Simplified approach – Trade receivables

Short term receivables:

For trade receivables and contract assets (including lease receivables) that do not contain a significant financing component in accordance with IFRS 15 Revenue from Contracts with Customers (so generally trade receivables and contract assets with a maturity of 12 months or less), ‘lifetime expected credit losses’ (i.e. stage 2 loss allowance) are recognised. Because the maturities will typically be 12 months or less, the credit loss for 12-month and lifetime expected credit losses would be the same.

This approach also applies if the practical expedient in IFRS 15 for contracts that have a duration of one year or less is applied. Under this practical expedient, no adjustment is made for a significant financing component.

When calculating expected credit losses, IFRS 9 permits the use of a provision matrix.

Many entities estimate credit losses using a provision matrix where trade receivables are grouped based on different customer bases and different historical loss patterns (e.g. geographical region, product type, customer rating, collateral or trade credit insurance, or type of customer).

Under the simplified model, entities could adjust the historical provision rates (which are an average of historical outcomes) for their trade receivables to reflect relevant information about current conditions and reasonable and supportable forecasts about the future. A similar approach might be followed for contract assets.

Recognition of the amount of credit losses is based on forward looking estimates that reflect current and forecast credit conditions.

Example

  • Company M has a portfolio of trade receivables of CU30 million at 31 December 2014
  • The customer base consists of a large number of small clients
  • To determine the expected credit losses for the portfolio, Company M uses a provision matrix
  • The provision matrix is based on its historical observed default rates, adjusted for forward looking estimates
  • At every reporting date, the historical observed default rates are updated Company M estimates the following provision matrix at 31 December 2014:

 

  • At 31 December 2015, Company M revises its forward looking estimates, which include a deterioration in general economic conditions. Company M has a portfolio of trade receivables of CU34million in 2015.

The credit loss allowance is increased by CU244,000 from CU580,000 at 31 December 2014 to CU824,000 as at 31 December 2015. The journal entry at 31 December 2015 would be:

Long term receivables

For other long term trade receivables and lease receivables, entities have an accounting policy choice to either apply the general three stage approach or the ‘simplified approach’ of recognising lifetime expected losses.

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