A Closer Look — Applying the expected credit loss model to trade receivables using a provision matrix

Published on: 27 Sep, 2018

Many assume that the accounting for financial instruments is an area of concern only for large financial entities like banks. This is not the case. Almost every entity has financial instruments that they need to account for. In particular, almost every entity has trade receivables and the new financial instruments standard changes the way entities must think about impairment. In this publication, we focus on the new impairment requirements in IFRS 9. Specifically, we will focus on the impairment guidance for trade receivables, contract assets recognised under IFRS 15 and lease receivables under IAS 17 (or IFRS 16).

Why specifically consider on the above items? The impairment guidance in IFRS 9 is complex and requires a significant amount of judgement, however, certain simplifications have been made specifically for trade receivables, contract assets and lease receivables. Almost every entity has one of (if not all) these items, therefore it is important that all entities understand the impact of the new accounting requirements.

In the first half of this publication we consider the new accounting requirements for impairment of financial assets and in the second half suggest a potential way of applying a provision matrix approach in practice.


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