There is no doubt that coronavirus does and will continue to pose significant impact on the relevant provisions for expected credit losses (ECLs) in short to medium term. The approaches used before the outbreak of COVID-19 need to be carefully re-considered in the current situation. The enterprises will need to determine whether the quality of financial information made available to them fits the purpose and what adjustments, if any, should be made. Such issues must be resolved on a case-by-case basis.

Accounting implications for expected credit losses (ECLs)

The International Accounting Standards Board has published an educational document on March 27 that addresses on how to apply IFRS 9 “Financial Instruments” (IFRS 9) in the event of increased economic uncertainty caused by the COVID-19. It provides guidance on relevant provisions for expected credit losses in accordance with IFRS 9 during this period.
The document mentions that some assumptions in the ECLs model used by enterprises to assess expected credit losses before the outbreak may no longer be applicable. Enterprises should not continue to use such models in the current environment.

For example, the extension of the repayment period for borrowers of a specific class of financial instruments should not automatically cause such instruments to be deemed to have significantly increased in credit risk. In addition, IFRS 9 requires enterprises to assess the risk of default in the expected lifetime of financial instruments when assessing a significant increase in credit risk.

Enterprises must estimate based on the best available information about past events, current conditions, and future economic conditions. In assessing future conditions, enterprises should consider the impacts both from COVID-19 and assistance programs provided by the government.

Although it may be difficult at this time to incorporate the specific impact of the COVID-19 and government assistance programs into the expected credit loss assessment model, changes in economic conditions should be reflected in the overall economic situation adopted by the enterprise and reflected in its model. If these effects cannot be reflected in the model, enterprises need to consider making relevant adjustments after adopting the model.

What actions for enterprises to take?

To make the provision on ECL, enterprises should consider the following:

  • Whether other economic scenarios are needed
  • Any necessary adjustment to the model results based on expert credit judgment
  • The impact of any assistance from the government on the borrower
  • The impact of any actions that the company plans to take on expected cash flows
  • Does the measurement appropriately reflect the type of customer or issuer that is particularly affected by COVID-19
  • Changes in customer behavior, such as wider use of credit lines and more cash holdings
  • The impact of any assistance from the government on the borrower
  • The impact of any actions that the company plans to take on expected cash flows

For more information, please contact Joe Yan.