Finance Indaba Gold Partner explains IFRS 9's approach to impairments

post-title's Bruce Mackenzie: "IFRS 9 calculates what you EXPECT to lose, not what you HAD lost."

IFRS 9, Financial Instruments was issued by the International Accounting Standards Board (IASB) in 2014, and became effective from 2018. Managing director of corporate finance advisory Bruce Mackenzie says that it’s surprising to many that the standard has been around for five years, because unless you are a bank, you probably haven’t done anything about it. 

He says:

“IFRS 9 introduces, among other things, a new model for impairments. Whereas the older standard, IAS 39, had an incurred model, IFRS 9 moves us into a world of expected losses. In simple terms, IAS 39 looked back at what you HAD lost, whereas IFRS 9 calculates what you EXPECT to lose.” 

While financial institutions and large listed entities have probably already completed their IFRS 9 implementations and are already finalising their December numbers, unlisted IFRS preparers have probably been less proactive. 

“This is the group of preparers I call the REST OF US – the IFRS reporters outside of the mainstream listed space,” says Bruce. “These are the companies who now have to face their first year-ends applying IFRS 9, and haven’t really done any preparation for it.”

So what should you do now? 
Bruce explains that the general approach in IFRS 9 requires expected credit losses to be measured through a loss allowance at an amount equal to the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument). 

“If you have no idea what this means, don’t worry – there is light at the end of the tunnel,” Bruce says. 

In addition to the above general model, IFRS 9 introduces a simplified approach for trade receivables. If you have a simple revenue transaction resulting in a receivable, then you must use the simplified approach that simply requires you recognise an upfront provision for what you expect to lose on the receivable over its lifetime. 

“Sounds easy enough,” says Bruce. “But beware: the devil is in the detail!”

He points out that this simplified approach is not as simple as making a guess as to what you think your provision should be. The standard still requires you to change your thinking and calculate your provision broadly follows the following steps:

  • Subdivide your receivables and other financial assets into sub-portfolios based on their credit risk ratings
  • Determine the age structure of trade receivables within a defined period of sales
  • Analyse the collection of receivables by the time buckets
  • Compute average historical loss rate by age-band 
  • Adjust the historical loss rate for forward-looking information 
  • Calculate Expected Credit Losses based upon the adjusted loss rates

But won’t the auditors just do it for you? 
Unfortunately not, says Bruce. “Remember your auditors can’t audit their own work. As much as I’m sure they’d want to assist you with this exercise, their strict independence requirements prevent them from doing this. In addition, with the microscopic focus on auditors in the press at the moment, I doubt any professional firm would take the chance in offering this service to its audit clients.”

So what do I do? 
Bruce explains that you can either hire an expert to do these calculations for you, or you can do them yourself. has developed a simple online calculator that performs all the calculations detailed in this article, including the adjustments for forward-looking information that IFRS 9 requires.

“Our tool is aimed at the REST OF US and aims to provide a high quality, cost-effective solution resolving your IFRS 9 problem.” 

You can find out more about the ECL Calculator and the other support services that offers accountants at the Finance Indaba on 16 and 17 October 2019 at the Sandton Convection Centre. 

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