On 27 March 2020, the International Accounting Standards Board (IASB) published a document responding to questions regarding the application of IFRS 9 Financial Instruments during the period of increased economic uncertainty arising from the COVID-19 pandemic.
The document intends to support the consistent application of requirements in IFRSs. Therefore, it highlights requirements within IFRS 9 Financial Instruments that are relevant for companies considering how the pandemic affects their accounting for expected credit losses; it does not change, remove or extend the requirements of IFRS 9.
The IASB notes that entities should not continue to apply their existing expected credit losses (ECL) methodology mechanically. For example, the extension of payment holidays to all borrowers in particular classes of financial instruments should not automatically result in all those instruments being considered to have suffered a significant increase in credit risk.
To assess the significant increase in credit risk, IFRS 9 requires that entities assess changes in the risk of a default occurring over the expected life of a financial instrument. Both the assessment of the significant increase in credit risk and the measurement of ECLs are required to be based on reasonable and supportable information that is available to an entity without undue cost or effort.
Entities are required to develop estimates based on the best available information about past events, current conditions and forecasts of economic conditions. In assessing forecast conditions, consideration should be given to both the effects of COVID-19 and the significant government support measures being undertaken.
According to the IASB, it is rather difficult at this time to incorporate the specific effects of COVID-19 and government support measures on a reasonable and supportable basis. However, changes in economic conditions should be reflected in macroeconomic scenarios applied by entities and in their judgements. If the effects of COVID-19 cannot be reflected in models, post-model overlays or adjustments will need to be considered. The environment is subject to rapid changes and updated facts and circumstances should continue to be monitored as new information becomes available.
Although the current circumstances are difficult and create high levels of uncertainty, useful information about ECLs can be provided if ECL estimates are based on reasonable and supportable information and IFRS 9 is not applied mechanically.
The IASB also recommends entities to consider the guidance commenting on the application of IFRS 9 in the current environment issued by relevant securities regulators (including the European Banking Authority, the European Central Bank and the European Securities and Markets Authority).
Please open the following link to access the document on the IASB website.