ECL - trade receivables

[Qasim]

Under IFRS 9 , Trade receivables with non significant financing component is done under lifetime ECl.

My questions is if the trade receivables is 100,000 at year end , and the company applies 10% of this amount directly which is 10,000 for ECL provision,
is this allowed under IFRS 9 standard ?

I believe this approach is called the specific balance sheet approach

10% is the amount management believes to be best fit based on past experience.

if it is not allowed , what is the correct approach for trade receivables ECL ?

And do we have to use a provisional matrix for calculating ECl ? ( default rate in each bucket , based on ageing report )

[JRSB]

Why do you think it's not allowed?

[Qasim]

in beginner accounting books , they use general allowance , which is like 10% of final balance sheet amount. , any increase in allowance, is debited to pnl and credit to the allowance for recevables ( they do not mention much about ifrs 9 financial instruments)


On video lectures on youtube when explaining trade receivables ECl , they use provion matrix , to calculate default rate in each aging bucket to calculate the final provision amount.

i have an audit client who wants to apply 10 percent of the amount directly to trade receivables ( and not use the provison matrix ) , to create the ECL provision for the first time

So i want to clarify if iFRS 9 ECL method allows the way ? (10 percent of 100,000 directly)

[Marek Muc]

You're referring to the simplified approach as described here: https://ifrscommunity.com/knowledge-bas ... d-approach

Provision matrix is an implementation example. It would be helpful to know why your client maintains the expectation of an equal percentage loss on all receivables, regardless of the length of time they are overdue.

[JakobLavrod]

In general, one should be quite careful in using these sort of "blanket" provision proportions (see here for an even more extreme example: https://www.canadian-accountant.com/con ... da-partner)

My recommendation is always to start from your actual collection process. What is happening? What do you do with invoices that are overdue? As Marek suggest, using some simple statistics from what losses you have taken in the past is a great start. It is also great from a business point of view, letting you understand what is going on with your receivables and what drives credit losses. It is also important that you revise the proportion used on accounts that keep being longer on your books without paying, someone 360 days late has a considerably lower chance of paying then someone 1 day late.

In short: See the ECL calculation as a chance of actually understanding what is going on in the business.

[JRSB]

If the situation is very straight forward then I could see a single 10% provision being ok if that's what the data supports. Depends where you are on the scale from a very simple business which collects cash from a small number of recurring good customers up to a bank with poor quality customers.

[JakobLavrod]

I would probably argue that the moment basic ECL model condition on delinquency status or similar, that is one coverage ratio (ECL / gross carrying amount) if on-time and one if delinquent. This would make it possible to reflect some form of credit quality, and also provide useful information if alot of accounts starts becoming overdue.

[xuerebx]

In general, one should be quite careful in using these sort of "blanket" provision proportions (see here for an even more extreme example: https://www.canadian-accountant.com/con ... da-partner)

Thanks for this link. I think I should start sending it to my clients

[JakobLavrod]

Great to hear it was of use. The whole case is very interesting as a case example on audit - firm interactions and well worth the study.