The invoice the bank paid
Updated: 12 hours ago
When a bank pays your suppliers and you pay the bank later, are those payments operating or financing cash flows?
Ballyvane Foods Ltd buys ingredients from about two hundred suppliers on 60-day terms. In 2026 its bank offers a supplier finance programme. Suppliers that sign up can have their approved invoices paid by the bank straight away, less a discount. Ballyvane pays the bank later. Suppliers get their cash sooner, Ballyvane keeps its cash longer, and the bank earns the discount.
At the year end the auditors ask a simple question: when Ballyvane pays the bank, is that an operating cash flow or a financing one? The answer can move net cash from operating activities by millions, and IAS 7 does not give it.
What the 2024 amendments did, and did not do
The IASB amended IAS 7 and IFRS 7 in May 2023, with effect for annual periods beginning on or after 1 January 2024. The EU endorsed the amendments in 2024. They define supplier finance arrangements and add disclosures. They do not say how the cash flows are classified or where the liability is presented. The IASB kept the project to disclosure, so classification remains a judgement made under the existing principles of IAS 7 and IAS 1.
A supplier finance arrangement is one where one or more finance providers offer to pay amounts an entity owes its suppliers, and the entity agrees to pay the finance providers on the same date as, or later than, the suppliers are paid (IAS 7.44G). The arrangements are also called supply chain finance, payables finance or reverse factoring. Arrangements that are only credit enhancements, such as letters of credit used as guarantees, are excluded, as are instruments used to settle directly with a supplier, such as a credit card.
For these arrangements an entity now discloses, in aggregate (IAS 7.44H):
the terms and conditions, such as extended payment terms and any security or guarantees, with dissimilar arrangements shown separately;
at the start and end of the period, the carrying amount of the liabilities that are part of the arrangement and the line items they are presented in;
of those, the carrying amount for which suppliers have already been paid by the finance provider;
the range of payment due dates for those liabilities and for comparable trade payables that are not part of an arrangement; and
the type and effect of non-cash changes in those liabilities.
IFRS 7 adds supplier finance arrangements to its liquidity risk disclosures (IFRS 7.B11F): if a programme is withdrawn, the entity may have to pay its suppliers on their normal terms, all at once, and the liabilities may be concentrated with one bank. The disclosures apply whichever way the cash flows are classified.
The rule that does exist: follow the nature of the liability
The IFRS Interpretations Committee answered the classification question in its December 2020 agenda decision on supply chain financing arrangements. The answer turns on what the liability is.
Still a trade payable. If the liability is a trade or other payable, part of the working capital used in the entity's main revenue-producing activities, the payment to the bank is an operating cash flow (IAS 7.6 and 7.14(c)).
In substance a borrowing. If the liability is in substance a borrowing, the payment to the bank is a financing cash flow (IAS 7.17). The bank's earlier payment to the supplier involved no cash in or out of the entity, so it is not shown in the statement at all. It is a non-cash transaction, disclosed under IAS 7.43, and the liability joins the reconciliation of liabilities from financing activities (IAS 7.44A–44E).
Two consequences follow. First, the presentation in the statement of financial position and the cash flow classification should agree: a liability presented within trade payables does not produce financing cash flows. Second, the agenda decision expects the entity to think about whether the liability belongs in trade payables at all. IAS 1 allows trade payables to include these liabilities only when they have a similar nature and function to other trade payables, and requires a separate line when its size, nature or function makes separate presentation relevant. From 2027, the same aggregation principles sit in IFRS 18.
Ballyvane's programme
During 2026, invoices of €24,000,000 go through the programme. Ballyvane pays the bank €18,000,000 during the year and owes it €6,000,000 at 31 December 2026. The terms of the programme decide the answer.
As signed: a trade payable. Ballyvane pays the bank the invoice amount 75 days after the invoice date, against 45 to 60 days for comparable payables outside the programme. It pays no interest or fees: the discount is borne by suppliers who choose to be paid early. There is no security and no link to Ballyvane's other facilities. The extension is modest and the liability keeps the nature and function of a trade payable. The €18,000,000 is an operating cash outflow, and the €6,000,000 stays in trade and other payables.
Change three facts: a borrowing. Now suppose Ballyvane pays the bank 180 days after the invoice date, pays a fee for the extra time and has a guarantee from its parent supporting the programme. The bank is financing Ballyvane's working capital for four months beyond normal terms, at Ballyvane's cost and against security. That is a borrowing. The payments to the bank are financing cash flows, and the bank's €24,000,000 of payments to suppliers is a non-cash transaction.
