Assessment of receivables value from the debtors under current assets
Trade receivables are financial assets falling under 'loans and receivables' in IAS 39 and FRS 26. According to these standards, loans and receivables are measured at amortised cost using the effective interest rate method. Initially, they will be carried at fair value at the time of recognition, which in the case of trade receivables/debtors will be the invoiced amount.
The effective interest rate method spreads the interest income or expense over the life of the financial asset or liability. Obviously, such a method does not seem to be relevant to trade receivables/debtors where normally there is no interest payment to spread. FRS 26 and IAS 39 therefore allow short-term receivables/debtors with no stated interest rate to be measured at the original invoice amount, if the effect of discounting is immaterial. This would apply to trade receivables/debtors and therefore, they will still be carried at the invoice amount.
However, FRS 26 and IAS 39 state that an entity must assess at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets is impaired. If there is objective evidence that an impairment loss on the financial assets has been incurred, the loss must be recognised in profit or loss. Since trade receivables/debtors are financial assets, annual impairment assessments must be performed.
The amount of the loss is determined by looking at the carrying value of the trade receivable/debtor and comparing it with the present value of the estimated cash flows discounted at the effective interest rate. As previously outlined, trade receivables will not normally be discounted and will not normally have an effective interest rate.
IAS 39 and FRS 26 detail a quite specific methodology for calculating an impairment loss. The use of old provisioning matrices such as age analysis and general provisions may not produce the correct answer under IAS 39.
The implications are, for example, that if an entity applies a flat percentage of 50% of receivables in 90 days, and 100% of receivables/debtors in 120 or more days for example, in order to estimate the impairment loss, this will not comply with the requirements of IAS 39/FRS 26. This will only be acceptable if the formula can be shown to produce an estimate sufficiently close to the method specified in IAS 39/FRS 26 which requires an estimate of the cash which will actually be received.
Impairment of individually significant balances must be separately assessed and an allowance made when it is probable that the cash due will not be received in full.
Impairment of individually non-significant balances can be measured on a portfolio or group basis. Any receivables that are not thought to be impaired are included in the group assessment.
If information becomes available that identifies losses on a receivable in the group then it is removed and individually assessed.
Trade receivables/debtors fall into the category of loans and receivables under IAS 39/FRS 26. They will be valued at fair value initially - which will be the invoiced amount. Because they are short-term receivables they will not normally be subject to discounting, nor will they normally have an effective interest rate. They will have to be assessed for impairment at each balance sheet date, and will be impaired if the present value of the cash flows is less than the carrying amount.
The assessment can be on an individual or group basis.
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