Consideration of the Time Value of Money in Calculating Expected Credit Losses on Retention Money | Ind AS 109

A company is a power plant equipment manufacturer that records revenue over time using the input method based on the cost approach. The contract provides that the customer is to withhold (i.e., retention money) a specified percentage of each milestone payment throughout the arrangement and pay the Company only when the specified project milestones are complete.

The company is providing for Expected Credit Losses (ECL) on the trade receivables, including deferred payments on a case to case basis after duly evaluating the criteria laid down in Indian Accounting Standard (Ind AS) 109, ‘Financial Instruments’, following the simplified approach.

While evaluating Ind AS 109 criteria for ECL on retention money, the Company does not consider time value of money stating that the extended period for receipt of retention money is for reasons other than provisions of finance and is purely to protect against non-performance of the Company.

Should the Company factor in the time value of money while providing for expected credit loss on the retention money?

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