27 August 2021
Please explain the accouting treatment of bad debts recovered under expected credit loss method as per Ind AS 109 and the presentation & disclosures in the financials with appropriate references. Thank You Kiran
09 July 2024
Under Ind AS 109, “Financial Instruments,” the accounting treatment of bad debts recovered under the expected credit loss (ECL) model involves several steps and considerations:
Accounting Treatment of Bad Debts Recovered
1. Recognition of Bad Debt Recovery: • When a previously recognized impairment loss is recovered, the recovery is recognized as income in the statement of profit and loss. • This recovery is recognized to the extent of the amount that was previously written off. If additional amounts are recovered beyond the previously impaired amount, they are recognized as a separate item in profit or loss. 2. Measurement: • Bad debts recovered are generally recognized at the amount recovered, which may be different from the amount originally written off. • The amount of recovery is adjusted against the carrying amount of the financial asset (if the recovery is from a financial asset). 3. Adjustment to ECL Calculation: • The recovery of a bad debt may impact the calculation of ECL in subsequent periods. The recovered amount may indicate a lower probability of default or a change in credit risk assessment, affecting the estimation of ECL for similar assets.
Presentation in Financial Statements
1. Statement of Profit and Loss: • Bad debts recovered are typically presented as a separate line item under “Other Income” in the statement of profit and loss. • If the recovery relates to a financial asset, the net impact on impairment losses and provisions is disclosed separately to provide clarity on the effect of recoveries. 2. Balance Sheet: • The impact of bad debts recovered may be reflected in the balance sheet, particularly in the reduction of provisions for bad debts or impairment losses. • If the recovery relates to a financial asset, the carrying amount of the asset is adjusted accordingly.
Disclosures
Under Ind AS 109, disclosures are crucial to provide transparency and understanding of the financial impact of bad debts and their recoveries. The following disclosures are typically required:
1. Nature and Extent of Credit Risk: • Disclosure of the entity’s policies for recognizing and measuring ECL, including how recoveries are treated under these policies. 2. Significant Judgments and Estimations: • Disclosure of significant judgments and estimations applied in determining ECL, including the factors considered in assessing the collectability of financial assets. 3. Impairment Provision Reconciliation: • Reconciliation of changes in impairment provisions, including the impact of recoveries, write-offs, and adjustments to ECL. 4. Financial Asset Categories: • Disclosure of how recoveries are accounted for based on the categories of financial assets (e.g., loans and receivables, financial assets measured at amortized cost, fair value through profit or loss). 5. Effect on Financial Performance: • Explanation of how bad debts recovered affect the entity’s financial performance and the implications for future credit risk management.
References
• Ind AS 109: The detailed requirements for financial instruments are outlined in Ind AS 109, which specifies the recognition, measurement, and disclosure principles for financial assets and liabilities. • Financial Statements Presentation: Presentation of financial statements should comply with Ind AS 1, “Presentation of Financial Statements,” which provides guidelines on the structure and content of financial statements, including income statements and balance sheets.
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