5 Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7) Draft Endorsement Criteria Assessment

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13 July 2023 Agenda Paper 5

Executive Summary

| | | Project Type | Endorsement and adoption | |:--------------------|:-------------------------| | Project Scope | Narrow-scope |

Purpose of the paper

The purpose of this paper is to:

Obtain Board feedback on the Draft Endorsement Criteria Assessment (DECA) and related Invitation to Comment (ITC) for the narrow-scope amendments Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7) (the Amendments).
Request the Board's approval to publish the DECA and ITC on the UKEB website for stakeholder consultation with a 90-day comment period.

Summary of the Issue

The Amendments are intended to complement existing disclosure requirements that apply to supplier finance arrangements. The Amendments do not introduce changes to recognition, classification or measurement requirements in IFRS Accounting Standards.

The purpose of the DECA is to assess whether the Amendments meet the statutory criteria for adoption set out in SI 2019/685¹. The DECA includes:

a description of the UK statutory requirements for adoption of new and amended international accounting standards;
a description of the Amendments; and
an assessment of whether the Amendments meet the statutory criteria for adoption.

The Amendments are effective for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted. Some transition relief is provided.

Decisions for the Board

Does the Board agree that, subject to any amendments or additions required by the Board, the DECA and ITC can be published for public consultation with a 90-day comment period?

Recommendation

Subject to any amendments or additions required by the Board, the Secretariat recommends that the Board approves the DECA and ITC for public consultation with a 90-day comment period.

Appendices

Appendix A [Draft] Endorsement Criteria Assessment of Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7)
Appendix B DECA—Invitation to Comment
Appendix C Your Details

Background

1In May 2023, the IASB issued the narrow scope amendments Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7) (the Amendments).

2The Amendments do not introduce changes to recognition, classification or measurement requirements in IFRS Accounting Standards, but are intended to complement existing disclosure requirements that apply to supplier finance arrangements.

3The Amendments aim to provide users of financial statements with the information that enables them to assess the effect of supplier finance arrangements on an entity's liabilities and cash flows, as well as on the entity's exposure to liquidity risk.

4The Amendments are effective for annual periods beginning on or after 1 January 2024. Earlier application is permitted. Some transition relief is provided.

Stakeholder outreach

5We gathered feedback on the IASB's initial proposals from a diverse range of UK stakeholders. That informed the UKEB comment letter to the IASB, submitted on 28 March 2022.

6In anticipation to the publication of the final Amendments, we gathered additional feedback through discussions with the Investor Advisory Group in February 2023, and with the Preparer Advisory Group and Accounting Firms and Institutes Advisory Group (AFIAG) in March 2023.

7The IASB issued its final Amendments on 25th May 2023. Since their publication we have conducted further outreach with the following UK stakeholders:

Users of accounts - one credit rating agency.
Preparers – we have had initial conversations with one membership organisation and one large multinational entity. Given the recent publication of the Amendments, in both cases we have agreed to have follow up discussions once they have been able to identify the specific implications for their organisations arising from the Amendments.
Finance providers – two financial institutions.
Accounting firms and institutes – the UKEB AFIAG at their June meeting.
The UK accounting regulator.

8Overall, the increased transparency on the use of supplier finance arrangements is welcomed, particularly by users of accounts and the UK accounting regulator, albeit with some potential application challenges highlighted by preparers.

9The results of this outreach are reflected in the DECA.

10As noted in our Project Initiation Plan (PIP), approved by the Board in May 2023, given the unusually short timeline for the UKEB endorsement work resulting from the IASB's effective date of 1 January 2024, our targeted outreach activities will continue during the DECA comment period. Stakeholders will also have the opportunity to share their views in their responses to the DECA.

Next steps and timeline

11In accordance with the PIP, the Board's aim would be to ensure an adoption decision is reached before the expected effective date of the Amendments of 1 January 2024.

12Subject to amendments or additions to the DECA required by the Board, the proposed timeline for publication, public consultation and subsequent finalisation of the Endorsement Criteria Assessment (ECA) is set out in the table and diagram below. Note that all dates are indicative and subject to subsequent modification. The Board will be alerted to any significant changes.

