‘Trade and other payables’ must be presented separately in the balance sheet from ‘other financial liabilities’ because they are sufficiently different in nature or function to warrant separate presentation. IAS 1 Presentation of Financial Statements, paragraph 55 also requires entities to present additional line items in the balance sheet when such presentation is relevant to a user’s understanding of the entity’s financial position.
Depending on the facts and circumstances of each reverse factoring arrangement, entities need to decide whether they have a ‘trade and other payable’, an ‘other financial liability’ or a separate reverse factoring liability on their balance sheet.
What are trade payables?
“…trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier…”
IAS 37, paragraph 11(a)
IAS 1, paragraph 70 also notes that some current liabilities, such as trade payables and some accruals for employee and other operating costs, are part of the working capital used in the entity’s normal operating cycle.
A customer’s outstanding reverse factoring liability to the bank/financier can therefore only be presented as a ‘trade payable’ if it:
- Represents a liability to pay for goods and services
- Is invoiced and formally agreed with the supplier, and
- Is part of the working capital used in its normal operating cycle.
In other words, the reverse factoring liability should only be classified as part of ‘trade and other payables’ if the liability has a similar nature and function to trade payables, e.g., if:
- It is part of the working capital used in the entity’s normal operating cycle
- The terms are similar to those of other trade payables (no interest or similar interest rates), and
- Similar to other trade payables, the debt is unsecured.
Classification as other financial liabilities (borrowings)
If the reverse factoring liability is not considered a trade and other payable because it is not similar in nature and function, it is presented in the balance sheet as an ‘other’ financial liability (borrowings). The following factors could indicate that the liability is a borrowing rather than a trade payable.
- If the repayment period of the reverse factoring liability is significantly longer than the normal working capital cycle.
- If interest is charged by the bank/financier, although this may not always be the case if the supplier would have imposed a similar interest charge for extended payment terms.
- If security is provided to the bank/financier (trade payables are usually unsecured).
Note, however, that the above list is non-exhaustive and other facts and circumstances may be relevant to whether a reverse factoring arrangement gives rise to a financial liability rather than a trade payable.
Once the customer has determined whether the reverse factoring liability is to be classified as ‘trade and other payables’ or as borrowings, they need to determine whether further disaggregation is required. If reverse factoring liabilities comprise a material portion of these line items, the customer may determine that the reverse factoring portion be shown as a separate line item in the balance, or otherwise in the notes.
Derecognition of a financial liability
The agenda decision notes that a financial liability is only derecognised and removed from the statement of financial position when it is extinguished, i.e. it is discharged, cancelled, or expires (refer IFRS 9 Financial Instruments, paragraph 3.3.1).
It is worth pointing out that derecognition does not automatically mean that the original trade payable becomes a borrowing. The agenda decision
requires that the ‘new liability’ be presented in the balance sheet in accordance with the presentation requirements in IAS 1 (as discussed above).
If the liability to the supplier is extinguished when the bank/financier pays the supplier, some may argue that the reverse factoring liability owing to the bank/financier should be classified as a borrowing because it no longer represents a liability to pay for goods and services. However, the agenda decision specifically requires classification as a trade payable or borrowing according to the principles outlined above. Accordingly, the identity of the entity to which the consideration is ultimately paid is not determinative for the classification of the liability.