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.
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.
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.
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.
How it works
Register new organisation
Login (existing client)
Register your organisation onto tool
Upload your debtors aging, insert your DPD and year end.
The system runs through various algorithms based on the standard and calculates your organisations total provision
Organisations are able to change their DPD and their recovery rate to view various output calculations
The system provides you with a preliminary report
After viewing the preliminary reports, changes can be made to the data before pulling the final report which is then securely saved as an encrypted PDF at that year end for your organisation
By logging into the system you are able to view your year end provisions at any point and you can choose to calculate the next years provision. All year end impairment provision PDFs are saved in table format. These PDFs can be downloaded
Cost is R5,900 per year end calculation
Use of ECL Tool
The ECL.Calculator ® has been designed to be determine an IFRS 9 compliant Expected Credit Loss allowance for Trade Receivables. Before utilizing the ECL.Calculator® please consider the issues discussed below and those highlighted in the table below.
It is not certain that the use of this tool will be considered to have all the necessary detail that is required of listed companies as IFRS 9 requires a "undue cost or effort" consideration for certain ECL input factors and it is our view that this threshold for listed entities is at a significantly higher level that for non-listed entities.
We therefore recommend that if you are performing ECL calculations for trade receivables in a listed company environment you contact us directly for a customized solution that will meet the appropriate requirement of IFRS 9.
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
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.