The Regulation of Supply Chain Finance: Key Changes to the Indian Accounting Standard 7

Context

In today’s evolving financial landscape, supply chain finance (“SCF”), popularly known as reverse factoring, has emerged as a strategically important liquidity tool for companies and their respective suppliers. SCF arrangements typically involve a financier paying a company’s suppliers on its behalf, while such company repays the financier later, often on extended payment terms. By allowing suppliers to receive early payments from anchors or financiers based on the credit worthiness of the buyer, while simultaneously enabling buyers to defer their payment outflows, SCF creates a win-win opportunity for both buyers and suppliers.

By bridging the gap between the issuance of an invoice and its payment, SCF has gained prominence as a lever that allows companies to improve their cash flows and make their supply chains more resilient. Notwithstanding its appeal in working capital management, SCF has been often misused by companies to conceal their debt-like obligations as mere ‘trade payables’. By operating in a grey area of financial reporting by window-dressing their debt as trade payables, companies have often used SCF as a tool for financial engineering where their balance sheets would artificially reflect a strong liquidity position, while obscuring their underlying leverage and short-term borrowings.

Recognising the potential systemic risks and opacity associated with SCF arrangements, the Ministry of Corporate Affairs (“MCA”) notified the Companies (Indian Accounting Standards) Second Amendment Rules, 2025 on August 13, 2025 which has introduced a key change in the regulatory regime governing SCF arrangements (“MCA Amendment”). The MCA Amendment mandates enhanced disclosures about SCF arrangements under the Indian Accounting Standard (“Ind AS”) 7 on Statement of Cash Flows.

This note outlines the key features of such disclosures as well as their broader impact on corporate governance and accounting transparency and reporting.

The MCA Amendment on SCF arrangements – a step towards enhanced financial reporting

In a supplier financing arrangement, a third-party financial institution facilitates payments between a buyer and its suppliers wherein the financial institution pays the supplier on behalf of the buyer, allowing the buyer to extend payment terms without affecting the supplier’s cash flow. It is a working capital tool that allows businesses to optimise cash flow, improve working capital, and strengthen supplier relationships.

Prior to the MCA Amendment, there was no requirement under Ind AS 7 to specifically disclose SCF arrangements in cash flow statements. By mandating the disclosure of SCF arrangements under Ind AS 7, the MCA Amendment is a step towards enhanced transparency in financial reporting.

Ø How are SCF arrangements defined in the MCA Amendment?

The MCA Amendment has added a new paragraph 44G to the Ind AS 7 which describes ‘supplier finance arrangements’ as being characterised by one or more finance providers offering to pay amounts owed by an entity to its suppliers and such entity agreeing to pay the finance provider(s) either on the same date or a date later than when the suppliers are paid, in accordance with the respective terms and conditions of the arrangement.

These arrangements typically grant the entity extended payment terms and grant such entity’s suppliers early payment terms, compared to the original payment due date under the corresponding invoices. Paragraph 44G of the Ind AS 7 provides more granularity to the characterisation and structuring of SCF arrangements by clarifying that “Arrangements that are solely credit enhancements for the entity (for example, financial guarantees including letters of credit used as guarantees) or instruments used by the entity to settle directly with a supplier the amounts owed (for example, credit cards) are not supplier finance arrangements” which clarification would allow entities to navigate SCF arrangements with greater ease.

Ø Contents of the Disclosure

The MCA Amendment mandates entities to disclose information about their supplier finance arrangements such that the disclosure “enables users of financial statements to assess the effects of those arrangements on the entity’s liabilities and cash flows and on the entity’s exposure to liquidity risk”. To meet this objective, entities are required to disclose the following aggregated information in their financial statements in relation to their SCF arrangements:

a) the terms and conditions of such arrangements (for instance, disclosures about extended payment terms and security or guarantees provided) as well as any arrangements with dissimilar terms and conditions;

b) as at the beginning and end of the reporting period:

(i) the carrying amounts and balance-sheet classification of SCF related financial liabilities;

(ii) the carrying amounts, and associated balance-sheet classification for suppliers which have already received payment from the finance providers and the range of payment due dates (for example, 30 - 40 days after the invoice date) for both SCF related financial liabilities and comparable trade payables that are not part of any SCF arrangement. Further, if the ranges of payment due dates are wide, then the entity is required to disclose an explanation about those ranges or disclose additional ranges; and

c) the type and impact of non-cash changes such as changes due to business combinations, foreign exchange fluctuations, or other transactions that do not involve the usage of cash or cash equivalent in SCF-related financial liabilities.

Ø Timeline for adoption of the MCA Amendment

Entities are required to implement the new disclosure requirements for annual reporting periods beginning on or after April 1, 2025 and the MCA Amendment provides some transition relief by exempting entities from providing comparative information for prior periods and from making interim disclosures within the year of initial adoption.

Ø Impact of the MCA Amendment on corporate governance and financial reporting

The MCA Amendment is an impetus towards greater financial transparency and reporting and also a step towards aligning Indian accounting standards with global practices. Companies can no longer artificially enhance their leverage and liquidity ratios by keeping SCF transactions off their balance sheets. Additionally, companies can no longer mislead investors or analysts about their working capital efficiency metrics or manipulate their cash conversion cycles. On the contrary, the MCA Amendment’s mandate on a proactive disclosure of financial liabilities related to SCF arrangements can now be used as a reliable benchmark to assess an entity’s cash flow management practices and track its performance over time.

Another positive impact of the MCA Amendment is that it aims to level the playing field between larger, well-established companies who have traditionally had better access to SCF arrangements to extend their payment terms without making corresponding disclosures on their balance sheets and smaller companies or startups who often lack the credit worthiness or business networks that are needed to obtain SCF. With the new disclosure requirements in place pursuant to the MCA Amendment, large companies will be required to disclose the proportion of their working capital that is supported by SCF arrangements, which will allow both regulators and investors to gain insights into their liquidity and debt management practices. This would be beneficial to startups and small companies because these disclosures would allow for ease of comparison on the sustainability of business models without being misguided by artificially inflated cash positions or lower reported debt by larger companies. Such comparison would ultimately help investors to differentiate companies on the basis of true efficiency and financial sustainability metrics, regardless of their size.

Conclusion

While the intent of the MCA Amendment is indeed laudable, strong enforcement and proper scrutiny would be needed to ensure its proper implementation. In the absence of a stringent enforcement mechanism, companies may find newer avenues to bypass these disclosures by structuring their financing arrangements through less transparent ways such as using disguised credit terms, entering into informal lending mechanisms or routing payments through intermediaries to avoid making the required disclosures. Thus, ensuring proper vigilance of the methods in which SCF arrangements are structured and disclosed by companies will be key in eliminating the systemic risks which have historically been associated with SCF.