, with separate disclosure of terms and conditions that are not similar;
  2. At the beginning and end of the reporting period:
    1. The carrying amount of supplier finance liabilities and the line items in which they are included in the balance sheet;
    2. The carrying amount of supplier finance liabilities, and the associated line items disclosed as above for which suppliers have already received payment for; and
    3. The range of payment due dates for both the liabilities disclosed as above and trade creditors that are not part of such arrangements. If the range of payment due dates is wide then additional disclosure is required about the range; and
  3. The type and effect of non-cash changes in the carrying amounts disclosed in 2.1 above.

There are exemptions from providing the comparative information in the first year these amendments are applied.

Under the proposals, small entities preparing their financial statements under Section 1A of FRS 102, Small Entities, are not required to comply with the amendment.

Qualifying entities are also not required to comply with the proposed amendment. A qualifying entity for the purposes of FRS 102 is defined as ‘a member of a group where the parent of that group prepares publicly available consolidated financial statements which are intended to give a true and fair view (of the assets, liabilities, financial position and profit or loss) and that member is included in the consolidation.’

The FRC anticipates it will issue the final amendments in the first half of 2024, to align with the delayed finalisation of FRED 82 Draft amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and other FRSs – Periodic Review.

FRED 84’s proposals, assuming no delays in its finalisation, will be effective for accounting periods commencing on or after 1 January 2025, with early adoption permitted.

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