Right-sizing a SAR 1.2 billion receivables provision under IFRS 9
A family-owned conglomerate with contracting, distribution and services subsidiaries carried an ECL provision that had grown for four years without anyone being able to explain it. We rebuilt the model from the loss data up, cut the over-provision and gave the audit committee a number it could defend.
The client
The group reports under IFRS as endorsed by SOCPA, is audited by a Big 4 firm and has bank facilities with covenants that reference profit before impairment. Nine operating subsidiaries sell to government ministries, government-related entities, large private contractors, retail distributors and related parties, on terms ranging from thirty days to milestone-based collection over a year.
Where the client started
The group applied a single provision matrix across nine subsidiaries with very different customers: government ministries and contractors in one, retail distributors in another, related parties in a third. Loss rates had been set at adoption in 2018 from a snapshot of the ageing report, then increased each year in response to auditor comments, with no link to realised losses.
By the fourth year the provision exceeded SAR 34 million against a receivables book of SAR 1.2 billion, and the audit committee had two questions: whether the number was right, and why nobody could explain it. The finance team could not answer either, because the model had been built by a previous adviser and the working papers had not been retained.
What we were engaged to do
- Independent review of the existing provision matrix and its history
- Reconstruction of five years of loss experience from the ledgers of all nine subsidiaries
- Re-segmentation and a new methodology paper agreed with management and the auditors
- A monthly model the finance team can run without external support
- Presentation to the audit committee and support through the year-end audit
Our approach
What changed
The rebuilt model produced a provision of SAR 20.6 million, a coverage ratio of 1.7 percent, with every loss rate traceable to realised experience and every judgement documented. The auditors accepted the methodology in the first review cycle. The SAR 38 million difference from the prior-year provision, adjusted for the current-year movement, was recognised as a change in estimate with full disclosure.
Two years later the finance team still runs the model monthly without our involvement, and the impairment line has not attracted an audit adjustment since. The covenant headroom created by the release also allowed the group to renegotiate a facility on better terms.
Optimising a loss valuation does not mean minimising it. It means measuring what the data actually says and documenting it so well that nobody needs to add a margin for uncertainty.
What we would tell another client
- Segmentation is where most of the value sits; a single loss rate across a mixed book is almost always wrong in both directions.
- Auditors accept a lower provision readily when every number is traceable; they resist one that is merely asserted.
- Hand-over training is part of the deliverable, not an extra. A model nobody can run is a liability.
Engagement details are anonymised and figures are rounded. Client identity is available on request, subject to confidentiality.
Continue reading
Cutting the finance cost base by 42 percent while closing on day seven
Mid-market distribution company, Riyadh
Valuing end-of-service obligations for a 3,400-employee group, including an intra-group transfer
Industrial and services group, Saudi Arabia
Allocating the purchase price of a SAR 480 million services acquisition
Listed facilities services group, GCC