Determining Expected Credit Losses & Assets

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 cridley@afrs.com.au.