28. Impairments of financial assets

As of 30 September 2020, impairment losses recognised in the balance sheet in accordance with IFRS 9 amounted to €160 million (30/9/2019: €104 million).

The following explanations relate to significant financial assets to which the impairment requirements of IFRS 9 are applied.

For trade receivables, METRO makes use of the simplified procedure to determine expected credit losses provided for in IFRS 9. METRO records the expected credit losses over the entire term of the financial instruments on the basis of a provision matrix. Trade receivables are combined in different portfolios with similar credit risk characteristics for this purpose. This is based on the regions used for METRO’s segment reporting.

The loss default rates per past-due category of these portfolios are estimated on the basis of previous experience with credit losses from such financial assets. The loss default rates determined in this way are adjusted by including a projected global corporate insolvency index. Due to Covid-19, this input parameter was adjusted accordingly in the current financial year.

The table below shows the expected credit losses on trade receivables for each maturity band as of the closing date, calculated on the basis of the provision matrix:

Besides the impairment recognised based on the presented regional provision matrix, the risk provision of €21 million (30/9/2019: €7 million) also includes an additional country and customer group-specific risk provision against the background of Covid-19.

Impairment on trade receivables is reconciled according to the simplified calculation as follows:

The impairment as of 30 September 2020 amounted to €89 million (30/9/2019: €47 million) and include impairments of €68 million (30/9/2019: €40 million) on individual receivables for which there are objective indications of an impairment of creditworthiness. The increase is mainly due to Covid-19.

The following table shows the gross carrying amounts of trade receivables that were or were not past due as of the closing date, which were depreciated either on the basis of the respective applied provision matrix or on the basis of objective indications of default:

In addition, collateral is available for trade receivables of €8 million (30/9/2019: €12 million). These receivables were not impaired.

METRO applies the general impairment requirements of IFRS 9 to receivables from suppliers, credit card transactions and loans. A possible credit risk in these cases is determined on the basis of the counterparty’s creditworthiness. For this purpose, METRO uses external ratings of well-known rating agencies as well as internal credit risk rating grades based on the risk of default of the respective financial instrument. The creditworthiness of the counterparties is continuously monitored so that METRO recognises a significant increase in the credit risk and can react promptly to any changes.

The following table shows the development of risk provisions in relation to financial assets to which the general impairment requirements of IFRS 9 are applied:

Risk provisions as of 30 September 2020 amount to €34 million (30/9/2019: €28 million).

Stage 1 of the model contains financial assets that have a low credit risk or whose credit risk has not increased significantly since the initial recognition of the asset. At this stage, the risk provision is calculated as the 12-month expected credit loss. If the credit risk on the closing date is significantly higher than at the time of initial recognition, the financial asset is reclassified to stage 2. The amount of the risk provision is determined at this level as the expected losses that can arise from all possible default events over the expected entire term of the financial instrument. If there is objective evidence that a financial asset will not be collected in whole or in part, it is reclassified to stage 3. Default is defined as the failure to maintain contractually agreed cash flows.

The table below shows the gross carrying amounts for those financial instruments for which the impairment losses are determined according to the general approach; they are differentiated according to the external rating of the counterparties:

METRO minimises credit risk by exclusively investing in first-class debt instruments from counterparties with a good to very good external rating (investment grade). Therefore, a significant portion of the financial assets is allocated to stage 1 of the impairment model.

For counterparties that do not have an external rating and are therefore assigned to the internal risk classes, the credit risk determined according to the general approach is as follows: