How do you decide the allowance for doubtful debts or expected credit loss on trade receivables?
What the interviewer wants to hear
- Uses an ageing analysis of receivables
- Applies the simplified approach with a provision matrix under Ind AS 109 / IFRS 9
- Bases rates on historical loss rates adjusted for current and forward-looking information
- Makes specific provisions for known problem customers
- Reviews and documents assumptions each period
Model answer
I start with an ageing report of trade receivables, split into buckets like current, 1–30, 31–90, 91–180 and over 180 days. Under Ind AS 109 or IFRS 9, trade receivables usually use the simplified approach, so we provide for lifetime expected credit losses using a provision matrix. I calculate historical loss rates for each bucket from the past few years of write-offs, then adjust them for current conditions, for example a slowdown in a customer’s industry. Separately, I look at specific customers in dispute, under insolvency or with bounced cheques and provide for them individually. The total is compared with last period and the movement goes to profit and loss. Finally, I document the method and assumptions so the auditors can follow them, and I write off balances only when recovery is no longer reasonably expected.
Can you answer it under time pressure?
Take a timed medium round and get scored on every answer.
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