Expected credit loss on trade receivables (Ind AS 109)
How to apply the simplified approach and a provision matrix, with a worked example.
Under Ind AS 109, you recognise a loss allowance for expected credit losses, not only incurred ones. For trade receivables, the standard offers a simplified approach: always measure the allowance at the lifetime expected credit loss, without tracking changes in credit risk.
A provision matrix
A common way to apply the simplified approach is an ageing-based matrix:
- Group receivables by ageing bucket (for example not due, 1 to 30 days, and so on). Segment further if customers behave differently (by type, region or product).
- Work out the historical loss rate for each bucket from past data.
- Adjust for current conditions and reasonable forward-looking information.
- Multiply the balance in each bucket by its loss rate and add up.
- Assess credit-impaired or disputed balances individually.
Worked example (illustrative)
| Bucket | Balance (₹) | Loss rate | Allowance (₹) |
|---|---|---|---|
| Not yet due | 50,00,000 | 0.3% | 15,000 |
| 1 to 30 days | 20,00,000 | 1% | 20,000 |
| 31 to 60 days | 10,00,000 | 3% | 30,000 |
| 61 to 90 days | 5,00,000 | 8% | 40,000 |
| 91 to 180 days | 3,00,000 | 20% | 60,000 |
| More than 180 days | 2,00,000 | 50% | 1,00,000 |
| Total | 90,00,000 | 2,65,000 |
The rates here are made up. Yours must come from your own data. Use the expected credit loss tool to try your own buckets.
Documentation auditors expect
- The data used and how rates were derived, with the period covered.
- The reasons for any adjustment for current and forward-looking factors.
- A review each reporting date and a record of changes in the matrix.
- Separate treatment of related-party and credit-impaired balances.
Read the complete Ind AS guide for the wider picture.