# Rebuilding an expected credit loss model for a listed IT services company with US$855 million in receivables Case study · Financial Reporting A listed Saudi Arabian IT services company kept running into auditor challenge over its credit loss provision. A rebuilt IFRS 9 model resolved every query in the reporting period. US$855mn Gross trade receivables covered by the model 0 Auditor queries on the model left open at sign-off 3 Methods combined: time value, flow rates, calculated LGD ## The situation The company is listed on the Saudi Exchange and serves government and large corporate clients on extended payment terms. Its receivables book was large relative to revenue, and its expected credit loss provision had turned into a recurring argument with the statutory auditor. Each reporting cycle ended in debate rather than documentation. ## The challenge - Loss rates taken from historical data alone, with no forward-looking information or link to economic conditions - Loss given default hard-coded at 100 percent, with no calculation or support behind it - No allowance for the time value of money, despite long collection cycles on government receivables - Too little documentation to show the judgements built into the model ## What we did We started with a technical gap assessment of the existing model against each relevant requirement of IFRS 9, and agreed the findings with management before redesigning anything. The rebuild answered the concerns the auditor had raised. The replacement combined three elements. Flow-rate analysis on ageing cohorts produced probability-weighted loss rates. Loss given default was calculated from actual recovery experience in each customer segment. Discounting captured the time value of money over realistic collection periods. On top of these sat a forward-looking layer that linked named economic indicators to the direction and size of any adjustment. Segments followed the way credit risk actually differed across the book, with government and public sector exposure kept apart from corporate customers. The model was calibrated to the economics of the portfolio rather than to a target figure, and a methodology paper recorded each judgement, the reasoning behind it, and what would trigger a review. ## The impact - Full compliance with IFRS 9 across every part of the model - Every credit loss query from the auditor resolved for the reporting period - A documented methodology the finance team now runs and updates itself - More confidence from the audit committee in the provisioning judgement Client details are anonymised, and some facts are generalised to protect confidentiality. **Industry** [Technology](https://soniassociates.in/industry-technology) **Capability** [Financial Reporting & Technical Accounting](https://soniassociates.in/service-financial-reporting) **Geography** Kingdom of Saudi Arabia **Duration** Three months **Standards and frameworks** IFRS 9 · Simplified approach · Forward-looking information ## More client impact [All client impact](https://soniassociates.in/case-studies) Energy & Infrastructure · Financial Reporting ### [Converting a six-SPV renewable energy platform to IFRS-converged Ind AS, entity by entity and on consolidation](https://soniassociates.in/case-ind-as-conversion-renewable-platform) 6 SPVs converted to Ind AS at the same time Diversified group · Financial Reporting ### [Consolidating a thirteen-entity group through a mid-year sale of a majority stake](https://soniassociates.in/case-consolidation-thirteen-entity-group) 13 Entities consolidated, including subsidiaries and associates Consumer & Retail · Finance Transformation ### [Removing recurring cash shortages across a highway fuel retail network](https://soniassociates.in/case-fuel-retail-finance-transformation) ~99% Reduction in recurring cash shortages by the third iteration ## Facing a comparable situation Describe it in a few lines. We will say whether we are the right firm to help. [Contact us](https://soniassociates.in/contact?topic=financial-reporting) [LinkedIn](https://www.linkedin.com/in/in-aditya/) --- Soni Aditya & Associates, Chartered Accountants. Office No 502, Unit 507, 5th Floor, 45 Baner Street, Baner, Pune, Maharashtra 411045, India. aditya@soniassociates.in · +91 93400 75288 · https://soniassociates.in/contact This website is published for general information, in keeping with the guidelines of the Institute of Chartered Accountants of India on members’ websites. It does not advertise or solicit work, and nothing on it is professional advice. Publications reflect the law and standards at the date they were written, so please take advice on your own facts before acting. Client engagements described here are anonymised. Site index for agents: https://soniassociates.in/llms.txt Canonical page: https://soniassociates.in/case-ecl-model-listed-it-services