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Forensic Accounting

General provision for doubtful debts

I heard that general provisions for doubtful debtors based on debtor age analysis is not allowed under IFRS. Is it true?

asked Nov 24, 2012 in IAS 39 - Financial Instruments: Recognition and Measurement by AcMac Level 2 Member (4,170 points)
recategorized Jan 13, 2013 by Mysio

3 Answers

+5 votes
Best answer

Yes it is true. As per IAS 39, trade recivebles are financial assets. IAS 39 states:

59  A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more  events  that  occurred after the initial  recognition of the asset ...

Therefore general provisions are no longer allowed. However if you have hundreds of debtors then evaluating each & every debtor for impairment is not practical. Therefore in most cases induvidual impairment is done for major debtors only. Minor debtors are generally grouped into homogenous groups and assessed for impairment collectively. The calculation is normally based on historical data. There are many mathamatical loss forecasting models that you can use to calculate the impairment (or expected loss) in debtos groups. Some of these techniques are:

- Net flow rate method

- Vintage loss curve method

- Score distribution method

For your reference check this simple collective impairment calculation example using net flow rate method, which seems to be more popular.

answered Nov 24, 2012 by Tina Level 5 Member (11,560 points)
edited Jun 22, 2013 by Mysio

IAS 39 reference given is no longer valid as disclosure requirements of impairment has been moved to IFRS 7 Financial Instruments: Disclosures

What is the formula of Net Flow Rate Method, as I see in the given example, Net Flow Rate has been forced to zero in certain columns, which I cant understand..

Please give me some link where I can learn about Net Flow Rate Method..

Thanks in advance...
0 votes
You cant have general provisions anymore. Debtors need to be tested for impairment as per IAS 36
answered Nov 24, 2012 by Ricky123 Level 1 Member (1,600 points)
0 votes
You should test for impairment. Its kind of provision as previously but you can not determine deciding % on the age bucket.
answered Dec 16, 2012 by JaneM Level 2 Member (4,320 points)