IFRS Foundation issue guidance on COVID-19 and IFRS 9
Not sure how to account for Expected Credit Losses (ECL) in the current uncertain climate? IFRS Foundation have issued guidance in order to support a consistent application of IFRS 9, Financial Instruments.
IFRS 9 sets out a framework for determining when a significant increase in credit risk on a financial instrument requires an Expected Credit Loss calculation to establish the amount in a financial statement that is at risk of impairment.
The IFRS Foundation highlights that the current uncertainty requires entities to rethink their approach to determining ECLs. For example, payment holidays prompted by COVID-19 should not automatically signal a significant increase in credit risk. Rather, the risk of default should be assessed over the expected life of the financial instrument.
COVID-19 related disruption has caused problems calculating ECLs – putting what were previously low risk accounts into doubt and what previously seemed certain into flux. IFRS encourage companies to use all reasonable supporting information for risk assessments, including the effects of Coronavirus and government support measures being taken.
In short, IFRS encourage taking a measured and flexible approach to providing much needed transparency to users of financial statements in the current challenging environment.
The long running debate about credit loss modelling between prudential regulators and accounting standards setters seems likely to continue to be a long running debate.
Read more here.