Last update 22/08/2019
IFRS 9 contains a rebuttable presumption that credit risk has increased significantly when contractual payments are more than 30 days past due. This means that when payments are 30 days past due, the financial asset is considered to have moved from Stage 1 to Stage 2, and lifetime expected credit losses are recognised. Past due is defined as failure to make a payment when that payment was contractually due.
Note: Contractual payment dates can be different for different clients, difference product, different regions and so on!
EXPLANATION
Trade receivables have contractual payment terms, either based on specific contracts, general terms and conditions (print them on the back of your invoice!) or customary business behavior (by the purchasing entity and/or the selling entity). IFRS 9 includes an assumption, that can be overruled in a policy document by management, that the entity has to suppose that a significant increase in credit risk for this late payment trade debtors has become apparent.
Without proof of the opposite, payments that are 30 days past due, transfer a financial asset into stage 2 and as a result lifetime expected credit losses are recognised. But management can overrule (in IFRS rebut) this assumption by analysing the case, document it and conclude whether there is or is not a case of an actual increase in credit risk for this specific case.
Another way of working this is to develop a management policy for the rebuttable presumption for more than 30 days past due by by either shortly summarising each customer’s normal payment behavior (including for example whether or not credit notes where issued, invoices were partially not paid etcetera) and set a individual (but rather narrow) normal payment behavior norm (for example 26 – 35 days, 36 – 45 days). Instead of each individual customer an entity can also use one description for the complete customer portfolio (or 2 – 3 sub-groups) and set one common (but more global) customer portfolio behavior norm (for example 29 – 40 days, 41 – 50 days, 51 – 60 days).
Rebuttable presumption – significant increase in credit risk
Rebuttable presumption – significant increase in credit risk
Rebuttable presumption – significant increase in credit risk Rebuttable presumption – significant increase in credit risk Rebuttable presumption – significant increase in credit risk