Ind AS · Key standards
What is expected credit loss under Ind AS 109, and how is it calculated for receivables?
Short answer
Ind AS 109 requires a loss allowance for credit losses expected in future, not only those already incurred. For trade receivables and contract assets, companies use the simplified approach: always provide for lifetime expected losses, usually through a provision matrix of historical loss rates by ageing bucket, adjusted for current and forward-looking conditions. Loans and other financial assets follow a three-stage approach.
Two approaches
| Approach | Used for | Allowance |
|---|---|---|
| Simplified | Trade receivables and contract assets (compulsory where there is no significant financing component); lease receivables by choice | Always lifetime expected credit loss |
| General (three stages) | Loans, debt investments, deposits and other financial assets | Stage 1: 12-month expected loss. Stage 2 (significant increase in credit risk, presumed at more than 30 days past due): lifetime loss. Stage 3 (credit-impaired, presumed at more than 90 days past due): lifetime loss, interest on the net amount |
The provision matrix (simplified approach)
- Group receivables into ageing buckets (not due, 1–30 days, 31–60 days, and so on), and by customer type if their behaviour differs.
- Work out historical loss rates for each bucket from at least two or three years of collection data.
- Adjust for current and forward-looking information, such as an industry downturn or a change in credit terms.
- Multiply each bucket's balance by its rate and add up.
- Assess individually disputed, credit-impaired and related-party balances.
Example: ₹90 lakh of receivables spread across six buckets, with loss rates from 0.3% (not due) to 50% (over 180 days), gives an allowance of ₹2.65 lakh. The expected credit loss guide shows the full working.
Points auditors look for
- Rates based on your own data, with the period and method documented.
- A reasoned forward-looking adjustment, not a flat percentage.
- A review at every reporting date, with changes explained.
- Disclosure of the method, the movement in the allowance, and credit-risk concentrations (Ind AS 107).
How it differs from AS
Under the Accounting Standards, a company provides for doubtful debts when a loss looks probable. Under Ind AS 109, even current receivables carry some allowance. Tax deduction is still allowed only when debts are actually written off, so a deferred tax asset arises. Try your own buckets in the ECL calculator.
Legal basis
- Ind AS 109, Financial Instruments (section 5.5, Impairment)
- Ind AS 107, Financial Instruments: Disclosures
Official sources
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