Does IFRS 9 apply to my company

IFRS 9 Financial Instruments is effective for annual periods beginning on or after 1 January 2018. IFRS 9 introduces a new impairment model based on expected credit losses. This model is different to the incurred model that we used under IAS 39. Almost every entity has financial instruments that they need to account for, including trade receivables. The new financial instruments standard changes the way entities must think about impairment. The impairment guidance in IFRS 9 is complex and requires a significant amount of judgement, for example, the standard requires companies to consider all information in their calculation of ECL’s, being past information, present information and forward looking information. The good news is that limited simplifications have been made specifically for trade receivables, contract assets and lease receivables.

Can my company use use the ECL Calculator?

The ECL calculator assists companies in calculating their IFRS 9 impairment model where they are required or have elected to use the simplified matrix approach for their trade receivables, contract assets and lease receivables. The calculator does not use the 3 stage general model approach.

How does the ECL Calculator calculates the IFRS 9 impairment?

Companies need to use a matrix approach to calculating their impairments. This broadly follows the following steps: 1. Subdivide your receivables and other financial assets into sub-portfolios based on their credit risk ratings 2. Determine the age structure of trade receivables within a defined period of sales 3. Analyse the collection of receivables by the time buckets 4. Compute average historical loss rate by age-band. 5. Adjust the historical loss rate for forward-looking information 6. Calculate ECLs based upon the adjusted loss rates The above can be complex and time consuming for many entities who don’t have in-house experts. In addition, auditors can not complete these calculations for their clients due to independence restrictions.

What is the output

The calculator produces a detailed report companies can use for their year end IFRS financial reporting. To view an example report, CLICK HERE.

What is the Cost?

The cost to produce an IFRS 9 ECL calculation is $150.

Who is Wconsulting

W.consulting is an independent financial reporting advisory firm. We have a team of JSE-accredited IFRS Advisors that assists companies in implementing new IFRS standards, researching emerging financial reporting issues and the formulation of accounting opinions on complex transactions. Our multidisciplinary team of specialists have broad experience in assisting listed companies, multinationals and large, state-owned enterprises with their financial reporting. One of our key differentiators is our ability to combine our main service disciplines: Financial Reporting, Talent Development (training), and Integrated Software Development to deliver new and exciting solutions to our clients.

Factors to Consider	Why this is important	How we can assist
A portfolio made up of individually insignificant trade receivables	If your portfolio is made up of a small number of individually significant trade receivables the ECL calculation will be very sensitive to any significant individual credit event (or the absence of one) within the historic data captured.	Please contact us directly so that we can consult with us on how to mitigate this risk and determine a more evenly calibrated ECL
A portfolio made up of trade receivables denominated in the same currency (this may include some foreign currency items if insignificant overall)	The inclusion of foreign currency denominated trade receivables in the portfolio may distort the determination of ECL as the information captured will incorporate movements associated with exchange rate fluctuations.	Ideally you should separate your trade receivable into sub-portfolios by currency and determine an ECL by portfolio. If you are unsure about how to do this, we can consult with you on the various options you could apply.
Any factors that cause your trade receivables portfolio to contain groups of items for which the credit characteristics are not similar should cause you to consider creating appropriate sub-portfolios	Bearing in mind the significance of each of the following factors with regards customer credit behaviour, consider disaggregation into sub-portfolios: Large, medium, small enterprises Wholesale vs Retail Insured vs Uninsured Public (government) vs Privately owned Geographical location Combinations of the above	Determining optimal portfolio segmentation can be a complex process and different approaches will result in different ECL outcomes. We are able to consult with you to determine the optimal segmentation approach.