COVID-19 continues, and will continue, to impact accounting and financial reporting. Some key areas where accounting issues may arise include lease accounting, income taxes, asset impairments, exit or disposal activities, fair value measurements, going concern, and revenue recognition. For banks, financial instrument impairment accounting could pose additional challenges.
Earlier this year, the International Accounting Standards Board (IASB) and the European Securities and Markets Authority (ESMA) issued statements regarding accounting implications of COVID-19 and the accounting for expected credit losses under IFRS 9.
IFRS 9 requires entities to determine an estimate of expected credit losses (ECLs) based on the best available information about past events, current conditions, and forecasts of future events or economic conditions. In light of the high degree of uncertainties resulting from COVID-19, the IASB and ESMA acknowledged that it may be challenging for entities to estimate ECLs. Both, however, have indicated that issuers should consider the effects of COVID in determining an estimate.
In the statement released by ESMA, they noted that, “Issuers should assess the extent to which, amongst other facts, the high degree of uncertainty and any sudden changes in the short-term economic outlook are expected to result in impacts over the entire expected life of the financial instrument.”
ESMA indicated that in their view, “when making forecasts, issuers should consider the nature of this economic shock (i.e. whether the COVID-19 effect is expected to be temporary) and the impact that the economic support and relief measures (including debt moratoria) will have on the credit risk over the expected life of the instruments, which include, depending on the instruments’ maturities, longer-term estimates.”
To the view the full ESMA public statement, click here.
Under the IFRS 9 impairment model, entities are required to recognize either 12-month or lifetime expected credit losses, depending on whether there has been a significant increase in credit (SICR) since initial recognition. As such, a key element to determining ECLs is assessing if there has been significant deterioration in credit quality since initial recognition.
Due to COVID, many banks and governments have provided support measures to provide relief to debtors that have been impacted by the pandemic such as suspension or delays in loan payments. A natural question arises as to whether these forbearance measures automatically result in a significant increase in credit risk conclusion.
Pre-COVID, there was an enforcement action that indicated expected and granted forbearance measures should lead, as a minimum, to triggering a SICR and thus resulting in recognition of lifetime ECLs for such forborne financial assets. However, as a result of COVID, the circumstances under which payment holidays are being granted have changed. Both the IASB and ESMA have indicated that it is not appropriate to automatically trigger a significant increase in credit risk conclusion for payment holidays as was typically the case under forbearance situations prior to COVID.
Blanket moratoriums are unlikely to indicate that all loans in the affected loan portfolio have experienced a significant increase in credit risk. An analysis is necessary though, as certain customers within that population may trigger a significant increase in credit risk.
If you are interested in other IFRS recent practice issues including further discussion on accounting issues associated with COVID-19, consider taking our IFRS Update eLearning course.
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