If it is not, then separate accounting considerations will apply depending on whether the loss event has occurred. If the guarantee is integral, then it will be included in the measurement of ECL on the trade receivable. The accounting will depend on whether the insurance is considered to be a financial guarantee integral to the contractual terms of the trade receivable.
Therefore, companies will need to consider how the timing and amount of cash flows generated by outstanding trade receivables might be affected and increase loss rates as necessary.Ĭompanies that have credit insurance for their trade receivables should consider how this affects the measurement of ECL and ensure that measurement is consistent with updated loss estimates and any limitations on coverage. The COVID-19 outbreak may lead to a significant increase in the loss rate for trade receivables.
Provision matrices are based on historical loss experience but should be adjusted to reflect information about current conditions and reasonable and supportable forecasts of future economic conditions. However, the segmentation applied in previous periods may no longer be appropriate and may need to be revised to reflect the different ways in which the COVID-19 outbreak affects different types of customers. A company that applies a provision matrix may be applying segmentation to capture the significantly different historical credit loss experience for different customer segments. IFRS 9 allows the use of practical expedients when measuring ECLs under the simplified approach – e.g. when payment dates are deferred for a significant period. Also, companies may need to consider a longer time horizon – e.g. However, they may now need to revisit this given the severe economic impacts of the COVID-19 outbreak. Because of the short-term nature of trade receivables, many companies may not have needed to consider updating ECL estimates for changes in future economic conditions relative to historic experience. This includes information about past events, current conditions and forecasts of future economic conditions. Reflecting information available at the reporting dateĮCLs are measured at an unbiased, probability-weighted amount, using reasonable and supportable information that is available without undue cost or effort at the reporting date. about segmentation of a portfolio or the effective interest rate used to discount expected future cash flows – may no longer be appropriate and so may need revising. In addition, certain assumptions used in the ECL estimate – e.g. This may include additional scenarios and the impact of any government support schemes. Those matrices will have to be adjusted to incorporate reasonable and supportable information that is available at the reporting date, including the impact of the COVID-19 coronavirus outbreak. How has the credit risk of borrowers and other debtors been reassessed?Ĭompanies using the simplified model often use provisioning matrices that are based on historical data.How have economic forecasts used to measure expected credit losses been updated?.
For application of the general model, see the following web articles : This article considers issues particularly relevant to the simplified model, in which ECL is measured at an amount equal to lifetime ECL. Credit losses are not just an issue for banks.ĮCLs on trade receivables are measured by applying either the general model or the simplified model. The concept of expected credit losses (ECLs) means that companies are required to look at how current and future economic conditions impact the amount of loss. Under IFRS 9, companies are required to account for what they expect the loss to be on the day they raise the invoice – and they revise their estimate of that loss until the date they get paid. Previously, companies provided for amounts when the loss had actually occurred. IFRS 9 Financial Instruments introduced changes to the calculation of bad debt provisions on trade receivables.
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