how to calculate ECL provision, when Past due information of debtors/ retention money or security deposit is not available. Dear Stanislav, the scope of IFRS 9 and those in the scope of IAS 37. S. Hi Silvia, As any other receivables that are default or delayed. Let’s take a look at our example to clarify that. produce a much lower bad debt provision than a general provision which many credit unions calculated under ^Resolution 49 _ plus a round sum additional prudent amount. BC5.84 In developing a model that depicts expected credit losses, the IASB observed that: Hi Bukola, there is probably some impairment, but immaterial, since probability of default within 12 months is close to zero for most governments. Dear Silvia Ok, but how we can calculate correlation between those. My assumption would be that the contra account is interest income since it was understated as a result of the IFRS 9 stage 3 requirement to use the net balance to calculate interest, but this is only an assumption. Hi Silvia Great Update! Dear Nariman, That would be enormous burden for the companies whose focus is something very different. But not after 1 February 2015 – after that date, your only option is to apply new IFRS 9 in its entirety, if you opt to apply it early. Or maybe it’s too late right now and I don’t get the obvious things. Add provision to debtor A of CU 2 200 and the total bad debt provision in line with IFRS 9 is CU 12 322.30. reducing the business/commercial interest income recognised to reflect the IFRS 9 stage requirements). S. How to calculate the provision if we don’t have any historical data for PD and LGD generation? In July 2014, the standard IFRS 9 was finally completed and the latest amendments brought us new impairment rules (besides the other things). When we have a bond with Discount, in my country we do such posting for interest revenue. Thus the statistics in the 3rd column is irrelevant for IAS 39 and total bad debt provision in line with IAS 39 is CU 2 200. Thank you so much for this post. For example under IAS 39, certain … Thank you once more for the good job. Its scope includes the recognition of impairment. 2) Sure, you can reverse the impairment loss. Do we have to consider time value of money while developing provision matrix? Thank you very much Silvia for clarification .Although I have been red about this in ACCA article ,now it become understandable . An example of say a loan facility with 5 years tenor, to be repaid on monthly equal installment and the loan repayment past due by six months with a collateral security. This is a major change from the previous Standard, IAS 39. The simplified approach. Careful analysis of the trade receivables showed the following: The last column of the table contains percentages of expected credit loss in the individual aging groups. I had earlier resolved not to write the ACCA paper p2 due to the complex nature of the standards. IFRS 9 will align measurement of financial assets with the bank’s business model, contractual cash flow of instruments, and future economic scenarios. Thank you for explanation. Bad debt allowance is then calculated as: (392 200 x 0.5%) + (52 300 x 0.8%) + (27 600 x 5.6%) + (13 200 x … There are many entities whose primary business is simply NOT providing loans or finances, but for example selling goods or services. Company doesn’t maintain bill wise details of dues in earlier years. Normally, if you get bonds at discount/premium, you would take that discount/premium into account when setting up cash flows from that instrument and not do any separate entries. S. Hi Neelakantam, I have one basic question for ECl, When to recognized it? In other words can I ignore this fact! From an IFRS 9 recognition requirements perspective, I understand that interest income needs to be recognised on the net carrying amount of the financial asset. This is quite insightful, please Silvia keep it up. So you just book the impairment of a financial asset (loan generated or whatever) and recognize an interest as calculated for the stage 3. report "Top 7 IFRS Mistakes" + free IFRS mini-course. Thank you Silvia! IFRS 9 introduces a two-step approach to determine the classification of financial assets: 1. Business model assessment and 2. As an example suppose the calculation at 1 October 2014 were: Bad debts Old GAAP FRS 102 Specific 500,000 500,000 General 1,500,000 nil IBNR Nil 300,000 Total 2,000,000 800,000 And assume the same calculation … As a financial Analyst, am completely in support of the provision of IFRS 9. Hypothetically yes, as soon as you also can say that the forward looking information confirms the trend. Financial Instruments. Izad, that’s difficult in this case, but I’m sure that there is at least some industry data or economical statistics in your country that you can use. Now customize the name of a clipboard to store your clips. under licence during the term and subject to the conditions contained therein. Under IFRS 9, recognition of impairment no longer depends on a reporting entity first identifying a credit loss event. Copyright © 2009-2021 Simlogic, s.r.o. This is a very interesting comparison; indeed the difference between IAS 39 and IFRS 39 is substantial, however, the old style loan loss provisioning under Dutch Gaap was similar to IFRS 9 and gave banks more room for prudent loan loss provisioning and less volatility of P/L. 1 961 + 418.4 + 1 545.6 + 1 174.8 + 1 522.5 + 3 500 = CU 10 122.30. 