Simplified impairment model

Last Updated on 28/02/2021 by 75385885

In IFRS 9 a simplified impairment model is allowed for the following financial assets:

• Trade receivable and contract assets without a significant financing component, and
• Other long term trade receivables, contract assets and lease receivables.

For trade receivables and contract assets that do not contain a significant financing component in accordance with IFRS 15 (so generally trade receivables and contract assets with a maturity of 12 months or less), ‘lifetime expected credit losses (ECLs)’ are required to be recognised (ie Stage 2 losses). Because the maturities will typically be 12 months or less, the credit loss for 12-month and lifetime ECLs would be the same.

In practice, many entities already estimate credit losses using a provision matrix where trade receivables are grouped based on different customer attributes and different historical loss patterns (e.g. geographical region, product type, customer rating, collateral or trade credit insurance, or type of customer), that can now be used under this model. Entities will need to update their historical provision rates with current and forward looking estimates. A similar approach might be followed for contract assets.

For other long term trade receivables, long term contract assets 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.