FRS 102 recognises a credit loss only once there is objective evidence that a loss event has already happened. IFRS 9 recognises expected credit losses from the day a receivable or loan is first recognised, using forecasts as well as past events. A UK company on FRS 102 uses the incurred loss model by default but may opt into the IFRS 9 recognition and measurement rules; companies on IFRS or FRS 101 must use expected losses.

How does the incurred loss model in FRS 102 work?

Paragraph 11.21 requires an entity, at the end of each reporting period, to assess whether there is objective evidence of impairment of financial assets measured at cost or amortised cost, and to recognise any impairment loss in profit or loss immediately. Paragraph 11.22 lists loss events that count as objective evidence:

  • significant financial difficulty of the debtor;
  • a breach of contract, such as a default or late payment of interest or principal;
  • a concession granted because of the debtor’s financial difficulty that would not otherwise be considered;
  • it becoming probable that the debtor will enter bankruptcy or another financial reorganisation; and
  • observable data indicating a measurable decrease in estimated future cash flows from a group of assets, such as adverse national, local or industry conditions, even if the decrease cannot yet be linked to individual assets.

Paragraph 11.24 requires individually significant assets to be assessed individually; others may be assessed individually or in groups with similar credit risk. For an asset at amortised cost, paragraph 11.25(a) measures the loss as the carrying amount less the present value of estimated cash flows discounted at the original effective interest rate. Paragraph 11.26 requires a reversal when the loss decreases because of a later event, capped at what the carrying amount would have been without the impairment. The FRS 102 treatment of trade debtors is covered in impairment of debtors.

What does IFRS 9 do differently?

The IASB explains that the incurred loss model in IAS 39 delayed recognition of credit losses until there was evidence of a trigger event. It was designed to stop companies building hidden reserves, but during the financial crisis it allowed losses to be postponed, and in practice recognition often waited for actual default. IFRS 9, effective for annual periods beginning on or after 1 January 2018, replaced it with a forward looking model:

  • a loss allowance is recognised from initial recognition, starting at 12 month expected credit losses for most loans and moving to lifetime expected losses if credit risk increases significantly;
  • the measurement is a probability weighted amount, discounted, using reasonable and supportable information about past events, current conditions and forecasts;
  • a credit loss arises even where the debtor is expected to pay in full but late; and
  • there is a rebuttable presumption that credit risk has increased significantly once payments are more than 30 days past due.

For trade receivables and contract assets without a significant financing component, IFRS 9 requires a simplified approach: the allowance is always lifetime expected losses, and a provision matrix based on adjusted historical loss rates is allowed as a practical expedient. The mechanics are in IFRS 9 expected credit losses.

How do the two models compare side by side?

Question FRS 102 Section 11 IFRS 9
When is a loss recognised? Only when objective evidence of a loss event exists From initial recognition, updated at each reporting date
What information is used? Observable data about events that have occurred Past events, current conditions and reasonable and supportable forecasts
Allowance on a new, performing loan Usually none 12 month expected credit losses
Trade debtors Impaired when evidence arises, individually or in groups Lifetime expected losses under the simplified approach
Reversals When the loss decreases because of a later event, capped Allowance remeasured at each reporting date
Extra disclosures Section 11 disclosures Inputs, assumptions, forward looking information and an allowance reconciliation

Which UK companies use which model?

Under paragraph 11.2, an FRS 102 entity chooses, for all its financial instruments, either Sections 11 and 12 in full, the recognition and measurement rules of IAS 39, or the recognition and measurement rules of IFRS 9 together with the Section 11 and 12 disclosures. An entity choosing Sections 11 and 12 uses the incurred loss model. Paragraph 11.2 does not allow a change from Sections 11 and 12, or from IFRS 9, to IAS 39 except to align with the consolidated accounts the entity is included in, and paragraphs 10.8 to 10.14 govern any other change of policy.

HMRC’s Corporate Finance Manual at CFM21810 confirms that IFRS 9 became mandatory for companies applying IFRS or FRS 101 for periods of account beginning on or after 1 January 2018. A subsidiary on FRS 101 therefore applies expected losses to its trade debtors and to intra group loans, while an otherwise identical FRS 102 subsidiary normally would not.

The FRC made no amendment to bring the expected credit loss model into FRS 102 in its Periodic Review 2024. Paragraph B11.49ZA says it intends to reconsider the matter in due course, taking into account the IASB’s third edition of the IFRS for SMEs Accounting Standard. It did add disclosures for FRS 102 entities that already apply the IFRS 9 model.

What does the difference look like in numbers?

Illustration only. At its year end a wholesaler has trade debtors of £210,000. Of these, £200,000 are not yet due and £10,000 is owed by a customer that has entered administration, where the wholesaler expects to recover £2,000. Its historical loss rate on debts not yet due, adjusted for current and forecast conditions, is 1%.

Allowance FRS 102 IFRS 9 simplified approach
Customer in administration £8,000 £8,000
Debts not yet due Nil, unless observable data shows a measurable decrease for the group £2,000 (1% of £200,000)
Total £8,000 £10,000

The difference is small for short dated trade debtors but can be much larger for long term loans, including loans to group companies or directors, where IFRS 9 requires an allowance from day one and lifetime losses after a significant increase in credit risk.

What must an FRS 102 company disclose if it uses IFRS 9?

Paragraph 11.48ZA requires an entity that has chosen the IFRS 9 recognition and measurement rules to explain the inputs, assumptions and estimation techniques used, including how forward looking and macroeconomic information is incorporated, and any changes in techniques or significant assumptions during the period with the reasons. Paragraph 11.48ZB requires a table reconciling the opening and closing allowance for expected credit losses.

Should an FRS 102 company opt into IFRS 9?

The main reasons to do so are consistency and data. A subsidiary whose parent reports under IFRS already produces expected loss figures for consolidation, and using them in its own accounts avoids running two models. On first adoption of FRS 102, paragraph 35.8C allows that choice directly. A standalone company with mainly short term trade debtors rarely gains much, because for short dated debts the simplified approach and the incurred model may give similar answers, while IFRS 9 adds work and disclosures. Any later switch is a voluntary change of accounting policy, which paragraph 10.11(d) requires to be applied retrospectively. A company leaving IFRS is covered in moving from IFRS back to FRS 102.

What mistakes come up most often?

  • Booking a general percentage provision under FRS 102 with no link to observable loss events or data about the group of debtors.
  • Ignoring the observable data test in paragraph 11.22(e), which allows a group allowance where economic or industry conditions point to a measurable decrease in cash flows.
  • Assuming an FRS 101 company can keep an incurred loss approach because it files Companies Act accounts.
  • Recording no allowance on interest free intra group or director loans under IFRS 9 because the borrower has never defaulted.
  • Forgetting to reverse an FRS 102 impairment when the debtor’s position improves; see reversing an impairment loss.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.