IFRS NEWS June 2025 

Accounting News 

Expected credit losses of Trade Receivables – Simplified approach 

An entity shall apply the simplified approach to expected credit losses for financial assets arising from contract balances that do not contain a significant financing component or when the entity applies the practical expedient for cases where the financing period is less than 12 months. 

For trade receivables with a significant financing component, entities may elect the simplified method as an accounting policy. 

The simplified method can be applied using a provision matrix in five steps. 

Step 1 Determine the accounts receivable segments according to credit risk. The segments can correspond to geographic areas, product lines, customer types, and customer ratings. 

Step 2 Determine historical credit loss periods. In practice, this can range from two to five years.  

Step 3 Determine historical credit loss rates. 

Step 4 Identify the macroeconomic variables related to credit losses. Establish the level of relationship and adjust historical rates to reflect future economic conditions. Macroeconomic variables can include GDP, sectoral GDP, and the unemployment rate. 

Step 5 Calculate Expected Credit Losses.   

Accounting Inquiries 

When is there no significant financing component? 

There is no significant financing component if any of the following factors occur:  

1. The client paid for the goods or services in advance and the schedule for the transfer of such goods or services is at the client's discretion. 

2. A substantial portion of the consideration promised by the customer is variable, and the amount or timing of that consideration varies depending on whether a future event, not substantially within the control of the customer or the entity, occurs. For example, if the consideration is a royalty based on sales. 

3. The difference between the consideration promised and the cash selling price of the good or service arises for reasons other than providing financing to the customer or the entity, and the difference between those amounts is proportional to the reason for the difference. For example, payment terms may provide the entity or the customer with protection that the other party will not adequately fulfill all or part of its obligations under the contract.