Which impairment model applies?
Ind AS 109 uses a forward-looking model for covered assets and exposures. Start by identifying the instrument and scope: examples include amortised-cost financial assets, qualifying debt assets measured at fair value through other comprehensive income, lease receivables, contract assets, and specified commitments and guarantees. The measurement and presentation differ by instrument. For periods under another reporting framework, apply that framework’s requirements rather than assuming a single incurred-loss rule for all balances.
| Exposure | Ind AS 109 approach |
|---|---|
| Trade receivables and contract assets from Ind AS 115 without a significant financing component, including where the practical expedient applies | Lifetime ECL is required under paragraph 5.5.15(a)(i). |
| Trade receivables and contract assets with a significant financing component | Lifetime ECL can be elected as an accounting policy; otherwise use the general approach. The election may be made separately for trade receivables and contract assets. |
| Lease receivables under Ind AS 116 | Lifetime ECL can be elected; otherwise use the general approach. The election may be applied separately to finance and operating lease receivables. |
| Ordinary amortised-cost loans and inter-corporate deposits | General approach, subject to the special treatment for purchased or originated credit-impaired assets. |
| Financial guarantees within the scope of paragraph 4.2.1(c) | After initial recognition, measure at the higher of the loss allowance and the amount initially recognised less cumulative income recognised under Ind AS 115 principles, when appropriate. |
General model: separate risk, horizon and interest
| Common staging label | Loss allowance | Interest for ordinary amortised-cost assets |
|---|---|---|
| Stage 1: no significant increase in credit risk since initial recognition | 12-month ECL: lifetime cash shortfalls from defaults possible in the next 12 months, or shorter expected life | Effective interest rate on gross carrying amount |
| Stage 2: significant increase in credit risk (SICR), but not credit-impaired | Lifetime ECL | Effective interest rate on gross carrying amount |
| Stage 3: subsequently credit-impaired | Lifetime ECL | Effective interest rate on amortised cost in subsequent reporting periods under paragraph 5.4.1(b) |
Compare the risk of default over the expected life at reporting date with that at initial recognition. The standard permits a low-credit-risk assumption where its conditions are met; it is not a zero-loss exemption. More than 30 days past due is a rebuttable SICR presumption, not a mandatory waiting period. Default is presumed to occur no later than 90 days past due unless reasonable and supportable information justifies a later criterion; default and credit impairment are separate judgments. Use actual contractual due dates and qualitative indicators such as liquidity distress and concessions. For assets purchased or originated credit-impaired, apply the credit-adjusted effective interest rate and recognise cumulative changes in lifetime ECL since initial recognition, rather than using the ordinary staging example.
Measure shortfalls and document the inputs
Paragraph 5.5.17 requires an unbiased, probability-weighted amount, time value of money and reasonable and supportable information available without undue cost or effort. A PD × LGD × exposure calculation can implement these principles, but the formula alone is not prescribed. In a multi-period model, avoid double counting default probabilities and discounting. Exposure at default is the expected exposure when default occurs, with contractual cash flows and relevant drawings as applicable; it is not always today’s gross carrying amount. Loss given default reflects expected severity, including qualifying recovery cash flows. Use the discount rate prescribed for the instrument and avoid discounting the same loss twice.
A provision matrix is a practical expedient for appropriate populations. Segment balances with shared risk characteristics and select a representative loss history. Use consistently defined and non-overlapping ageing bands, including balances not yet due. Adjust historical loss rates for current and forecast conditions where supported. A default rate is not automatically a loss rate. Pool trade receivables and contract assets only where that grouping reflects shared risk and supports measurement; conditional rights and invoiced receivables need not have the same risk characteristics.
Six worked cases
1. Trade receivable provision matrix
At 31 March 2025 a manufacturer has ₹50 crore of short-term receivables, with no significant financing component. Assume four years of representative loss experience and supported additive forward-looking overlays. Exposure is in ₹ crore and allowance in ₹ lakh.
| Days past due | Gross | Historical loss | Overlay, percentage points | Adjusted loss | Allowance |
|---|---|---|---|---|---|
| Not due through 30 | 25 | 0.80% | +0.20 | 1.00% | 25 |
| 31–60 | 12 | 2.50% | +0.50 | 3.00% | 36 |
| 61–90 | 6 | 6.00% | +1.50 | 7.50% | 45 |
| 91–180 | 4 | 15.00% | +3.00 | 18.00% | 72 |
| 181–365 | 2 | 35.00% | +5.00 | 40.00% | 80 |
| Over 365 | 1 | 75.00% | +10.00 | 85.00% | 85 |
| Total | 50 | — | — | 6.86% blended | 343 |
The net balance is ₹46.57 crore. If opening allowance was ₹250 lakh and there were no other allowance movements, debit impairment and credit allowance by ₹93 lakh.
2. Corporate loan staging and interest
Assume a five-year loan of ₹10 crore originated on 1 April 2023 at a 10% effective interest rate. For simplicity, hold the illustrated gross carrying amount constant and assume the LGDs below already reflect any material discounting. At 31 March 2024, 12-month PD of 1.5% and LGD of 40% give ₹6 lakh ECL. At 31 March 2025, 45 days past due and a three-notch downgrade support SICR on these facts. A lifetime PD of 12% and LGD of 45% for the remaining life give ₹54 lakh, an increase of ₹48 lakh. A full year at the assumed gross interest base yields ₹1 crore in either of these stages.
