IFRS 9 para 5.5.15 simplified approach for trade receivables and contract assets, disclosures for receivables and contract assets and liabilities

SimCorp A/S – Annual report – 31 December 2018

Industry: computer software
SECTION 1 (extract)
BASIS OF PREPARATION (extract)
New financial reporting standards (extract)
The annual report for 2018 is presented in conformity with the new and revised IFRS/IAS standards and new IFRIC interpretations endorsed by the EU, which apply to financial years beginning on January 1, 2018.

The accounting policies have been applied consistently during the financial year and for the comparative figures. For standards implemented prospectively the comparative figures are not restated. In 2017, the Group early adopted IFRS 15, opting for the modified retrospective application method with the cumulative effect on equity of initially applying IFRS 15 recognized at the date of initial application of January 1, 2017.

The Group has adopted all requirements of IFRS 9 Financial Instruments as of January 1, 2018. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 utilizes a revised model for recognition and measurement of financial instruments and a single, forward-looking expected credit loss (ECL) impairment model, rather than incurred losses.

For financial assets that do not have a significant financing component, e.g. trade receivables, a simplified approach is permitted. For trade receivables, the loss is measured on initial recognition and throughout the lifetime of the receivable at an amount equal to lifetime expected credit loss.

In addition, although contract assets are excluded from the scope of IFRS 9, they are within the scope of its impairment requirements. The loss is measured on initial recognition and throughout the lifetime of the asset at an amount equal to lifetime expected credit loss.

Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward in IFRS 9, so the Group’s accounting policy with respect to financial liabilities is unchanged.

As a result of the adoption of IFRS 9, management has changed its accounting policy for financial assets retrospectively, for assets that were recognized at the date of application. The change did not materially impact the carrying value of any financial assets on transition date.

Under IFRS 9, financial assets are classified according to their cash flow characteristics and the business model in which they are managed. The Group has categorized its financial assets to financial assets measured at amortized cost, at fair value through the statement of income and at fair value through other comprehensive income (see Note 6.3 Financial assets and liabilities). The new classification requirements have no impact on the classification, measurement and carrying amount of the group’s financial assets.

In addition, in connection with the amendment that IFRS 9 made to IAS 1.82 the Group has elected to disclose interest income from contract assets within revenue. Previous periods have not been restated as the reclassification is considered immaterial.

SECTION 5 (extract)
NET WORKING CAPITAL AND CONTRACT BALANCES (extract)
This section contains information on contract balances and working capital.

Contract balances show assets and liabilities arising from contracts with clients.

The main components of working capital are accrued revenue, accounts receivable, and other payables.

Working capital management prioritizes ensuring a strong cash flow performance.

In this section, the following notes are presented:
5.1 Receivables
5.2 Contract balances
5.3 Trade payables and other payables

5.1 RECEIVABLES
Accounting policy
A receivable is the Group’s unconditional right to consideration and is accounted for in accordance with IFRS 9. As the objective of the Group’s business model for realizing these assets is to collect contractual cash flows, they are initially recognized at fair value, and subsequently carried at amortized cost less expected loss allowance.

The Group assesses possible increase in credit risk for financial assets measured at amortized cost at the end of each reporting period. For trade receivables from clients and accrued revenue, the simplified approach is used, and the loss allowance is measured at the estimate of the lifetime expected credit losses.

For trade receivables not due and for trade receivables past due for up to a maximum of 360 days, an expected loss rate between 0.04% and 1.02% is applied, depending on region of origin and the client’s credit rating. Higher expected loss rates are used if an individual assessment indicates a higher probability of default. In calculating the expected credit loss rates, the Group considers historical loss rates, and adjusts for forward looking macroeconomic data, refer to note 6.2 Risk for additional information. In addition, trade receivable more than 360 days overdue are assessed for impairment individually.

If there is no reasonable expectation of recovery, the gross carrying amount is written-off.

Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in repayment plan with the Group, and a failure to make contractual payments for a period greater than 360 days past due.

Derivatives

Derivative financial assets with a positive fair value at the balance sheet date are initially recognized at fair value as of the trade date as a trade receivable. For additional information refer to note 6.3 Financial assets and liabilities.

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No security has been received with respect to trade receivables.

Based on the rates applied the identified expected loss provision was immaterial for 2017.

No impairment was recognized for trade receivables in 2018 or in 2017. Balances presented above are past due, but not individually impaired.

Accrued revenue consists mainly of revenue from the sale of perpetual software licenses and receivables from professional services contracts in progress.

Other receivables comprise mainly sales and payroll taxes.

The Group’s exposure to currency and credit risk for trade receivables is disclosed in Note 6.2 Risk.

5.2 CONTRACT BALANCES
Contract assets are expected to be realized within the Group’s normal operating cycle, 20% of it is expected to be realized within the next twelve months.

Accounting policy
Contract balances consist of client-related assets and liabilities. Contract assets stem from subscription agreements with payments in the future. When control over goods or services is transferred to a client before the client pays consideration, the contract is recognized as either a contract asset or a receivable. A contract asset represents the right to consideration in exchange for the right to use software or services transferred to a client when that right is conditional on SimCorp’s future performance.

