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Chapter 11

5.3 Simplifications

An entity can assume that there has not been a significant increase in the credit risk
of a financial asset if, at the reporting date, the level of credit risk is low.

In relation to trade receivables, an entity is allowed to choose to create an allowance
equal to lifetime expected credit losses.

5.4 Measuring expected losses

An entity’s estimate of expected credit losses must be:

 unbiased and probability weighted

 reflective of the time value of money

 based on information about past events, current conditions and forecasts of
future economic conditions.

If an asset is credit impaired at the reporting date, then the expected credit losses
should be measured as the difference between the asset’s gross carrying amount
and the present value of the estimated future cash flows when discounted at the
original effective rate of interest.

Illustrations and further practice

Now try TYU question 11 from Chapter 11.

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