Date	Milestone	Status
13 July 2023	Presentation of Draft Endorsement Criteria Assessment (DECA) for approval	This meeting
	DECA consultation period (90 days): 21 July – 20 October 2023
19 October 2023	Verbal update to the Board on feedback received on the DECA.	To be completed
16 November 2023	Consideration of an adoption package for approval and the draft Due Process Compliance Statement for the project. Board members provide a tentative vote.	To be completed
Mid-November – early December 2023	Estimated period for formal voting, publication of voting outcome and Adoption Package on the UKEB website	To be completed
14 December 2023	Final Due Process Compliance Statement for noting.	To be completed

Endorsement and Adoption timeline (as proposed in May 2023 PIP)

Timeline displaying the UKEB project endorsement process from April to December 2023, detailing key milestones, approvals, and deadlines.

Questions for the Board

1Does the Board have any comments on the DECA (Appendix A) or the Invitation to Comment (ITC) (Appendix B)?

2Does the Board agree that, subject to any amendments or additions required by the Board, the DECA and ITC can be published for public consultation with a 90-day comment period?

The UKEB does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.

Introduction

Purpose

1The purpose of this Draft Endorsement Criteria Assessment (DECA) is to determine whether Supplier Finance Arrangements (Amendments to IAS 7² and IFRS 7³) (the Amendments), issued by the International Accounting Standards Board (IASB) in May 2023, meet the UK's statutory requirements for adoption as set out in Regulation 7 of Statutory Instrument 2019/685⁴ (SI 2019/685).

2The IASB's proposals were set out in Exposure Draft ED/2021/10 Supplier Finance Arrangements (Proposed amendments to IAS 7 and IFRS 7) (the ED)⁵. The UKEB submitted its Final Comment Letter (FCL)⁶ on the ED to the IASB on 28 March 2022.

Background to the Amendments

3The Amendments do not introduce changes to recognition, classification or measurement requirements in IFRS Accounting Standards, but are intended to complement existing disclosure requirements that apply to supplier finance arrangements. The Amendments require entities to disclose additional information in the notes about such arrangements.

4The Amendments aim to provide users of financial statements with the information that enables them to assess the effect of supplier finance arrangements on an entity's liabilities and cash flows, as well as on the entity's exposure to liquidity risk.

5Section 2 in this DECA provides a brief description of the Amendments.

Scope of the adoption assessment

6The amendment to paragraph IG18 of the Guidance on Implementing IFRS 7 (which accompanies but is not part of that standard), has not been included as part of the UKEB's assessment as UK-adopted international accounting standards comprise only the mandatory⁷ sections of standards. Nevertheless, we have read the amendment to paragraph IG18 and have not identified any inconsistencies with the rest of the Amendments.

Structure of the assessment

7We have presented our analysis in the following sections:

Section 1: describes UK statutory requirements for adoption of new or amended international accounting standards; and
Section 2: assesses whether the Amendments meet the criteria in Section 1.

Do the Amendments lead to a significant change in accounting practice?

8A standard adopted by the UKEB under Regulation 6 of SI 2019/685 that it considers is likely to lead to a "significant change in accounting practice", is subject to the requirements in paragraph 3 of Regulation 11 of SI 2019/685 that the UKEB:

carry out a review of the impact of the adoption of the standard; and

publish a report setting out the conclusions of the review no later than 5 years after the date on which the standard takes effect (being the first day of the first financial year in respect of which it must be used)".

9Section 2 of the DECA assesses whether the Amendments lead to a significant change in accounting practice and [tentatively] concludes that they do not.

1. Section 1: UK statutory requirements for adoption

UK statutory requirements

1.1Paragraph 1 of Regulation 7 of SI 2019/685 requires that an international accounting standard only be adopted if:

"(a) the standard⁸ is not contrary to either of the following principles—

an undertaking's accounts must give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss;

consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking;

(b) the use of the standard is likely to be conducive to the long term public good in the United Kingdom; and (c) the standard meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.”

1.2This DECA assesses the criteria above in the following order:

Whether the Amendments are not contrary to the principle that an entity's accounts must give a true and fair view (SI 2019/685 Regulation 7(1)(a)).
Whether the Amendments meet the criteria of relevance, reliability, understandability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management (SI 2019/685 Regulation 7(1)(c)).

