a construction company k agrees to build a new stadium for a professional football c 599060

Impairment of short-term receivable

A construction company, K, agrees to build a new stadium for a professional football club, L. The project takes approximately six months and payment of €10 million is due six weeks after completion. On completion, K has recognised revenue and a corresponding receivable of €10 million because the effect of discounting at the current annualised rate of 5% is immaterial.

Shortly after completion, it becomes apparent that L is in financial difficulties and is unlikely to be able to settle the €10 million debt. In order to avoid formal insolvency proceedings, L attempts to restructure its financial obligations and offers to pay K €1 million per year for the next 10 years. Because it believes this arrangement appears to offer the best prospects for the recovery of its debt, K accepts.

On the face of it (and assuming no defaults on the rescheduled debt are expected), it might be argued that K need not recognise an impairment loss because it will receive all of the money owed and the debt’s original effective interest rate was 0%. However, the original receivable was, in principle, discounted – it is just that the effects of discounting were not reflected in the financial statements as they were not material. Therefore, the effect of discounting the rescheduled payments at 5% per annum (approximately €2.28 million) should be recognised as an impairment loss.