IFRS 9 – IMPAIRMENT – SIMPLIFIED APPROACH

The simplified approach does not require an entity to track the changes in credit risk, but instead, requires the entity to recognize a loss allowance based on lifetime ECLs at each reporting date, right from origination.

An entity is required to apply the simplified approach for trade receivables or contract assets that result from transactions within the scope of IFRS 15 and that do not contain a significant financing component, or when the entity applies the practical expedient for contracts that have a maturity of one year or less, in accordance with IFRS 15.

One of the approaches suggested in the standard is the use of a provision matrix as a practical expedient for measuring ECLs on trade receivables.

PAST DUE CARRYING AMOUNT PD LIFETIME ECL
1-30 days $7.000.000 1,5% $105.000
31-60 days $4.000.000 3,4% $136.000
61-90 days $2.500.000 7,1% $177.500
> 90 days $1.000.000 10,8% $108.000
TOTAL $14.500.000 $526.500

In practice, many corporates use a provision matrix to calculate their current impairment allowances.

However, in order to comply with the requirements of IFRS 9, corporates would need to consider how current and forward-looking information might affect their customers’ historical default rates and, consequently, how the information would affect their current expectations and estimates of ECLs.

In order to prepare a provision matrix in accordance with IFRS 9 the following steps are needed:

Step 1

For a given period e.g. 1 year, calculate the ageing profile of credit sales (how long does it take for trade receivables to settle the amounts due). The ageing profile is crucial for the calculation of historic default rateStep 2.

Total Credit Sales $100.000 Total Paid Ageing Profile
Paid in 30 days -$20.000 -$20.000 $80.000
Paid between 30-60 days -$35.000 -$55.000 $45.000
Paid between 60-90 days -$30.000 -$85.000 $15.000
Paid after 90 days -$12.000 -$97.000 $3.000 – bad debts

Step 2

Calculate the historic default rate per category by using the ageing profile – Step 1.

Current >30 days >60 days >90 days
Ageing Profile $100.000 $80.000 $45.000 $15.000
Bad debts $3.000 $3.000 $3.000 $3.000
Historic Default Rate 3% 3,8% 6,7% 20%

Step 3*

Convert the historic default rate into forward looking PD. In order to do so, the following need to be considered:

  • GDP
  • Inflation
  • Unemployment rates
  • External market conditions
  • etc.
Current >30 days >60 days >90 days
Ageing Profile $100.000 $80.000 $45.000 $15.000
Bad debts $4.000 $4.000 $4.000 $4.000
Forward Looking PD 4% 5% 8,9% 27%

*Step 3 is a highly judgmental area.


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