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Credit Monitoring Arrangement (CMA) data is a financial report prepared for the purpose of obtaining credit facilities from banks and financial institutions. It provides a detailed analysis of a company's financial health and performance. Here are the key benefits of CMA data: 01) Facilitates Credit Approval: CMA data provides banks and financial institutions with a comprehensive financial overview of a company, helping them assess creditworthiness and make informed lending decisions. It includes financial projections, past performance, and future plans, making it easier to justify the need for credit. 02) Enhances Financial Analysis: The structured format of CMA data allows for a detailed analysis of a company’s financial status, including liquidity, profitability, and cash flow. This helps both the lender and the borrower understand the financial dynamics and plan accordingly. 03) Improves Financial Planning: Preparing CMA data involves detailed financial projections and analysis, which helps companies plan their finances more effectively. This includes forecasting revenues, expenses, and cash flows, enabling better financial management and strategic planning. 04) Builds Credibility: A well-prepared CMA report demonstrates the company's commitment to transparency and financial discipline. It builds credibility with lenders and investors, showing that the company has a clear understanding of its financial position and future prospects. 05) Identifies Financial Needs: CMA data helps identify the exact financial requirements of the company. It highlights the working capital needs, term loan requirements, and other funding needs, ensuring that the company requests an appropriate amount of credit. 06) Monitors Financial Health: Regular preparation and review of CMA data help companies monitor their financial health over time. It provides insights into financial trends, allowing management to take proactive measures to address potential issues and improve financial performance. 07) Enhances Negotiation Power: With detailed and accurate CMA data, companies are better positioned to negotiate favorable terms and conditions with lenders. It provides a strong foundation for discussions on interest rates, repayment schedules, and other loan terms. 08) Ensures Compliance: CMA data preparation often involves adhering to specific guidelines and standards set by banks and financial institutions. Ensuring compliance with these requirements can facilitate smoother credit approval processes and maintain good relationships with lenders. 09) Supports Business Growth: Access to credit facilitated by comprehensive CMA data can support business expansion and growth initiatives. It provides the necessary funds for capital investments, working capital needs, and other strategic projects, enabling the company to achieve its growth objectives. #BGL #BALANCEOR #CMA #COST #ACCOUNTING #TAXATION #BOOKKEEPING

Let's understand Expected Credit Loss (ECL) ECL is a financial accounting concept used to account for potential losses arising from credit risks associated with financial assets. Under the IFRS 9, Banks are required to use an ECL model to estimate potential losses on financial assets, such as loans and bill discounting. The ECL model operates on the premise that financial assets are inherently subject to credit risk—the risk of loss that may occur if a borrower fails to repay a loan or meet other contractual obligations, or if a client fails to pay their obligations on due date. Banks must estimate the probability of default and the potential loss resulting from such defaults, incorporating these estimates into their financial statements. The ECL model involves three stages of analysis: Stage 1: Performing Assets Identify the credit risk of financial assets and estimate the probability of default over the next 12 months. Stage 2: Credit Risk Significantly Increased Estimate the credit risk over the remaining life of the financial instrument. Stage 3: Credit-Impaired Assets Estimate the potential losses associated with the credit risk, considering factors such as the time value of money, reasonable and supportable information, and an unbiased probability-weighted amount. The ECL calculation follows the probability of default approach, using the formula: ECL (Expected credit loss) = EAD (Exposure at default) LGD (Loss given default) * PD (probability of default) Where: EAD (Exposure at Default): The outstanding balance at the time of default. LGD (Loss Given Default): The percentage of loss if a default occurs. PD (Probability of Default): The likelihood of default. For example, if the Probability of Default (PD) is 2.5%, the Loss Given Default (LGD) is 60%, and the outstanding balance (EAD) at year-end is USD 1000000/-, the ECL would be calculated as follows: ECL = PD 2.5% * LGD 60% * EAD 1000000/- =15000 This calculation helps Banks to better manage and mitigate credit risks by providing a more accurate representation of potential losses in their financial statements.

