ECLs are measured at an unbiased, probability-weighted amount, using reasonable and supportable information that is available without undue cost or effort at the reporting date. This includes information about past events, current conditions and forecasts of future economic conditions. Because of the short-term nature of trade receivables, many companies may not have needed to consider updating ECL estimates for changes in future economic conditions relative to historic experience. However, in some cases the impact of economic and/or geopolitical uncertainty may be immediate and may significantly alter the historical collection patterns for some segments of trade receivables. Companies may need to reassess the impact of external events on future economic conditions and consider a longer time horizon – e.g. when payment dates are deferred for a significant period. [IFRS 9.5.5.17]
IFRS 9 allows the use of practical expedients when measuring ECLs under the simplified approach – e.g. using a provision matrix. A company that applies a provision matrix may be applying segmentation to capture the significantly different historical credit loss experience for different customer segments. However, the segmentation has to be kept under review to reflect the different ways in which economic uncertainties affect different types of customers.
Provision matrices are based on historical loss experience but need to be adjusted to reflect information about current conditions and reasonable and supportable forecasts of future economic conditions. Certain economic uncertainties may lead to a significantly different loss rate for trade receivables compared with prior periods. Companies will need to consider how the timing and amount of cash flows generated by outstanding trade receivables might be affected and amend loss rates as necessary.
Companies that have credit insurance for their trade receivables need to consider how this affects the measurement of ECLs and ensure that measurement is consistent with updated loss estimates and any limitations on coverage. The accounting will depend on whether the insurance is considered to be a financial guarantee integral to the contractual terms of the trade receivable. If the guarantee is integral, then it will be included in the measurement of ECLs on the trade receivable. If it is not, then separate accounting considerations will apply depending on whether the loss event has occurred. Companies may also have to consider whether the insurance they hold covers losses arising from external events, such as the war in Ukraine. If there are contractual exclusions, some losses may not be covered. [Insights 7.1.132, 139–140]
Discount rate
Trade receivables without a significant financing component are measured on initial recognition at the transaction price determined under IFRS 15 Revenue from Contracts with Customers, and do not have a contractual interest rate. This implies that the effective interest rate for these receivables is zero. Accordingly, discounting of cash shortfalls to reflect the time value of money when measuring ECLs is generally not required.
However, if a trade receivable becomes overdue and is then modified to effectively incorporate a significant financing component, then further analysis and judgement may be required, because using an effective interest rate of zero may no longer be appropriate. Certain economic uncertainties may lead to more renegotiations of trade receivables or changes to the effective terms of the receivables. For example this may be the case for receivables impacted by the legal prohibition for Russian businesses to make payments in currencies other than Russian roubles. [Insights 7.8.400.30]
The objective of IAS 24 is to ensure that an entity's financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances with such parties.
Who are related parties?
A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to as the 'reporting entity') [IAS 24.9].
- (a) A person or a close member of that person's family is related to a reporting entity if that person:
- (i) has control or joint control over the reporting entity;
- (ii) has significant influence over the reporting entity; or
- (iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
- (b) An entity is related to a reporting entity if any of the following conditions applies:
- (i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
- (ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
- (iii) Both entities are joint ventures of the same third party.
- (iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
- (v) The entity is a post-employment defined benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.
- (vi) The entity is controlled or jointly controlled by a person identified in (a).
- (vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
- (viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity*.
* Requirement added by Annual Improvements to IFRSs 2010–2012 Cycle, effective for annual periods beginning on or after 1 July 2014.
The following are deemed not to be related: [IAS 24.11]
- two entities simply because they have a director or key manager in common
- two venturers who share joint control over a joint venture
- providers of finance, trade unions, public utilities, and departments and agencies of a government that does not control, jointly control or significantly influence the reporting entity, simply by virtue of their normal dealings with an entity (even though they may affect the freedom of action of an entity or participate in its decision-making process)
- a single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a significant volume of business merely by virtue of the resulting economic dependence
What are related party transactions?
A related party transaction is a transfer of resources, services, or obligations between related parties, regardless of whether a price is charged. [IAS 24.9]
Disclosure
Relationships between parents and subsidiaries. Regardless of whether there have been transactions between a parent and a subsidiary, an entity must disclose the name of its parent and, if different, the ultimate controlling party. If neither the entity's parent nor the ultimate controlling party produces financial statements available for public use, the name of the next most senior parent that does so must also be disclosed. [IAS 24.16]
Management compensation. Disclose key management personnel compensation in total and for each of the following categories: [IAS 24.17]
- short-term employee benefits
- post-employment benefits
- other long-term benefits
- termination benefits
- share-based payment benefits
Key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including any directors (whether executive or otherwise) of the entity. [IAS 24.9]
If an entity obtains key management personnel services from a management entity, the entity is not required to disclose the compensation paid or payable by the management entity to the management entity’s employees or directors. Instead the entity discloses the amounts incurred by the entity for the provision of key management personnel services that are provided by the separate management entity*. [IAS 24.17A, 18A]
* These requirements were introduced by Annual Improvements to IFRSs 2010–2012 Cycle, effective for annual periods beginning on or after 1 July 2014.
Related party transactions. If there have been transactions between related parties, disclose the nature of the related party relationship as well as information about the transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements. These disclosure would be made separately for each category of related parties and would include: [IAS 24.18-19]
- the amount of the transactions
- the amount of outstanding balances, including terms and conditions and guarantees
- provisions for doubtful debts related to the amount of outstanding balances
- expense recognised during the period in respect of bad or doubtful debts due from related parties
- purchases or sales of goods
- purchases or sales of property and other assets
- rendering or receiving of services
- leases
- transfers of research and development
- transfers under licence agreements
- transfers under finance arrangements (including loans and equity contributions in cash or in kind)
- provision of guarantees or collateral
- commitments to do something if a particular event occurs or does not occur in the future, including executory contracts (recognised and unrecognised)
- settlement of liabilities on behalf of the entity or by the entity on behalf of another party
A statement that related party transactions were made on terms equivalent to those that prevail in arm's length transactions should be made only if such terms can be substantiated. [IAS 24.21]