2) And in case our assumptions are went wrong and Company recovered full amount (no Bad debt) in subsequent period, can we reverse the Impairment, if so as what line like income?. Solely payments of principal and interest (‘SPPI’) assessment — Considers how financial assets are managed to generate cash flows — Assessed at portfolio level (not instrument level) — Sub-division of portfolios may beappropriate Examples of key … When I worked as an auditor, I used to discuss this issue with my colleagues very frequently…. Nicely explained Silvia. Therefore, it’s everything else but NOT easy to adopt these newest requirements. Thanks. As a result, ABC needs to recognize bad debt provision based on provision matrix, as this simplification is permitted by IFRS 9. That’s why I asked for the reasoning of your auditor…. As ABC assumes the recovery close to nil, it can recognize bad debt provision amounting to 100% of the receivable’s gross carrying amount of CU 2 200. Now, luckily, IFRS 9 tells us how to create bad debt provision for trade receivables and how to get these percentages. Thank you so much. Nice presentations! Great discussion about the IFRS 9. if you have a history or past statistics on average overdue days in collecting the payments, then you should be able to develop a simple model. I really enjoy reading your articles. for individual receivables, you do not use the provisioning matrix (or percentages). And yes, of course, you should take the time value of money into account, because that’s the reason why there’s still some expected credit loss (in fact, when your debtors pay you later, then you are losing the interest). In this article, I’d like to explain this methodology and illustrate it on a simple example. A detailed worked example of how to calculate a provision matrix is given in the Appendix to this guide. However, with this lecture am now confident that i can pass the exams come june 2015. for bigger loans, you would make an individual assessment. Oh yes, you are right of course, the last part of sentence was referring to purchased credit impaired assets because you recognize the impairment loss on these assets right at initial recognition. It makes sense. Dr Accrued interes/ Cr Interest income amount:principal*contractual interest rate, Dr Impairment/ Cr Interest income amount: negative (principal*contractual interest rate-amortised cost*EIR). Hi Silvia, As you know, Intra-group loans within the scope of IFRS 9 are required to be measured at fair value on initial recognition. Everyone of them agreed that yes, there is always some bad debt … Please clarify. S. I said thank you and then thought about discount and premium. keep it up. You make it pretty easy to follow. Good Day and Thanks for your positive cooperation, All Rights Reserved. When your financial asset has already become credit impaired (meaning that certain default events have occurred), then an entity still recognizes lifetime expected credit losses. That’s quite different from IAS 39 provision, isn’t it? 🙂, Thanks a lot Silvia,, its a great help…Plz share a video on the same as well.. However, my concern is when the customer/debtor pays their account which was provided for (ECL provision based on stage 3). By the way, here’s the article where you can learn more about setting the default rates. How should ABC calculate bad debt provision in line with IAS 39 and IFRS 9? Some of these techniques are: - Net flow rate method My idea is to keep exact track on the contractual on cortractual receivables and to comply with the interest recognition requirements on IFRS 9. Hmhm. S. Dear Silva, please can you help with an illustration on practical application and how to obtain required information for ifrs 9 expected loan loss provisioning for Banks. Interest revenue for stage 2 assets is calculated exactly in the same way as in stage 1 (on gross carrying amount). Unfotunately these confusions remains with some people for life. The ageing profile is crucial for the calculation of historic default rate – Step 2. The interest billed would have been R100 x 5% = R5, but interest recognised would have been R80 x 5% = R4. ECL for all other assets (loans, debt securities…) is measured by general model (12-month ECL and life-time ECL). IFRS® is the IFRS Foundation’s registered Trade Mark and is used by Simlogic, s.r.o How many of the receivables then not overdue were paid on time (no credit loss)? Dear Hamada, But imagine that a construction company will apply IFRS 15 an IFRS 9 starting from Jan 2016, they have to recognise impairment losses for expected life of debtors plus they might not be able to record that much revenue like last year as majority of their construction contract terms not including enforceable right to payment for customer so Revenue will be recognised at a paeticular point after completion as per IFRS 15. Of course, bad debt provision to debtor A’s receivable of CU 2 200 will not be any different. ABC, a trading company, has trade receivables with gross carrying amount of CU 500 000 at the end of 20X4. Of Bad Debt Under IFRS 9 Thanks so much. Or we just post the new sum ( Dt – accrued interest, Cr – Interest revenue) and forget about the contract terms, am I right? b) According to the IFRS 