The Salamander Company has evaluated its receivables, and has identified the fol

Question

The Salamander Company has evaluated its receivables, and has identified the following possible impairments:

Note #1 has recently deteriorated in credit quality. For Note #1, Salamander estimates the present value of credit losses occurring in the next twelve months is $50,000, and the present value of credit losses occurring after twelve months is $20,000.

Note #2 has not deteriorated in credit quality. For Note #2, Salamander estimates the present value of credit losses occurring in the next twelve months is $5,000, and the present value of credit losses occurring after twelve months is $10,000.

If Salamander is reporting under IFRS and therefore uses the ECL model, it would recognize an impairment loss of:

$50,000 $55,000 $75,000 $85,000

Explanation / Answer

In case the credit quality of financial asset has not detoriated, ECL is calculated only for credit losses occurring within twelve months.

However, in case the credit quality of financial asset has detoriated, ECL is calculated for all possible default events over the expected life of an instrument.

So, imairment loss (ECL) will be as follows:

For Note #1 = 50,000+20,000 = 70,000

Note #2 = 5,000

Total ECL = 75,000

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