From Carmen Ridley, our expert content advisor for our Caseware Financials Reporting reviews the General Approach versus the Simplified Approach for determining expected credit losses. A reminder that this blog contains only general guidance or reminders.
What is the simplified method for determining expected credit losses and which assets is it used for?
AASB 9 requires entities to determine the bad debt provisions through the expected credit loss (ECL) model. The ECL model is a forward looking model.
There are two approaches which you can use to comply with this AASB 9 requirement:
- The general approach involves regular assessment of the credit risk of the instrument and changes to the impairment model. This is done through moving from a 12 months ECL estimate to lifetime ECL estimate, if a significant increase in credit risk has occurred.
- The simplified approach has been included in AASB 9 to allow entities to determine their impairment calculation using a less onerous process. Rather than potentially moving from 12 months to lifetime estimates, the entity determines the lifetime ECL of the instrument at inception of the instrument.
This method is:
- Mandatory for trade receivables and contract assets that do not contain a significant financing component.
- Optional for trade receivables and contract assets that do contain a significant financing component and lease receivables.
The diagram below illustrates the two models for reference.
For more information or clarification on a particular client or entity, please contact Carmen directly via firstname.lastname@example.org.
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