Supply chain finance arrangements frequently result in on-balance-sheet liabilities for buyers because the economic obligation to pay typically remains with the buyer even when a third-party funder advances cash to the supplier. The IFRS Foundation staff IFRS Foundation explains that accounting recognition follows the substance of the transaction rather than its legal form. Mary E. Barth Stanford Graduate School of Business has written extensively on how reporting should reflect economic obligations, which supports treating financed payables as buyer liabilities unless derecognition criteria are plainly met.
Accounting treatment and determinative factors
Under both international and US practice the key issues are whether the buyer has discharged its contractual obligation and whether the buyer retains credit risk or control over payment timing. In a typical reverse factoring or supplier finance program the supplier receives early payment from a factor, but the buyer continues to owe the purchase amount and usually must reimburse the factor. If the buyer remains legally and economically responsible, the arrangement is a form of financing and the corresponding payable stays on the buyer’s balance sheet as a financial liability. Only where a supplier’s receivable is legally sold and the buyer has no further obligation can the payable be derecognized.
Relevance, causes and consequences
Supply chain finance is attractive because it improves working capital metrics and supports suppliers, especially in geographically dispersed or resource-constrained supply chains. Buyers use these programs to extend payment terms while suppliers get earlier liquidity. Gillian Tett Financial Times covered how rapid growth of the market and certain aggressive structures obscured leverage ahead of the Greensill collapse, prompting regulatory and auditor scrutiny. The consequences of misclassification include understated leverage, misleading liquidity metrics for investors, and unexpected contagion risk for suppliers in developing economies that rely on early payments. Cultural and territorial nuance matters: suppliers in emerging markets may face harsher consequences if funding dries up, and different jurisdictions apply local legal tests that affect whether a financing is on or off the balance sheet.
In practice, auditors and standard-setters examine contract wording, recourse, and who bears credit risk to decide recognition. For buyers, transparent disclosure of supply chain finance programs and clear accounting consistent with the economic substance is essential to avoid hidden liabilities, reputational damage, and regulatory challenge.