Expected Credit Loss (ECL) is a concept introduced in the International Financial Reporting Standards (IFRS) 9, which pertains to the measurement of financial instruments, particularly focusing on the recognition of credit losses. Here’s a summary of its key aspects: 1. Objective: The ECL model aims to provide a more forward-looking approach to recognizing credit losses, ensuring that entities account for potential future losses rather than solely relying on historical data. This proactive approach enhances the timeliness and relevance of financial reporting regarding credit risk. 2. Scope: ECL applies to financial assets measured at amortized cost, such as loans and trade receivables, and to certain financial assets measured at fair value through other comprehensive income (FVOCI). 3. Three-Stage Approach: Stage 1: Financial assets that have not experienced a significant increase in credit risk since initial recognition. In this stage, entities recognize 12-month ECL, which represents the expected credit losses that result from default events that are possible within the next 12 months. Stage 2: Financial assets that have experienced a significant increase in credit risk since initial recognition but are not yet deemed to be credit-impaired. Entities recognize lifetime ECL, which accounts for all possible default events over the life of the asset. Stage 3: Financial assets that are credit-impaired. For these assets, entities continue to recognize lifetime ECL, and interest revenue is calculated on the net carrying amount (i.e., after deducting the ECL allowance). 4. Significant Increase in Credit Risk: The determination of a significant increase in credit risk involves various factors, including changes in credit ratings, payment history, and macroeconomic conditions. Entities must develop criteria to assess when to move assets between stages. 5. Calculation of ECL: The calculation of ECL is based on historical data, current conditions, and reasonable and supportable forecasts of future economic conditions. This involves estimating the probability of default, loss given default, and exposure at default. 6. Disclosure Requirements: IFRS 9 mandates detailed disclosures about the ECL model, including how ECLs are calculated, the assumptions made, the credit quality of financial assets, and how changes in credit risk are assessed. 7. Impact on Financial Statements: The introduction of the ECL model under IFRS 9 has significant implications for the financial statements of entities, affecting the timing and amount of credit loss provisions, thereby impacting profit or loss and equity. Overall, the ECL framework enhances the quality of financial reporting by requiring entities to account for credit losses in a more timely and transparent manner, ultimately leading to improved risk management and financial stability.

𝗘𝘅𝗽𝗲𝗰𝘁𝗲𝗱 𝗖𝗿𝗲𝗱𝗶𝘁 𝗟𝗼𝘀𝘀 ECL stands for "Expected Credit Loss," and it is a concept used in accounting and finance, particularly under the International Financial Reporting Standards (IFRS 9). For the role of accounts receivable, ECL is crucial because it impacts how businesses assess the potential risk of default on receivables. 𝗞𝗲𝘆 𝗣𝗼𝗶𝗻𝘁𝘀 𝗮𝗯𝗼𝘂𝘁 𝗘𝗖𝗟 𝗶𝗻 𝗔𝗰𝗰𝗼𝘂𝗻𝘁𝘀 𝗥𝗲𝗰𝗲𝗶𝘃𝗮𝗯𝗹𝗲: Risk Assessment: ECL involves estimating the likelihood that customers will default on their payments. This is based on historical data, current market conditions, and forward-looking information. Provision for Bad Debts: Businesses must recognize a provision for expected credit losses on their accounts receivable, rather than waiting for actual defaults to occur. This ensures that financial statements provide a more accurate picture of the company's financial health. Three-Stage Model: IFRS 9 introduces a three-stage model for recognizing ECL: Stage 1: Applies to accounts where there has been no significant increase in credit risk since initial recognition. A provision for 12-month expected losses is recognized. Stage 2: Applies when credit risk has increased significantly. The provision reflects lifetime expected credit losses. Stage 3: Applies when the asset is considered credit-impaired. The full lifetime expected loss is recognized. Impact on Financial Reporting: Incorporating ECL can lead to more conservative reporting, which can affect profitability and equity. It also influences cash flow planning and risk management strategies. Relevance to Stakeholders: Understanding and accurately calculating ECL is important for stakeholders, including management, investors, and auditors, as it directly affects the valuation of receivables and overall financial performance. For an accounts receivable role, being knowledgeable about ECL is essential for accurately recording and reporting on receivables, managing credit risk, and ensuring compliance with relevant accounting standards

Expected Credit Loss (ECL) calculations - are a fundamental component of financial reporting under IFRS 9 (International Financial Reporting Standards) and are used to assess the credit risk of financial instruments. The ECL model requires entities to recognize expected credit losses based on the likelihood of default over the life of a financial asset. Here’s a breakdown of the ECL calculation process: ### Components of ECL Calculation 1. Exposure at Default (EAD): The total value exposed to loss at the time of default. This might include the outstanding balance of loans, credit lines, or other financial instruments. 2. Probability of Default (PD): The likelihood that a borrower will default on their obligations over a specified time period. PD can be derived from historical data, credit ratings, or statistical models. 3. Loss Given Default (LGD): The portion of the exposure that is expected to be lost if a default occurs. This takes into account the recoveries from collateral or other mitigating factors. ### Steps to Calculate ECL 1. Determine the EAD: Assess the total amount at risk for each financial instrument. 2. Estimate PD: Use historical data, credit scoring models, or external credit ratings to estimate the probability of default over the relevant time frames (12 months for Stage 1 and lifetime for Stages 2 and 3). 3. Estimate LGD: Analyze historical recovery rates and consider the characteristics of collateral to estimate the potential loss in the event of default. 4. Calculate ECL for Each Stage: Using the formulas mentioned above, calculate the ECL for assets in each stage. 5. Aggregate ECL: Sum the ECL amounts from all stages to determine the total expected credit loss for the portfolio. ### Overview of ECL Calculation The ECL calculation typically follows a three-stage model based on the credit quality of the financial asset: 1. Stage 1: Performing Assets - For assets that are not credit-impaired and have not experienced a significant increase in credit risk since initial recognition. - ECL is calculated based on 12-month expected credit losses. - Formula: ECL(Stage 1)= EAD*PD(12 months)*LGD 2. Stage 2: Underperforming Assets - For assets that have experienced a significant increase in credit risk since initial recognition but are not credit-impaired. - ECL is calculated based on lifetime expected credit losses. - Formula: ECL(Stage 2)= EAD*PD (lifetime)*LGD 3. Stage 3: Non-Performing Assets - For assets that are credit-impaired. - ECL is also based on lifetime expected credit losses but reflects the fact that the asset is in default. - Formula: ECL(Stage 3)= EAD*PD (lifetime)*LGD ### Conclusion ECL calculations are essential for financial institutions to assess and report credit risk accurately under IFRS 9. The model emphasizes a forward-looking approach, requiring organizations to estimate losses based on expected future conditions rather than relying solely on past performance.

