Reverse factoring and supplier finance programmes run by a finance company

In a supplier finance programme the finance company pays a large buyer's suppliers early, at a discount, and collects the full invoice amount from the buyer on the due date or a later extended date. Its real exposure is to the buyer, not to the suppliers, and the discount is yield on that exposure. The buyer's own accounting, whether it keeps the amounts in trade payables and what it discloses under the supplier finance requirements, does not determine the finance company's accounting. Misreading the arrangement leads to ECL on the wrong counterparty, understated concentration on large buyers, and platform or programme fees recognised on the wrong basis.

Does the finance company acquire the supplier's receivable from the buyer (by assignment), or does it lend to the supplier or to the buyer? Does the buyer give an irrevocable payment undertaking once it approves an invoice, so that the finance company's credit risk is on the buyer only? Has the supplier any recourse obligation? Is the due date to the finance company the original invoice date or an extended date, and does the buyer pay any interest or fee for extension? What fees are charged, to whom, and for what: discount on early payment, per-invoice fees, platform subscription, programme fees from the buyer? Is the finance company committed to buy all approved invoices up to a programme limit?

1. Identify the asset: where the supplier assigns its receivable without recourse and the buyer has undertaken to pay the finance company, the finance company recognises a financial asset, a receivable from the buyer.
2. If the supplier keeps recourse, analyse the transfer as in BANK-074; the finance company may instead hold a loan to the supplier.
3. Classify the receivable from the buyer; it usually meets the hold-to-collect and SPPI conditions and is measured at amortised cost.
4. Include the early-payment discount, and any interest or fee paid by the buyer for extended terms, in the effective interest rate of the receivable.
5. Recognise fees that do not relate to a specific financed invoice, such as platform subscriptions or programme management fees, under IFRS 15 as the service is provided.
6. Fees charged per financed invoice are part of the yield and belong in the effective interest rate.
7. Measure ECL on the buyer, and treat the commitment to purchase approved invoices up to the programme limit as a loan commitment within the ECL scope where it is irrevocable (see BANK-007).

The receivable from the buyer is measured initially at the amount paid to the supplier (its fair value) and subsequently at amortised cost, accreting the discount to the full invoice amount over the period to the buyer's payment date. ECL is based on the buyer's PD over that period and the LGD on an unsecured trade obligation, with programme-level concentration considered. IFRS 15 fees are measured at the contractual amount allocated to the service period.

Disclose: (1) the nature of supplier finance programmes operated and the classification of the resulting assets; (2) concentration of credit risk on programme buyers; (3) undrawn programme commitments and their ECL; (4) interest income from programmes separately from IFRS 15 platform and programme fees; (5) the finance company's disclosures are its own credit and concentration disclosures, and do not replicate the buyer's supplier finance disclosures, which are the buyer's responsibility.

• Measuring ECL on suppliers when the credit risk is on the buyer
• recognising the early-payment discount as fee income on the day of payment
• concluding that because the buyer presents the amounts as trade payables, the finance company holds a trade receivable outside the scope of its lending risk management
• ignoring irrevocable commitments to buy approved invoices when measuring ECL
• omitting concentration on a single large buyer from credit risk disclosures
• treating per-invoice fees as IFRS 15 revenue