ECL for Receivables

Methods for Computing ECL:

  • Historical Loss Method
  • Roll Rate Method
  • Transition Matrix Method

Key highlights:

  • Computation of ECL as per the requirements of the Accounting Standard
  • Simplified Approach for receivables ECL – recognizes lifetime expected credit loss
  • Determine appropriate groupings of receivables by creating segments based on two dimensions in customer master e.g., Divisions could be Paper, Infotech, Hotel, FMCG and Agri. Departments could be Wholesale, Retail, Institutional and Exports – based on these there the user can have up to 20 segments, if warranted 
  • Select the sample period to determine the historical loss percentage
  • Ability to create multiple scenarios for the segments created
  • Apply macro-economic data to get multipliers for different scenarios
  • Determine the probability weights for each scenario to arrive at the probability-weighted expected credit loss

Data upload

  • Upload the raw data covering the customer master, invoices, collections, credit notes and write offs for the last several years
  • Upload the opening unpaid invoices as the starting point
  • Define the segments based on the data in customer master
  • Input the multipliers for various segments

System highlights:

  • Cloud-based application with full security
  • Three User Profiles provided in the Customer Portal:
  • Accountant role – Multiple accountants can enter the data. Each accountant can view or edit the data uploaded by him/her
  • Manager role – One person responsible for the processed output, who can view and edit all data entered by any accountant. He/she can process the data and generate all reports  
  • Auditor role – One auditor login to view all the input data and reports available in the system. Can view the entire audit trail for all transactions and processes
  • Dashboard providing details of historical loss percentage, ECL based on multiple scenarios for defined segments

Implementation:

  • Ageing of receivables automatically done by the system based on the input data uploaded
  • Accounting entries can be exported to the user’s accounting system in any standard format.

A: Create segments based on customer master with combinations of Divisions and Departments

B: Determine the sample period that represents the historical loss most accurately

C: Compute the historical loss rate for each segment defined by the user

D: Apply the effect of macro-economic data by setting multipliers for the other two scenarios

E: Determine the probability of each scenario and compute the probability weighted ECL

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