9, simplification of impairment on trade receivables is allowed but after calculating provision matrix, it would be adjusted based on forward-looking estimates if correlations exist between AR and macro-economic factors. Hi Tirrfu, Can you give example for instance a loans receivable for 3 years, what will be the entries: from stage 1 on year 1, then stage 2 on year 2, because of significant increase in credit risk, then back to stage 1 on year 3, because of regained capacity of the borrower. Instead, standard IFRS 9 permits the use of simplification. What do the rules in IFRS 9 say? But where could i have the example based on 1 receivable that I expect to gain with monthly repayment and given 1yPD, please? Thank you for always updating the changes in IFRS in simple way. Dear Upendra, Minor debtors are generally grouped into homogenous groups and assessed for impairment collectively. In order to prepare a provision matrix in accordance with IFRS 9 the following steps are needed: Step 1. Thanks waiting for your response? Thank you so much. Should we include trade receivables from a fully owned subsidiary company for ECL computation ( at consolidation level as well as parent company’s stand alone financial level). Now, please be careful, because expected credit losses are in fact a difference between: As a result, the timing of payments from the financial instrument directly affects their present value and thus the amount of an impairment loss. I have a government receivable. Articles. Cheers, Hmmm. Firstly, let’s try to calculate bad debt provision in the old way, in line with IAS 39. These companies might have huge portfolios of trade receivables in their accounts. For smaller loans, you can do a “portfolio” approach, or a collective assessment. The tables do not provide a complete list of the disclosure requirements under IFRS 9. Sorry about your illness. How we treat then receivables from government entities that are default or delayed in collection due to issues in government probably bankruptcy.? Silvia, why do you think that impairment loss shall be recognised at initial recognition? Under IFRS 9, the entire contract will have to be measured at FVPL in all but a few cases. S. THANKS IT IS GREAT EFFORTS (( I HAVE PROJECT TO IMPLEMENT IFRS 9 IF I WILL BY IFRS KIT IT WILL HELP ME). publication help you? IFRS 9 establishes principles for the financial reporting of financial assets and financial liabilities. First of all, I want to celebrate all of you with welcomed New 2019 year. (b) for most financial instruments, the pricing is not adjusted for changes in expected credit losses in subsequent periods. Does IFRS require adjustment of provision for bad debts with revenue or Cost of goods sold or under selling expenses. You can group the loans according to their characteristics and assess them on a collective basis – that’s possible and permitted by IFRS 9. It is the reality, fully agreed with the principle of Time-value-of money. Hi Silvia great and elaborated article on ecl. Dr Interest income (I/S) xxx Could you please give a more practical example with a loan portfolio or one loan contract. Standard says Maximum 12 month since initial recognition. Apologies for the long-winded scenario but I needed to be as clear as possible. Dear Silvia OK, so maybe you have just found out that IFRS 9 can hurt you pretty much. Let´s se what the tax courts have to say about it? In essence, if a financial asset is a simple debt instrument such as a loan(a) , (b) the objective of the business model in which it is held is to collect contractual cash flowsits (and IFRS 9 mentions three methods in calculating credit loss and the credit loss relating to trade receivables is calculated under the simplified method. Do you have anything to say? However, maybe I’ll write an article about it in the future. I have a query: IFRS 9 Stated that we shall use amortised cost as an interest base, but are we have to use amortised value of the principal less than the portion of the impartment related to the principal, or we use the amortised cost (interest + principal) less than impairment. Cr Debtor (B/S) R104 Because, I am required to do provision matrix in line with IFRS 9. South Asian Management Technologies Foundation. My query relates to the Stage 3 ECL provision and interest income being based on the net carrying amount of the financial asset (as opposed to the gross carrying amount for Stages 1 and 2). Hi Silvia, This is a brilliant web-site and is extremely useful and clear to understand. This was a very short and helpfull Example thx so much. Cr ???? You are great! A request, please do a write-up on a possible expected loss model for the banks that can be followed just like what you have done for non-bank entities. I really love the way you present ifrs. Do we need to differentiate between “credit risk” and “dispute risk” when applying the expected credit loss model for provisioning of trade receivables. IFRS 15 Revenue from Contracts with Customers – Summary, How to Prepare Statement of Cash Flows in 7 Steps, The present value of cash flows based on the contract of a financial instrument; and. Of course, trade receivables do meet the definition of a financial instrument and as a result, they are subject to IFRS 9 as well. 1) Is the Default rate / Loss rate to be calculate on yearly basis and apply