1.1c) Whether use of the Amendments is likely to be conducive to the long term public good in the UK (SI 2019/685 Regulation 7(1)(b)). SI 2019/685 Regulation 7(2) includes specific areas to consider for this assessment. They are:

whether the Amendments are likely to improve the quality of financial reporting;
the costs and benefits that are likely to result from the use of the Amendments; and
whether the Amendments are likely to have an adverse effect on the economy of the UK, including on economic growth.

Relevance, reliability, understandability and comparability

1.3Information is relevant if it is capable of making a difference in the decision-making of users⁹ or in their assessment of the stewardship of management. The information may aid predictions of the future, confirm or change evaluations of the past, or both.

1.4Financial information is reliable if, within the bounds of materiality, it:

can be depended on by users to represent faithfully what it either purports to represent or could reasonably be expected to represent;
is complete; and
is free from material error and bias.

1.5Financial information should be readily understandable by users with a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence.

1.6Information is comparable if it enables users to identify and understand similarities in, and differences among, items. Information about an entity should be comparable with similar information about other entities and with similar information about the same entity for another period.

1.7In conducting our overall assessment against the technical accounting criteria we are required to adopt an absolute, rather than a relative, approach. Our assessment is therefore an absolute one against the criteria (do the Amendments provide information that is understandable, relevant, reliable and comparable?) rather than a relative one (do the Amendments provide information that is more understandable, relevant, reliable and comparable than current, or any other, accounting?). When an assessment of any individual aspect or requirement of the Amendments uses comparative language (e.g. ‘enhances comparability'), this does not mean that our objective is to reflect a real comparison in relative terms. Instead, our objective is to explain that any individual aspect or requirement of the Amendments has the potential to “enhance” one or more of the qualitative characteristics. Consideration of whether the Amendments are likely to improve the quality of financial reporting is separate from this assessment and is included within the UK long term public good assessment in Section 2.

True and fair view assessment

1.8As noted above, the first adoption criterion set out in SI 2019/685 Regulation 7(1) requires that an international accounting standard can be adopted only if:

"[...] the standard is not contrary to either of the following principles –

an undertaking's accounts must give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss;

consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking; [...]”

1.9For the sake of brevity, we refer to our assessment against this endorsement criterion as 'the true and fair view assessment' and to the principles set out in SI 2019/685 Regulation 7(1)(a) as the ‘true and fair view principle'. However, these abbreviated expressions do not imply that our assessment has considered anything other than the full terms of the endorsement criterion set out above.

1.10The duty of the UKEB under Regulation 7(1)(a) is to determine generically, before a standard is applied to a set of accounts, whether that standard is not contrary to the true and fair view principle. In other words, it is an ex-ante assessment. We have therefore considered whether the Amendments contain any requirement that would prevent accounts prepared using the Amendments from giving a true and fair view.

1.11Our approach is to determine whether the Amendments are not contrary to the true and fair view principle in respect of any of the specific items identified in SI 2019/685 Regulation 7(1)(a) (namely, the assets, liabilities, financial position and profit or loss) in the context of the preparation of the accounts as a whole. A holistic approach has been taken to this assessment, considering the impact of the Amendments taken as a whole, including its interaction with other UK-adopted international accounting standards.

1.12For the purposes of our assessment, we consider the requirement in IAS 1 Presentation of Financial Statements for financial statements to "present fairly the financial position, financial performance and cash flows of an entity"¹⁰ to be equivalent to the Companies Act 2006 requirement for accounts to give a true and fair view.

1.13Our assessment is separate from the duty of directors under section 393(1) of the Companies Act 2006, which requires directors to be satisfied that a specific set of accounts gives a true and fair view of an undertaking's or group's assets, liabilities, financial position and profit or loss.

[Draft] Adoption decision

1.14Section 2 of this DECA assesses whether the Amendments meet the statutory endorsement criteria set out in this Section.

1.15On the basis of this assessment, [and subject to any stakeholder feedback,] the UKEB [tentatively] concludes that the Amendments meet the statutory endorsement criteria. The UKEB is therefore of the view that it will adopt the Amendments for use in the UK.

