Overview:

In India, Ind AS 109 (converged with IFRS 9) mandates an Expected Credit Loss (ECL) approach for impairment of financial assets, including trade receivables​.

This forward-looking model replaced the old “incurred loss” model after the 2008 global financial crisis to ensure losses are recognized promptly rather than waiting for a default event​

For trade receivables, this means companies must estimate lifetime credit losses from the moment a sale is made on credit.

Legal Mandate: Compliance with Ind AS 109 is not optional—it is required by law. Section 133 of the Companies Act, 2013 empowers the central government to prescribe accounting standards. Accordingly, the Companies (Indian Accounting Standards) Rules have made Ind AS 109 mandatory for all listed and large companies. SEBI’s LODR Regulations further require listed companies to ensure their financial statements comply with Ind AS and properly disclose all required information​

In practice, if a company fails to record ECL on significant receivables, it would overstate assets and breach these regulations. For example, regulators have flagged cases where companies did not recognize ECL on long-outstanding receivables, leading to inflated debtor figures​

Accounting Requirements: Under Ind AS 109, trade receivables (being typically short-term and without significant financing components) are usually measured using the “simplified approach”, i.e. recognizing lifetime expected losses upfront for all receivables​

This simplification spares companies from assessing 12-month vs. lifetime ECL for each receivable. If a trade receivable does contain a significant financing component (e.g. a long-term receivable), Ind AS 109 allows an accounting policy choice: the company can still apply the simplified model or use the general “staged” approach for impairment​

Regardless of approach, all receivables must be segmented and assessed for credit risk – Ind AS 109 expects firms to group receivables by similar risk characteristics and consider age of balances, since older receivables generally carry higher default risk​

Moreover, the standard explicitly requires using reasonable forward-looking information (e.g. macroeconomic trends) in estimating losses, not just historical default rates​

In short, the regulatory expectation is that companies will implement a robust, data-informed ECL model for trade receivables that meets the letter and spirit of Ind AS 109.

Regulatory Oversight: Several authorities oversee and guide compliance in this area:

• NFRA (National Financial Reporting Authority): As the auditor regulator, NFRA has highlighted ECL provisioning as a complex accounting estimate requiring close attention by preparers, audit committees, and auditors​

Audit committees are expected to question management on ECL assumptions, and auditors must ensure the ECL methodology (e.g. use of a provision matrix for receivables) is appropriate and Ind AS 109-compliant​.

NFRA’s oversight means that inadequate ECL provisioning can lead to audit qualifications or investigation.

• ICAI (Institute of Chartered Accountants of India): The ICAI has issued detailed guidance (2024) on the ECL framework, underscoring the shift to a forward-looking approach that considers historical data, current conditions, and future economic projections​

This guidance encourages strong credit risk management and high-quality data for ECL calculations, reinforcing what Ind AS 109 requires. While not law, ICAI’s publications set industry best practices that auditors and companies are urged to follow.

• RBI (Reserve Bank of India): For financial institutions like banks and NBFCs, the RBI has aligned its guidelines with Ind AS 109’s principles. NBFCs in India (which follow Ind AS) must compute ECL on loans and receivables, as guided by RBI’s March 2020 Ind AS roadmap​

Even banks (currently under old norms) are moving toward an ECL-based regime – RBI’s guidance notes have advocated shifting from the incurred loss model to a “robust ECL provisioning methodology”​

This regulatory push underscores that expected-loss provisioning is considered critical for prudence across the finance sector.

Key Takeaway: CFOs, Finance Managers, and Auditors should recognize that ECL on trade receivables is a legal and professional obligation in India’s corporate reporting framework. Ind AS 109 (backed by the Companies Act and SEBI rules) requires timely, well-grounded credit loss allowances on receivables. Regulators like NFRA and RBI expect a disciplined, forward-looking process, and ICAI’s guidance offers a blueprint for compliance. Finance leaders must ensure their companies have policies and systems in place to meet these expectations, treating ECL provisioning for receivables with the same rigor as other financial reporting requirements.

Compliance with ECL requirements not only satisfies regulators but also leads to more realistic financial statements. In the next part of this series, we will explore the risks and challenges of non-compliance with these ECL provisions.