or fixed initial time and use in future periods? And what is your oppinion on this model for interest income recognition: How do i calculate effective interest rate. plz guide as I am about to have my accountancy exams. I don’t amortize premium or discounts separately. This is very nice. Payment is often delayed, but always made. Your materials are amazingly understandable. Let’s say you have 1 000 of receivables and 200 of them were paid with 60 days delay. When applying the simplified approach, we do not assess in which stage the debt … I agree with above comment . Under IFRS 9's 'general approach', a loss allowance for lifetime expected credit losses is recognised for a financial instrument if there has been a significant increase in credit risk (measured using the lifetime probability of default) since initial recognition of the financial asset. yes, you actually don’t go with the contract terms. Hi Silvia, In fact, 12-month expected credit losses are just the portion of the life time expected credit losses. Dear Upendra, As per IFRS 9 the Bad debts Provision would be calculated as follows. Whether employee advances are financial assets and if yes, how we will calculate impairment on that, If we have won legal case to collect money from customer how will we treat it in ECL model. Lifetime PD and LGD is 20% and 25% respectively and default is expected at the end of 2 years. This model requires recognizing impairment losses in line with the stage in which the financial asset currently is. Base the default rate on historical credit losses, adjusted for forward-looking information such as the downturn in the economy following coronavirus. Hope it’s clearer 🙂 S. Thank you, I got it, in spite of practically It will require a lot of efforts. Do we need to calculate impairment on advance against which we will receive inventory? Hi silvia, IAS 39 requires recognizing the impairment loss to the extent it has already been incurred. could u help me please how to build migration matrices in IFRS 9? Under IFRS 9, financial assets are classified according to the business model for managing them and their cash flow characteristics. Also, technically speaking, under IAS 39/IFRS 9, you do not recognize “provision for bad debts”, but an impairment loss on financial assets. Things need to be simple not complicated. Thanks Silva for this insight. I have a couple of question relating to impairment AR. I hope you get the point, although this is very simplified. under each of classification and measurement, impairment and hedging. i am implementing IFRS effective 2018, is it permitted under IFRS 9 to route the provision resulting from ECL calculation through P&L in 2018 and not through adjusting opening Retained Earnings for those receivables were outstanding as of 31st December 2017? much later than contractually due date). I would like to know when do we apply the general model and when do we apply the simplification/provision matrix? It’s the same subject to IFRS 1. Basically, use IRR formula to your cash flows and you’ll be fine. Thank you! As you can see IFRS 9 and IAS 39 provides very different results. Is there some time to get ready? How ECL is applied? (a) when an entity prices a financial instrument, part of the yield, the credit risk premium, compensates the entity for the credit losses initially expected (for example, an entity will typically demand a higher yield for those instruments with higher expected credit losses at the date the instrument is issued). I hope you will soon come up with the full video on ifrs 9 and ifrs 15 as well. 018: How to account for income from loan application fees? As a very simple example, say the gross balance was R100 and the ECL provision R20 (Net carrying amount being R80). This is too complex topic to reply in a comment, but to give you some hints: try taking your trade receivables portfolio at some past reporting date and analyze the losses. Once again thank you for your nice articles.. Hi Yustino, Thank you very much. Thanks for this precise and insightful notes of the IFRS. Let me just remind you that you should apply these standards retrospectively (with some exceptions) and it means that you should restate also 2015 figures under the new rules. I forgot to delete it. ABC’s receivable to debtor A amounts to CU 2 200 and ABC expects to recover close to nil. When applying the general approach, an assessment has to be made of the stage in which the debt falls as this will affect whether 12-month or lifetime expected credit losses should be recognised. Hello, please try to look here: http://www.cpdbox.com/how-to-calculate-interest-rate-implicit-in-the-lease/ What a significant difference between IAS 39 and IFRS 9. Your ability to simplify complex concepts is a gift. Consequently, subsequent changes in expected credit losses are economic losses (or gains) of the entity in the period in which they occur. IFRS 9 instead uses more forward-looking information to recognise expected credit losses for all debt-type financial assets that are not measured at fair value through profit or loss. 1. what is timing of PD from 15 April to next 12 month or from 30 April to next 12 month? S. Hi Silvia. Effective for annual periods beginning on or after 1 January 2018, IFRS 9 sets out how an entity should classify and measure financial assets and financial