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IFRS 9Case studies (Step 3 of 5)

Case study

Step 3 of 5
Practical caseIFRS 9L3 · Advanced

Impairment of a group: provision matrix for trade receivables, stages 1 to 3 of loans and scenario-weighted loss

8 documents22 tasks≈ 120 min
0 / 25 items completed
Standards
IFRS 9 — Financial Instruments
Assistance levelNo help · reduced assistance
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: shown

Case brief

Situation

Mercadia Distribution SA (fictitious entity) closes its books on 31 December 20X6. It must measure the expected credit losses of its trade receivables, of three loans at different stages (significant increase in risk, credit-impaired, return to a 12-month measurement) and of a sovereign bond. You prepare the calculations, the reconciliation of the loss allowance and the entries.

Your assignment

Establish the approach for the trade receivables, compute the historical rates, the loss allowance of each bucket and the total of the matrix; assess the significant increase in risk of loan X and compute its scenario-weighted loss; compute the impairment charge and reconcile the loss allowance on the receivables; qualify loan Y, compute its net amortised cost and its interest; assess the return of loan W to 12 months, compute its expected loss and the reversal; analyse the Helvana bond; record the five entries, present their effect on the financial statements and conclude. One document is not useful.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Advanced level: no help, the work is grouped by kind.

Documents

File documents

8 documents: open each one to read it.

Document 1Memo

Group profile and case conventions

Mercadia Distribution SA (fictitious entity) closes its books on 31 December 20X6. Case conventions: amounts in EUR; the losses of each scenario are given already discounted at the effective interest rate; case convention (pedagogical assumption, not imposed by IFRS 9): the 12-month expected loss of an exposure is computed as exposure × probability of default × loss given default, without discounting; probabilities, loss rates and forward-looking information are case data and not rules; the entries are illustrative.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Conversion factor to a percentage (100)100%
Balance of bucket 1 (Not past due)€1,000,000.00
Historical losses of bucket 1€5,000.00
Historical receivables of bucket 1€1,000,000.00
Balance of bucket 2 (Past due 1 to 30 days)€400,000.00
Historical losses of bucket 2€8,000.00
Historical receivables of bucket 2€400,000.00
Balance of bucket 3 (Past due 31 to 90 days)€150,000.00
Historical losses of bucket 3€12,000.00
Historical receivables of bucket 3€200,000.00
Balance of bucket 4 (Past due more than 90 days)€50,000.00
Historical losses of bucket 4€20,000.00
Historical receivables of bucket 4€50,000.00
Loss rate of bucket 3 adjusted for forward-looking information7%
Opening loss allowance on trade receivables€36,000.00
Receivable written off in 20X6 (customer Davane)€6,000.00
Opening 12-month loss allowance of loan X€12,000.00
Probability of default over the remaining life at origination (loan X)3%
Probability of default over the remaining life at the reporting date (loan X)9%
Loss of the central scenario€60,000.00
Probability of the central scenario55%
Loss of the downside scenario€150,000.00
Probability of the downside scenario30%
Loss of the severe scenario€400,000.00
Probability of the severe scenario15%
Gross carrying amount of loan Y€800,000.00
Loss allowance of loan Y€280,000.00
Effective interest rate of loan Y6%
Opening lifetime loss allowance (loan W)€90,000.00
Exposure at default (loan W)€1,000,000.00
12-month probability of default (loan W)2%
Loss given default (loan W)50%
Revenue forecast for 20X7€18,500,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort8

  • Group profile and case conventions

  • Trade receivables: ageing and loss history

  • Movements of the loss allowance on trade receivables

  • Loan X to Orsan Logistique: credit risk monitoring

  • Loan Y to Vantel Industrie: credit-impaired asset

  • Loan W to Karnel Services: credit improvement

  • Helvana sovereign bond (investment grade)

  • Revenue forecast for 20X7

Relevant to the treatment0

    No effect0

      Questions

      Work programme

      22 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.

      1. Task 1Analysis

        Which approach applies to the trade receivables and is a provision matrix acceptable?

      2. Task 2Calculation

        Compute the historical loss rate of each bucket.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the historical loss rate of each bucket.

        1. %
        2. %
        3. %
        4. %

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Historical loss rate of bucket 4

      3. Task 3Calculation

        Compute the loss allowance of each bucket with the rates retained.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the loss allowance of each bucket with the rates retained.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Loss allowance of bucket 4

      4. Task 4Calculation

        Compute the total loss allowance of the matrix.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the total loss allowance of the matrix.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Analysis

        Has loan X suffered a significant increase in credit risk? Retain the stage and justify.

      6. Task 6Calculation

        Compute the scenario-weighted expected credit loss of loan X.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the scenario-weighted expected credit loss of loan X.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Calculation

        Compute the impairment charge of the year for the trade receivables and for loan X.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the impairment charge of the year for the trade receivables and for loan X.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Impairment charge on loan X

      8. Task 8Calculation

        Reconcile the loss allowance on the trade receivables (opening, charge, write-offs, closing).

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Reconcile the loss allowance on the trade receivables (opening, charge, write-offs, closing).

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      9. Task 9Analysis

        Is loan Y credit-impaired? What is the basis of its interest?

      10. Task 10Calculation

        Compute the net amortised cost of loan Y.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the net amortised cost of loan Y.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      11. Task 11Calculation

        Compute the 20X6 interest of loan Y.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the 20X6 interest of loan Y.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      12. Task 12Analysis

        Should loan W return to a 12-month measurement?

      13. Task 13Calculation

        Compute the 12-month expected loss of loan W (exposure × probability of default × loss given default).

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the 12-month expected loss of loan W (exposure × probability of default × loss given default).

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: 12-month expected loss of loan W

      14. Task 14Analysis

        Compute the amount of the reversal of the loss allowance of loan W.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the amount of the reversal of the loss allowance of loan W.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      15. Task 15Analysis

        Can the Helvana bond be measured at 12 months solely because it is investment grade?

      16. Task 16Journal entries

        Record the charge of the year for the trade receivables.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      17. Task 17Journal entries

        Record the write-off of the Davane receivable.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      18. Task 18Journal entries

        Record the charge for loan X.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      19. Task 19Journal entries

        Record the interest of loan Y.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      20. Task 20Journal entries

        Record the reversal of the loss allowance of loan W.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      21. Task 21Effects on the financial statements

        What is the cumulative effect of the five entries on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      22. Task 22Conclusion

        Write the conclusion.

      Workspace

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 25).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IFRS 9 §5.5.3
      • IFRS 9 §5.5.5
      • IFRS 9
      • IFRS 9 §5.5.9
      • IFRS 9 §5.5.11
      • IFRS 9 §5.4.1
      • IFRS 9 §5.5.15
      • IFRS 9 §B5.4.7
      • IFRS 9 §B5.5.37