If the timing of payments specified in the contract provides the client with a significant financing benefit, the transaction price is adjusted to reflect this financing component. The Group applies the practical expedient in paragraph 129 of IFRS 15 and does not adjust the amount of consideration for the effects of a financing component if it expects, at contract inception, that the period between delivery and payment will be one year or less.

Contract assets relate to the Group’s rights to consideration for software licensed to clients under subscription agreements with future payments, subsequent to revenue recognition.

When a client pays consideration in advance, or an amount of consideration is due contractually before transferring of the license or service, then the amount received in advance presented as a liability. Contract liabilities represent mainly prepayments from clients for unsatisfied or partially satisfied performance obligations in relation to licenses, software updates and support, and services. Software updates and support and ASP billing generally occurs at periodic intervals (e.g. quarterly or yearly) prior to revenue recognition, resulting in liabilities.

The majority of license agreements are recognized as revenue in the year of sale. However, contracts with functionality gaps or acceptance criteria may have revenue recognition deferred, resulting in a contract liability when billing has occurred. Contracts in progress relating to fixed fee professional services are measured at the estimated sales value of the proportion of the contract completed at the balance sheet date. Amounts invoiced on account in excess of work completed are included in prepayments under current liabilities.

Contract assets are within the scope of impairment requirements in IFRS 9. For contract assets the simplified approach is used and the expected loss provision is measured at the estimate of the lifetime expected credit losses.

An expected loss rate between 0.40% – 2.38% is applied, based on average default rates by region as published by Standard & Poor. For additional information refer to note 6.2 Risk.

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1 Adjustments include: reclassifications, cancellations, foreign exchange adjustments, cumulative catch-up adjustments (including those arising from change in measurement of progress, change in estimate of transaction price and contract modifications), change in time frame for a right to consideration to become unconditional or for a performance obligation to be satisfied.
2 With the amendment that IFRS 9 made to IAS 1.82 the Group has elected to disclose within revenue the interest income derived from the financial component provision made to contract assets. Previous periods have not been restated due to immateriality.
3 Loss allowance arises from the adoption of IFRS 9.

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The table indicates when the balance in contract assets with clients, gross of interest and expected loss allowance, is expected to be invoiced.

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1 Adjustments include: reclassifications, foreign exchange adjustments, cumulative catch-up adjustments (including those arising from change in measurement of progress, change in estimate of transaction price and contract modifications), change in time frame for a right to consideration to become unconditional or for a performance obligation to be satisfied.

SECTION 6 (extract)
CAPITAL STRUCTURE AND FINANCING ITEMS (extract)
6.2 RISK (extract)
Credit risk
The maximum exposure to credit risk equals the following carrying amounts:simcorp12

The Group is not exposed to significant risks concerning individual clients or business partners as clients are generally major investment managers in the financial sector. Under the Group’s policy for assuming credit risk, all major clients and other business partners are assessed prior to any contract being signed.

Credit risk relating to cash funds comprising current account bank deposits is deemed to be immaterial as the accounts are held with selected recognized international banks with high credit ratings. No security has been received.

Receivables
In assessing expected credit loss of trade receivables which comprises many small balances, the Group uses an allowance matrix. Expected loss rates are calculated separately for exposures in different segments based on common credit risk characteristics in relation to geographical region. Two factors are therefore considered when estimating expected loss rates: the actual credit loss experienced over the past 7 years and a factor which reflects differences between economic conditions during the period over which the rates were collected, current conditions, and the Group’s view of economic conditions over the expected life of the receivables.

Expected loss factors for all delinquency stages are currently null for all aging categories based on historical levels as the actual credit loss experienced was null for all categories over the last 7 years. Receivables over three hundred and sixty days past due are also individually assessed for impairment.

Accumulated average corporate default rates by region as published by Standard & Poor are used as proxy for probability of loss as these provide an indication on counterparty default risk by region of origin (between 0.04% and 1.02%). Higher expected loss rates were used for certain balances if an individual assessment indicated a higher probability of default.

The table below depicts exposure to credit risk for trade by geographical region: Geographical category Other includes: Azerbaijan, Kuwait and United Arab Emirates.

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  • Trade receivables and accrued revenue.

The table below depicts information about exposure to credit risk and expected credit loss for trade receivables from individual customers as at December 31:

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No single client represents more than 9.5% (2017: 7.1%) of total receivables from clients.

Contract assets
The expected credit loss provision is measured at the estimate of the lifetime expected credit losses. An expected loss rate from 0.04% up to 3.18% is applied for clients with investment grade rating depending on the length of the asset’s lifetime and location.
Expected loss rates are based on average default rates by region as published by Standard & Poor.

For unrated clients and clients that do not have investment grade rating, an expected loss rate from 0.38% up to 13.79% is applied depending on the length of the asset’s lifetime and location.

The table depicts exposure to credit risk for contract assets by geographical region:

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Timing of invoicing for the contract assets balance can be found in note 5.2.

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