Provision matrix mistakes auditors find

What provision matrix mistakes do auditors find?

A 0% loss rate on current receivables

IFRS 9 requires lifetime expected losses on all receivables, including those not yet due. Unless the company has never lost money on an invoice that was current at a period end, a 0% rate is wrong. It usually arises because write-offs were attributed to the bucket the invoice was in when written off, always the oldest, instead of the bucket it started in. Tracing write-offs back to their original bucket fixes it; see historical loss rates.

No forward-looking adjustment

Loss rates copied from historical data without considering the outlook do not meet IFRS 9. Auditors compare the matrix with the company's own budgets, going concern assessment and economic forecasts; if those show a weakening economy but the matrix does not, expect a finding. See forward-looking adjustments.

Incomplete or wrong data

• Write-offs taken from the ledger without checking that they are credit losses.
• Ageing based on invoice date rather than due date, so customers on 60-day terms look overdue.
• Recent periods included before their outcomes are known, understating loss rates.
• Historical data that no longer reflects the business, such as a period before a major change in credit policy.

Credit notes and disputes treated as credit losses

Returns, pricing disputes, rebates and volume discounts reduce receivables but are not credit losses. Including them in write-offs overstates loss rates and mixes revenue matters into ECL. They belong in revenue, often as variable consideration under IFRS 15.

One matrix for very different customers

A single matrix for, say, government bodies and small private customers gives rates that fit neither, and becomes more wrong as the mix shifts. See segmenting receivables.

Specific provisions double counted

When a specific customer is provided for individually, its balance must be removed from the matrix population; otherwise it carries both a specific provision and a matrix rate. A reconciliation from the ledger to the matrix, showing what has been excluded and why, prevents this.

An example of the current bucket fix

A company wrote off 50,000 of receivables last year. Its old matrix attributed all of it to the over 90 days bucket, because that is where each invoice was when written off, and so gave a 0% loss rate for current balances. Tracing each write-off back shows that 4,000 came from invoices that were current at an earlier quarter end. With 3,200,000 of current balances across the quarters reviewed, the corrected current loss rate is 0.125%, which on today's 900,000 of current receivables adds 1,125 to the allowance.

How can companies prepare for the audit?

Keep a short methodology note explaining the buckets, segments, period and forward-looking adjustment; a reconciliation from the receivables ledger to the matrix; the data used to calculate loss rates, with the write-off trace; and evidence for the forecast used. Auditors can then test the matrix rather than reconstruct it; see how auditors test ECL.

Other findings

• Contract assets and unbilled revenue left out of the matrix, although they carry credit risk too; see ECL on contract assets.
• Balances with related parties included at trade rates when they need separate assessment.
• No documentation of why the method, the historical period and the segments were chosen.

See also the IFRS 9 provision matrix.

This guide is general information. It is not tax or legal advice for your situation.