2. Section 2: Description and assessment of the Amendments

	Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7)

Appendix A: Glossary

Term	Description
The Amendments	Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7)
DECA	Draft Endorsement Criteria Assessment
ED	Exposure Draft
FCL	Final Comment Letter
IASB	International Accounting Standards Board
IAS	International Accounting Standard
IFRS	International Financial Reporting Standard(s)
SI	Statutory Instrument
UKEB	UK Endorsement Board

Contact Us

UK Endorsement Board 1 Victoria Street | London | SW1H 0ET | United Kingdom www.endorsement-board.uk

Appendix B: Invitation to Comment

Call for comments on Draft Endorsement Criteria Assessment of Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7)

Deadline for completion of this Invitation to Comment:

Close of business, Friday 20 October 2023

Please submit to: [email protected]

Introduction

The objective of this Invitation to Comment is to obtain input from stakeholders on the endorsement and adoption of Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7) (the Amendments), published by the International Accounting Standards Board (IASB) in May 2023. The Amendments aim to provide users of financial statements with the information that enables them to assess the effect of supplier finance arrangements on an entity's liabilities and cash flows, as well as on its liquidity risk and risk management. The Amendments will be effective for annual periods beginning on or after 1 January 2024. Earlier application is permitted. The information collected from this Invitation to Comment is intended to help with the endorsement assessment.

UK endorsement and adoption process

The requirements for UK adoption are set out in Statutory Instrument 2019/685¹¹.

The powers to formally adopt international accounting standards for use in the UK were delegated to the UK Endorsement Board in May 2021¹².

Who should respond to this Invitation to Comment?

Stakeholders with an interest in the quality of accounts prepared in accordance with IFRS Accounting Standards.

How to respond to this Invitation to Comment

Please download this document, answer any questions on which you would like to provide views, and return it to [email protected] by close of business on Friday 20 October 2023.

Brief responses to individual questions are welcome, as well as comprehensive responses to all questions.

Privacy and other policies

The data collected through submitting this document will be stored and processed by the UKEB. By submitting this document, you consent to the UKEB processing your data for the purposes of influencing the development of and adopting IFRS for use in the UK. For further information, please see our Privacy Statements and Notices and other Policies (e.g. Consultation Responses Policy and Data Protection Policy)¹³.

The UKEB's policy is to publish on its website all responses to formal consultations issued by the UKEB unless the respondent explicitly requests otherwise. A standard confidentiality statement in an e-mail message will not be regarded as a request for non-disclosure. If you do not wish your signature to be published, please provide the UKEB with an unsigned version of your submission. The UKEB prefers to publish responses that do not include a personal signature. Other than the name of the organisation/individual responding, information contained in the “Your Details” document will not be published. The UKEB does not edit personal information (such as telephone numbers, postal or e-mail addresses) from any other response document submitted; therefore, only information that you wish to be published should be submitted in such responses.

Assessment against endorsement criteria

Our draft assessment [tentatively] concludes that:

the Amendments meet the criteria of relevance, reliability, understandability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management, as required by SI 2019/685 (see Regulation 7(1)(c));
application of the Amendments is not contrary to the principle that an entity's accounts must give a true and fair view as required by SI 2019/685 (see Regulation 7(1)(a)); and
that the Amendments are likely to be conducive to the long term public good in the UK as required by SI 2019/685 (see Regulation 7(1)(b)), having considered:
- whether they will generally improve the quality of financial reporting;
- the costs and benefits that are likely to result from their use; and
- whether they are likely to have an adverse effect on the economy of the UK, including on economic growth.

Our assessment of the Amendments is set out in Section 2 of the DECA on the pages indicated below:

	Page
Rationale for the Amendments	10-12
Technical accounting criteria assessment	13-14
True and fair view	14-15
UK long term public good (including costs and benefits for preparers and users)	15-18

Questions

Technical accounting criteria assessment

1Do you agree with our assessment of comparability, and in particular the view that the principle-based approach (not defining but describing the characteristics of supplier finance arrangements in scope of the Amendments) is on balance workable and allows for the application of judgement, thereby assisting preparers (and their auditors) in ensuring the disclosure objectives are met? (please select one option)

Yes	No
☐	☐

2Please include any comments you may have in response to question 1: