IFRS 9’s “expected credit loss” model sounds forbidding. For most small and medium-sized companies, applying its simplified approach is easier than the name suggests — provided they know which rulebook they are following.
Every company that sells on credit carries a quiet liability: the near-certainty that some portion of what it is owed will never arrive. For decades, accountants waited for that bad news to harden into fact — a customer entering administration, an invoice long past due — before writing anything off. IFRS 9, the standard that governs financial instruments, takes a less forgiving view. It asks companies to look ahead rather than back, and to set money aside for losses they expect but have not yet suffered.
For the finance directors of large banks, that shift ushered in a forbidding apparatus of models and staged calculations. For the owner of a small or medium company, it need not. Buried in the standard is a concession — the simplified approach — designed for precisely the receivables that dominate a smaller company’s balance sheet. Understanding it is largely a matter of stripping away the jargon.
From incurred to expected
The change of philosophy is the part worth grasping. Under the old regime, a receivable sat on the books at its full value until there was concrete evidence it had gone sour. IFRS 9 replaced that reactive stance with the expected credit loss, or ECL: an upfront estimate of the slice of receivables a company is likely to lose, informed by its own history and its reading of the future, even while every customer is still paying on time. The reasoning is that a balance sheet ought to show debtors at what the company realistically expects to collect, not at the optimistic figure printed on the invoices.
A shortcut, not a loophole
Full IFRS 9 measures credit risk through a three-stage model that tracks how the likelihood of default on each balance shifts over time. It is a sensible discipline for a lender’s loan book and a needless burden for a company’s trade debtors. So the standard carves out a simplified approach for three familiar items: trade receivables, the money owed by customers for goods and services delivered; contract assets, revenue earned but not yet billed; and, at the company’s option, amounts due under leases it has granted.
The simplification is real. Rather than monitor each balance through the staged model, a company estimates from the outset the loss it might bear over the entire life of the receivable — the lifetime expected loss. Because most trade debts are settled within a matter of months, that lifetime is short and the exercise correspondingly light. One caveat deserves emphasis: for ordinary trade receivables the approach is not a matter of choice. It is mandatory.
Which rulebook?
Before any of this bites, a company must establish which standards it actually reports under — a question with particular force in Saudi Arabia. Accounting rules in the Kingdom are endorsed by the Saudi Organization for Chartered and Professional Accountants (SOCPA), and they come in two forms. Listed companies and other public-interest entities must apply full IFRS, the simplified approach included. Most private small and medium-sized enterprises may instead elect to use the separate IFRS for SMEs Standard, a lighter framework that SOCPA has permitted since 2018 and whose third edition has now been approved for use in the Kingdom, effective for periods beginning on or after January 1 2027, with early adoption allowed.
The distinction is more than administrative. The two rulebooks treat delinquent customers differently. The provision matrix described here belongs to full IFRS 9 and its forward-looking creed. The IFRS for SMEs Standard clings to an older, incurred-loss instinct: broadly, a company provides for a debt once there is evidence it has turned bad, rather than anticipating the loss in advance. A smaller company that reports under full IFRS — common where it belongs to a larger group or answers to banks and outside investors — will need the simplified approach. One that has opted for IFRS for SMEs will not.
Putting it to work
In practice, the method resolves into a single, intuitive tool: the provision matrix. A company gathers its receivables into groups that share credit characteristics — by sector, region or product line — and sorts each group by age, from those not yet due to those months overdue. It then examines its own record to see what proportion of each band it has historically failed to collect, adjusts those rates for present conditions and reasonable expectations of the future, and applies the result. Multiplying each band by its loss rate, and adding the totals, yields the allowance.
A worked example makes the mechanics plain. Riyadh Creative Co, a small company, holds SAR 1,000,000 of trade receivables at December 31 2025:
| Aging bucket | Balance (SAR) | Expected loss rate | Expected credit loss (SAR) |
|---|---|---|---|
| Not yet due | 600,000 | 0.5% | 3,000 |
| 1–30 days overdue | 200,000 | 1.5% | 3,000 |
| 31–60 days overdue | 120,000 | 4.0% | 4,800 |
| 61–90 days overdue | 50,000 | 10.0% | 5,000 |
| More than 90 days | 30,000 | 25.0% | 7,500 |
| Total | 1,000,000 | 23,300 |
The company’s allowance comes to SAR 23,300 — a shade over 2 per cent of the book. Note that even balances not yet due attract a provision: under the expected-loss model the figure is seldom nil, because there is always some chance that a paying customer stops.
Recording it is undramatic. The company debits an impairment charge of SAR 23,300 in the income statement and credits a loss allowance of the same amount, shown as a deduction from receivables, which then appear net at SAR 976,700. In later periods only the movement is booked: were next year’s calculation to demand an allowance of SAR 30,000, the company would charge a further SAR 6,700; were it to fall to SAR 18,000, it would release SAR 5,300 back to profit.
The judgment that matters
The arithmetic, as the example shows, is trivial. The substance lies in the estimates — and it is here that companies most often stumble. Treating balances that are merely current as risk-free is rarely defensible; leaning on historical write-off rates without regard to a deteriorating economy or a wobbling major customer defeats the purpose; and, most commonly, confusing the two Saudi frameworks leads a company to apply a model it is not on. The simplified approach asks little in the way of computation. What it demands is honesty about which customers will pay — and the discipline to price that judgment into the accounts before events force the question.
This article is general information and does not constitute accounting or professional advice. Expected credit loss estimates depend on a company’s specific circumstances; readers should consult their advisers before applying this guidance to their own financial statements. Prepared under IFRS as endorsed in Saudi Arabia (SOCPA).