Change ahead
Trade credit risk accounting in the
new world of IFRS9From January 2018, companies reporting under the International Financial Reporting Standards (IFRS) will be required
to upgrade their current credit risk provisioning processes tocomply with the requirements of the new ‘expected credit loss
impairment principles’.

2018
IFRS9

What will this mean for your business? Where will special attention be needed in order to comply with this new requirement?
In this brief factsheet you can find a simple explanation of thenew standard, as well as main challenges particularly faced by
non-financial corporates.

1What will change?
Stimulated by the recent global
financial crisis, the International
Accounting Standards Board (IASB)
has introduced the Expected Credit
Loss (ECL) principle as a part of thenew IFRS9 Financial Instruments
standard with the ambition ofincreasing the accuracy andtransparency of how credit risk ismanaged by businesses.

Who is affected?
The new standard will apply to awide range of entities, as its scope
is not industry specific. To complywith the new standard entities will
be required to collect and collatecredit information, which for manybusinesses, is likely to result in theneed to significantly modify current
credit information systems andprocesses.

Apart from the direct impact on how
businesses calculate provisions, thestandard also increases the disclosure
requirements that companies will haveto include in their financial statementsin the future. The concept of expectedcredit loss will also be introduced in
the Financial Accounting Standards
Board’s (FASB) new US GAAP
standard; commonly referred to as theCurrent Expected Credit Loss model(CECL), which will come into effect in
the coming years.

The requirements will be particularly
challenging for financial institutions
to apply. Financial institutions arecomplex and have a high exposure
to credit risk. As a result, IFRS9 canhave a major impact on their capital.
Accordingly, much of the reported
commentary on IFRS9 is heavily
focused on the financial industry.
However, non-financial companies
will also need to prepare to comply
with the new regulation and, forcorporations with large portfoliosof trade receivables and credit risk
provisions the changes to systems
and processes will be considerable,
although the financial impact on this
sector is not expected to be as high.

Both standards will demand a more
dynamic approach to credit risk management and it is expected that thenew practices will require companies
to modify not only accounting policies
but also credit management systems.

2

In this paper, we focus especially on
the implications of the new standards
for non-financial corporations,particularly in the area of tradereceivables.

Where is the challenge?
Compared to the current provisioning
regime, the main changes relevant for
non-financial corporations include:
77 The measurement of provisions
under IFRS9 (CECL) should reflect
a probability-weighted estimateof the Expected Credit Losses(ECL). Instead of the current
practice where companies makevery limited provisions, or noprovisions at all, for receivables
that are not yet overdue (i.e. there
is no evidence of an incurredloss), companies will in the futureneed to recognize expected credit
losses in their financial statementson all of their receivables. The
new regulation puts emphasis
on evaluating information about
the creditworthiness of buyers
when making ECL calculations.
The estimation of the ECL shouldbe ‘forward looking’, taking into
account both the current andforecasted information and not
rely solely on historical data as iscurrently the norm.
77 ECL estimates must be updated ateach reporting date to assimilate
new information and to include anychanges in expectations.
Whereas banks and other financialorganisations may be more familiar
with the concepts above, for some
non-financial corporations therequirements are new and present anadditional challenge.

Do you believe that non-financial corporates can by carefulconsiderations and assessment of available alternative
methodologies influence the impact of IFRS 9 Impairment /CECL on their Balance Sheet and P&L?

4%
No42 %
Yes, and to asignificant extent

Source:IFRS9 survey results,
PRMIA

35%
Yes, but only
to a limited extent

39 %Yes, and to a large extent

However, there is one main challengethat banks and non-financial
corporations have in common. Since
the regulation is ‘principle based’
it doesn’t provide clear definitions
and processes to follow in order
to be compliant. This leads tovarious possible interpretations ofthe principles, multiple alternative
methodological choices and a numberof decisions to be made.
With the expected financial impact
and volatility that comes with the newstandards, each of the alternatives
can have financial consequences
and therefore should be assessedand considered carefully. According
to a recent survey more than 60%of the participants believe that thefinancial impact of IFRS9 (CECL) canbe influenced significantly or to a large
extent by considering and assessing
alternative methodologies.
A further consideration is that

because IFRS9 (CECL) estimates fallunder the scope of the statutory
audit, such interpretations andmethodological choices will have to bebacked up by robust documentation.
All in all, in order to become IFRS9(CECL) compliant non-financial
corporations will have to deal with anumber of challenges, with the key
areas being credit information, ECL
calculations, methodological choices
and last but not least, potential
financial implications.

How can Atradius help?
By leveraging the global credit risk
management services and expertiseof Atradius, non-financial corporations
can limit their exposure to credit risk
and therefore decrease the amount ofprovisions (ECL). Credit insurance cansignificantly reduce expected credit
losses in the receivables portfolio
because non-performance of a buyer
is covered by Atradius. Moreover,the debt collections services offeredworldwide significantly increase theefficiency of debt recoveries fromproblematic customers. With local
presence and knowledge of themarkets across the world, Atradius isclose to its customers as well as theirbuyers to provide the best solutions
tailored to local needs.
These solutions will result in a major
decrease in the ECL and can have apositive impact on P&L volatility.
Moreover, high-quality credit risk
information on millions of companies
globally offered by Atradius to its
existing credit insurance customers
can contribute to streamlining ECL
calculation, reducing investments
in creating expensive and complex
processes internally and can provide
an alternative / benchmark to internal
estimates, increasing the robustnessof the ECL methodology.
In the next paper we will further
explore the added value of Atradiusin IFRS9 (CECL) implementation
programs of corporations around theworld.
As a specialist in tailor-made solutions
Atradius can prepare a tailored offer
to best fit your needs and challenges.
Contact us and find out how Atradius
can help your business.

It is in no way easy to handle these
new sets of requirements solely by
relying on internal information andprocesses. External solutions areavailable to support non-financial
corporations in gaining relevant
insight into the quality of the buyer
portfolio, adjusting internal models
and limiting the negative impact on
the balance sheet.
3Disclaimer
This report is provided for information purposes only and is
not intended as a recommendation or advice as to particulartransactions, investments or strategies in any way to any
reader. Readers must make their own independent decisions,commercial or otherwise, regarding the information
provided. While we have made every attempt to ensure thatthe information contained in this report has been obtained
from reliable sources, Atradius is not responsible for any
errors or omissions, or for the results obtained from the useof this information. All information in this report is provided’as is’, with no guarantee of completeness, accuracy,
timeliness or of the results obtained from its use, andwithout warranty of any kind, express or implied. In no event
will Atradius, its related partnerships or corporations, or thepartners, agents or employees thereof, be liable to you oranyone else for any decision made or action taken in relianceon the information in this report or for any consequential,
special or similar damages, even if advised of the possibilityof such damages.

atradius_factsheet_ifrs9_20171030_01

Copyright Atradius N.V. 2017

Connect with Atradius

atradius

Contact us
Atradius.com@atradius

atradiusgroup

Atradius
www.atradius.com