Ballyvane, 2026 (€) | Trade payable view | Borrowing view |
Operating: payments for programme invoices | (18,000,000) | – |
Financing: repayments to the bank | – | (18,000,000) |
Net decrease in cash | (18,000,000) | (18,000,000) |
Non-cash: bank paid suppliers on Ballyvane's behalf (disclosed, IAS 7.43) | – | 24,000,000 |
Liability at 31 December 2026 | 6,000,000 in trade payables | 6,000,000 in financing liabilities |
Net cash from operating activities, compared with the trade payable view | – | +18,000,000 |
The cash in the bank is the same. What changes is where it is reported: under the borrowing view, inventory bought for €24,000,000 never appears as an operating outflow, and operating cash flow is €18,000,000 higher. That is why users asked the IASB for these disclosures, and why the judgement deserves care.
How to make the call
There is no bright line. Look at the arrangement as a whole, and document why you reached your view.
Look at | Points to a trade payable (operating) | Points to a borrowing (financing) |
Payment terms | Within the range normal for your industry and close to payables outside the programme | Well beyond normal terms, such as 180 days where suppliers normally give 60 |
Who pays for the time | The supplier bears the bank's discount; you pay the invoice amount | You pay interest or fees to the bank for the extra time |
Security | None beyond what suppliers normally get | A guarantee, collateral or cross-default with your other bank facilities |
Legal position | The supplier's claim is assigned to the bank on the same terms | The payable is extinguished or its terms substantially modified, so a new liability to the bank is recognised (IFRS 9.3.3.1–3.3.2) |
How it is managed | Run by procurement and accounts payable to settle invoices efficiently | Sits in the bank's credit lines and is used to fund working capital |
Two warnings. The judgement is about the substance of the liability, not about the result: a classification chosen to meet a covenant on operating cash flow is the wrong reason. And programmes change. A new fee, a longer extension or a guarantee added at renewal can turn a trade payable into a borrowing part-way through the life of a programme.
If the call is finely balanced, it is likely to be one of the significant judgements to disclose. The Tipping Point walks through judgements like this one and drafts the note.
What Ballyvane discloses
On the trade payable view, Ballyvane's note sets out:
the terms: suppliers who opt in may be paid early by the bank at a discount they bear; Ballyvane pays the bank the invoice amount 75 days after the invoice date; no security or guarantee is given;
the carrying amount of €6,000,000 within trade and other payables at 31 December 2026, and nil at 1 January 2026 when the programme had not started;
€4,800,000 of that amount already paid to suppliers by the bank;
payment due dates of 75 days after invoice for programme liabilities, against 45 to 60 days for comparable trade payables outside it; and
no non-cash changes in the liabilities in the year.
The judgement itself goes in the significant judgements note, and the liquidity risk note explains what would happen if the bank withdrew the programme. The Disclosure Review tool checks the notes against the requirements.
The audit angle
Supplier finance can be hard to see in the general ledger, because the programme liability often looks like any other payable. Auditors ask about such arrangements when obtaining an understanding of the entity (ISA 315), include them in bank confirmation requests (ISA 505), and read programme agreements for fees, guarantees and terms. Liquidity matters too: an entity that relies on a programme to pay its suppliers needs to consider what happens if the bank withdraws it, both in its going concern assessment and in the auditor's work under ISA 570. The collapse of Greensill Capital in 2021 showed how quickly that can happen.
Our Audit Risk Matrix and Audit Procedure Builder help plan the work on payables and cash flow classification.
In short
The 2024 amendments added disclosures, not classification rules. The disclosures apply whichever view you take.
Classify by the nature of the liability: a trade payable gives operating cash flows; a borrowing gives financing cash flows.
Under the borrowing view, the bank's payment to the supplier is a non-cash transaction and the liability enters the IAS 7.44A reconciliation.
Keep presentation and cash flow classification consistent, and revisit the conclusion whenever the programme's terms change.
Tools
Our IAS 7 Cash Flow Statement Builder builds the statement of cash flows from two trial balances, with a working for every line and the IAS 7.44A reconciliation of liabilities from financing activities. Run it with the programme balance as a trade payable and again as a financing liability to see what the judgement does to operating cash flow.
Related on the site:
IAS 7 Statement of Cash Flows: the Learning Hub note, including supplier finance arrangements and a case study on covenant pressure.
IFRS 18 Transition Tool: from 2027 the indirect method starts from operating profit, and interest paid moves to financing for most entities.
The Tipping Point: for documenting the classification judgement.
Ballyvane Foods Ltd is fictional. References are to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures as amended by Supplier Finance Arrangements (May 2023), and to the IFRS Interpretations Committee agenda decision Supply Chain Financing Arrangements – Reverse Factoring (December 2020).