At 31 March 2026, assume 120 days past due and insolvency evidence support a credit-impaired conclusion. Probability-weighted, discounted recoveries of ₹4 crore imply ₹6 crore allowance, or ₹5.46 crore more than the previous ₹54 lakh if there are no other movements. Net carrying amount is ₹4 crore. For the subsequent period, applying 10% to a constant ₹4 crore amortised-cost base would give ₹40 lakh for a full year, 60% less than ₹1 crore. A closing impairment assessment does not justify applying the closing net balance retrospectively to the whole year.
3. Forward-looking scenario weights
Assume a historical loss rate of 3.00% and a supported loss-rate adjustment of 0.50 percentage points for each one-percentage-point decline in GDP growth relative to the 6.5% baseline. This illustration treats the modeled rates as loss rates; a model predicting only defaults needs a separate severity assessment.
| Scenario | Weight | GDP growth | Loss rate | Weighted contribution |
|---|---|---|---|---|
| Base | 50% | 6.5% | 3.00% | 1.50% |
| Upside | 20% | 7.5% | 2.50% | 0.50% |
| Downside | 30% | 4.5% | 4.00% | 1.20% |
| Total | 100% | — | — | 3.20% |
Document the data, sensitivity, and whether rates and weights reflect the current portfolio. The calculation does not validate the model assumptions by itself.
4. Inter-corporate deposit and a promoter guarantee
A ₹5 crore deposit carrying 11% contractual interest is 60 days past due amid debtor liquidity distress. Assume SICR is established, there is no evidence of credit impairment and the guarantee is enforceable, part of the contractual terms and not separately recognised. If the supported lifetime PD is 20% and the discounted loss severity after guarantor recoveries is 50%, ECL is ₹50 lakh on the stated ₹5 crore exposure. Validate ranking, costs, timing and guarantor capacity. A nominal guarantee does not make the exposure risk-free.
5. Allowance, write-off and a separate tax test
A ₹75 lakh receivable is in liquidation in October 2024. If expected distribution is 10% and timing is immaterial, expected recovery is ₹7.50 lakh and the illustrative allowance is ₹67.50 lakh. By March 2025 new evidence establishes no reasonable recovery expectation. Recognise the remaining ₹7.50 lakh impairment once and write off ₹75 lakh by debiting the allowance and crediting the gross receivable. Gross and allowance then close at nil. The write-off does not necessarily extinguish legal rights or enforcement activity.
For FY 2024–25, an ordinary trade debt allowance alone does not satisfy section 36(1)(vii) of the 1961 Act. Test the actual write-off, section 36(2), including prior income recognition or the applicable money-lending condition, and any other restrictions before claiming a deduction. A deferred tax asset is assessed separately under Ind AS 12 and is not automatic; consider the tax basis and probable taxable profit.
6. A finance lease receivable
A five-year equipment lease starts on 1 April 2024 with a 9% implicit rate. Assume the lessor has elected lifetime ECL for its finance lease receivables, the pre-allowance net investment at the measurement date is ₹2 crore, and the default scenario yields ₹1.60 crore of supported net recoveries already on the appropriate measurement basis. The shortfall is ₹40 lakh, or 20% of exposure. With a 4% lifetime PD and no shortfall in the no-default outcome, ECL is ₹1,60,000. Check repossession and disposal costs, timing, residual value assumptions and any other contractual recoveries; do not add a recovery already reflected in the cash flows.
Practical FAQs and documentation
Can an allowance be nil?
A strong rating or government counterparty does not create an exemption. Evaluate the probability of loss and of no loss even when loss is unlikely. Document the estimate and applicable materiality rather than forcing an arbitrary floor or automatically recording zero.
Can short-term balances ignore time value?
Assess materiality rather than relying on a blanket one-year exemption. Where a material effect exists, reflect it using the applicable effective interest rate or permitted approximation; lease receivables have specific guidance. For extended or modified balances, analyse modification, timing and the appropriate discount basis.
Does customary late payment rebut SICR?
Measure days past due from enforceable terms. Rebut the presumption only with reasonable and supportable evidence. Consider other information that points to SICR before any days-past-due threshold.
How do issued financial guarantees differ from collateral in a receivable model?
Assess scope and the guarantee’s own measurement under paragraphs 4.2.1(c) and 5.5. Collateral or an integral guarantee that is not recognised separately may affect cash flows for a receivable’s loss estimate; this is a different calculation.
Do later collections automatically change year-end ECL?
Under Ind AS 10 consider whether they evidence conditions existing at reporting date. Exclude changes that arose only later from measurement at that date and consider applicable disclosure.
Can the lifetime ECL election be changed at will?
No. Apply the election consistently to its applicable class; test any policy change under Ind AS 8. Keep the model version, portfolio segmentation, current inputs, scenario evidence, ECL and gross ledger movements, and management approvals. Under Ind AS 107, reconcile loss allowances by the relevant measurement categories and provide applicable risk, exposure and enforcement disclosures. Explain how the provision matrix was used where relevant.