Bank reporting often brings additional complexities to organizations looking to grow, especially if it pulls focus away from an already saturated finance and accounting department. Head to our latest blog to learn the top challenges associated with bank reporting alongside some tips and steps for success. #bankreporting #auditpreparation #auditprep

#credit_apprisal_04 #credit_credit_risk_management_corporate_Finance_CRM Response to the 3rd aspect of credit appraisal process bankers will try to understand the financial stand of the customer. Financial standing contains results which are based on the company’s financial data. 1. Records of all financial activities of business: The client has to have proper documentation or evidence of transaction and dealings of the business. They will have to make balance sheet whereas a company's financial situation is defined by its assets, liabilities & equities. They will also have to have proper profit-loss statement whereas all proof of sales, expenses & earnings will be documented. 2. Authenticity of Financial Statement: Auditors review financial statements, internal processes, and transaction records to assess accuracy and completeness whereas unaudited financial statements are those that have not been examined or verified by a licensed independent auditor. Bankers always prefer Audited Financials more than Un-Audited Financials. 3. Clean Audit Report is also required as it means the financial statements are reasonably stated by the auditors. To understand and value a company, bankers examine its financial position by studying its financial statements and calculating certain ratios. # Performance Efficiency: Profit margin is a financial ratio that measures the percentage of profit earned by a company in relation to its revenues. This percentage provides a comprehensive picture of the operating efficiency of a business or an industry. Maintaining a healthy profit margin will help to ensure the financial success of a business, which will improve its ability to obtain loans. NPM = NP [Revenue-All expenses]/Total Revenuex100 # Solvency: To understand a company is solvent or not, D/E Ratio plays a vital role at a glance. The D/E ratio is used to evaluate a company’s financial leverage and is calculated by dividing a company’s total liabilities by its shareholder equity. It is a measure of the degree to which a company is financing its operations with debt rather than its own resources. Debt/Equity=Total Liabilities/Total Shareholders’ Equity Among similar companies, a higher D/E ratio suggests more risk, while a low one may indicate that a business is not taking advantage of debt financing to expand. # Liquidity: Liquidity is the ability to convert assets into cash quickly and cheaply. The current ratio is the simplest liquidity ratio to calculate and interpret. This measures a company's ability to pay off its current liabilities (payable within one year) with its total current assets such as cash, accounts receivable, and inventories. The higher the ratio, the better the company's liquidity position: Current Ratio=Current Assets/Current Liabilities Liquidity ratios determine a company's ability to cover short-term obligations and cash flows, while solvency ratios are concerned with a longer-term ability to pay ongoing debts. #Happy_reading 😊

How Does a Credit Controller Analyze Financial Statements & Assign a Credit Score? As a Credit Controller, assessing a company’s financial health is crucial before offering credit. Here’s an easy way to break it down with key formulas: Profitability (Income Statement) Net Profit Margin = (Net Profit ÷ Revenue) × 100 A higher margin indicates the company is making more profit for every dollar of sales, showing financial strength. Liquidity (Balance Sheet) Current Ratio = Current Assets ÷ Current Liabilities A ratio of 1.5 or higher usually means the company can cover its short-term debts easily. Solvency Debt-to-Equity Ratio = Total Debt ÷ Shareholder Equity A lower ratio means the company is less reliant on debt, making it less risky to extend credit. Cash Flow Operating Cash Flow = Net Income + Depreciation + Changes in Working Capital Positive cash flow is vital to ensure the company can pay its obligations. Credit History On-time Payment Percentage = (On-time Payments ÷ Total Payments) × 100 A higher percentage reflects good payment habits, which boosts the client’s credit score. By combining these formulas, we assign a Credit Score that helps determine if the company can handle more debt responsibly. This approach ensures businesses make informed, low-risk decisions! #CreditControl #FinancialAnalysis #BusinessFinance #CreditRisk #CashFlow