liabilities. Dear Eskil, S. Hi Silvia, 1600.4+814+2160+1974+3000+4812+4000 =$18,360.4. Pls, continue the good jobs…, Superb no one dull then me I have understood very easily. Need to know a scenario 1) when the debt goes bad in the same year revenue was recognised and 2)when the debt goes bad in the year following which revenue was recognised. If the business expects that some of its customers will fail to pay back the amount that they owe, then the business will create a provision for bad debts or a provision for doubtful … Keep it up. So please put a video too. Is there any instance when revenue needs to be adjusted when a receivable is doubtful or certain to be bad? The amount lent is, therefore, not fair value. Modelling For Provisioning Of Bad Debt Under ifrs 9. no, you do NOT adjust the revenue when the debt goes bad (I don’t mean interest revenue here). S. Hey Silvia , I also have the same question as Rajesh. contract often still can be measured at Amortized Cost. S. In this case there will no provision matrix right i.e. It is real awesome and I am addictive of IFRS, I always like to increase my practical understanding of these issues.. No public clipboards found for this slide, DMI, WMA Certified Digital Services Manager with over 11 years of experience, Vice President Corporate Planning at SUMMIT CAPITAL, The Ministry of Common Sense: How to Eliminate Bureaucratic Red Tape, Bad Excuses, and Corporate BS, Authentic: A Memoir by the Founder of Vans, Fulfillment: Winning and Losing in One-Click America, Bezonomics: How Amazon Is Changing Our Lives and What the World's Best Companies Are Learning from It, Your Turn: Careers, Kids, and Comebacks--A Working Mother's Guide, Ask for More: 10 Questions to Negotiate Anything, Liftoff: Elon Musk and the Desperate Early Days That Launched SpaceX. God bless you richly. I think you hit the point. Provision can be created only if the entity has a present obligation as a result of a past event (IAS 39). Provision For Bad Debts / Banks usually provide lots of loans and under ifrs 9, they have to apply general models to calculate impairment loss for loans.. Charged to the profit and loss account. However, the good news is that unless you work for a financial institution like bank, you don’t have to follow the above general model. Do you perhaps know one should go about the accounting of my concern raised? My only advice is to follow your own tax rules with regard to calculating taxable profit and tax. If we have it, what should we do? • 12 month expected credit loss • MU1,050,000 x 0.5% x 25% discounted at 5%: MU1250 • Lifetime expected credit loss • MU (1,050,000 /1,052) x 20% x 25%: 47619 • Assumption: First year interest was paid fully. If interest revenue is calculated on the gross carrying amount, everything is OK. It will often mean to add the expense for recognizing IFRS 9 provision back to the accounting profit and calculating+recognizing deferred tax. Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. For example, if a company has Can we apply stage 3 for credit impaired retail loans which are not individually significant ? In this case, how we account for impairment loss on inter-company loans? So lovely. a) how we account for inter-group loans in line with IFRS 9, especially its impairment. The present value of cash flows that an entity really expects to obtain from the financial instrument. Your article is very good. Thank you Silvia for the write up. However, from a business/commercial perspective, the customer/debtor is still billed interest based on the gross carrying amount of the financial asset. To illustrate, a risk manager at a credit card company believes the firm must record $10 million in noncollectable items because customers are filing for bankruptcy or experiencing financial … you can use both internal and external data for estimating ECL provision. Although past experience shows that some percentage of other receivables might not be recovered (look to the 3rd column of the table), ABC can’t recognize any bad debt provision to remaining receivables, as there’s no evidence of impairment loss really incurred. The only comment I would to make is that IASB is not good at choosing effective terminology eg deferred tax, now lifetime expected credit loss, there are few such. I like it, though the new requirements may seem complex, you’ve simplified it in your explanation on how to apply it. I love this! If trade receivables, go for simplified approve as mentioned above. Hi Fahad, well, advances for inventory are not financial instruments, unless you expect to receive cash. However, because IFRS 9 requires that loss rates reflect relevant, reasonable and supportable information about future expectations, bad debt provisions under IFRS 9 will likely be higher than under the previous incurred loss approach. With regard to loans – you generally cannot use this simplification. this question requires much longer reply that I can do in a comment. I’m an ACCA student preparing for paper P2. I also have confidence and evidence that full payment will be made of the outstanding receivables balance, after which the government won’t have to owe me anymore (payment model will change). In which case for dispute risk- the treatment may be provision created as a net from revenue.

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