PHILLIMON MHLANGA
Accountancy regulator, the Public Accountants and Auditors Board (PAAB), has said local entities should use reasonable and supportable information available when dealing with the measurement of estimated credit losses under the International Financial Reporting Standard (IFRS 9) in the context of coronavirus pandemic.
PAAB secretary, Admire Ndurunduru, this week said in light of the deadly virus also known as Covid-19, there were now new accounting challenges arising from high levels of uncertainty surrounding the forward looking information relevant to estimating credit losses and to applying IFRS 9 assessment of credit risk.
IFRS 9, has been a subject of much debate in the last few weeks, with concerns that the expected credit loss models and immediate provisions for the life of the loan will have a cyclical effect under stressed conditions.
Covid-19 has caused serious business disruptions with many entities taking extraordinary measures to support the fight against the virus. Now, there is need to take a serious consideration of the activities in accordance with IFRS 9, a principles based standard which requires the use of experienced judgment. Due to expected difficulties in estimating expected credit losses because of the COVID-19, Ndurunduru said entities can use all reasonable and supportable information available—historic, current and forward-looking to the extent possible—when determining whether lifetime losses should be recognised on a financial instrument and in measuring expected credit losses.
He also reminded entities on the importance of providing all relevant disclosures related to the actual and potential impacts of COVID-19 in order to comply with the requirements of IFRS 7 as well.
This affects accounting for expected credit losses. Ndurunduru said a number of assumptions and linkages underlying the way ECLs have been implemented to date may no longer hold in the current environment imploring entities not to continue applying their existing ECL methodology mechanically. “Instead, entities may need to adjust their approaches to forecasting and determining when lifetime losses should be recognised to reflect the current environment,” he said.
He said entities might be providing measures on a voluntary basis to its customers and borrowers in the context of COVID-19 in the form of renegotiations, rollovers or rescheduling of cash-flows that might or might not have an impact on the net present value of these cash-flows.
“Assessing these impacts requires an assessment of the specific conditions and circumstances that allow entities to distinguish between measures that have an impact on the credit risk over the expected life of financial assets and those which address temporary liquidity constraints of customers and borrowers,” Ndurunduru said.
On accounting implications resulting from the introduction of the COVID-19 support measures, Ndurunduru said entities should carefully assess the impact of the economic support and relief measures on recognised financial instruments and their conditions. This includes the assessment of whether such measures result in modification of the financial assets and whether modifications lead to their derecognition.
“Determining whether derecognition occurs depends on whether the modification of the terms of the instrument is considered substantial or not. It is noted that such assessment should include both qualitative and quantitative criteria and, especially given the current situation, might be subject to significant judgement,” Ndurunduru said.
