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What’s the logic behind ‘trade receivables & contract assets’ not having financing component requiring impairment always using lifetime expected credit loss whereas if there’s a financing component there’s option?
What do you mean exactly? I don’t quite follow your point, sorry.
IFRS 9 suggests that when the financial asset in question is a receivable or contract asset (and)
There is no significant financing component,
The credit losses need not be assessed for under normal 12 month/lifetime expected/actual but there can be a simplification and the losses can always be calculated as ‘lifetime expected losses’
But if there’s significant financing component,
Then regular test to see where it fits in..
What’s the logic behind the simplification only with regards to when there’s no significant financing component
If there is a financing component then the market rates if interest can change and so the value of the receivable/contract asset may change as the rates change so therefore we adopt the normal model to see how it changes each year. If there is no financing component then the interest rate doesn’t have an impact of the value of the receivable and so the simplified option exists.
As a practical example, think about a company’s trade receivable and having to look at each stage for each of the receivables. It just wouldn’t be practical and so the method is simplified.