Articles on Expected Credit Loss

How is the expected credit loss measured ECL measurement criteria An entity shall measure expected credit losses of a financial instrument in a way that reflects: an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes; the time value of money; and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. The expected credit losses are calculated based on the present value of all cash shortfalls over the expected life of financial instruments. A cash shortfall is determined as the difference…

Approaches for assessing credit risk Drivers of expected credit loss The Standard explains that an entity may apply various approaches to determine whether the credit risk on a financial instrument has increased significantly since initial recognition or when measuring expected credit losses. The entity is also allowed to apply different approaches for different financial instruments. The approach should normally include an explicit PD as an entity. However, even where such an input is not included, the approach may still be considered to be as per the requirements of Ind AS 109 provided the entity is able to separate the changes…

Simplified Approach for ECL for trade receivables Trade receivables, contract assets & lease receivables An entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for: (a)  trade receivables or contract assets that result from transactions that are within the scope of Ind AS 115, and that: (i)   do not contain a significant financing component (or when the entity applies the practical expedient for contracts that are one year or less) in accordance with Ind AS 115; or (ii)  contain a significant financing component in accordance with Ind AS 115, if the entity chooses…

What is meant by significant increase in credit risk Significant increase in credit risk (SICR) At each reporting date an entity shall assess whether the credit risk on a financial instrument is increased significantly since initial recognition. The entity is required to assess the change in the risk of a default occurred over the expected life of the financial instrument and not the change in the amount of expected credit losses. The effect of this is that the risk of default occurring on the financial instrument as at the reporting date is compared with the risk of default occurring on…