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COVID-19 business support measures: impact on IFRS 9

8 April 2020: ICAEW Financial Services Faculty’s Philippa Kelly looks at the accounting challenges around payment holidays and other support extended to help businesses survive the impacts of coronavirus.

International Financial Reporting Standard 9 Financial Instruments was introduced following the financial crisis to make accounting for loan losses more forward-looking and to give markets better information about where banks may be exposed to risk. 
The crisis created by coronavirus has resulted in an extensive array of government-backed measures to support businesses and the encouragement of payment holidays and interest waivers. The way support is structured means it appears the same as forbearance measures which might be extended on a case-by-case basis to businesses or individuals who are struggling financially. 
Standard setters and regulators are keen not to see a ratcheting up of expected credit losses due to banks extending support through this crisis and neither are the banks themselves, as this would constrain the amount of capital they have which enables them to continue lending to further support the economy. 
The International Accounting Standards Board (IASB), the European Securities and Markets Authority (ESMA) and the Prudential Regulation Authority (PRA) have all published letters or statements on how the principles in IFRS 9 may be used to best reflect the economic and practical realities of the crisis and intended support from government through what is hoped to be a short-term liquidity shock. 
On 3 April, the Basel Committee on Banking Supervision (BCBS) published their measures to reflect the impact of COVID-19, which encompass considerations for IFRS 9 reporting in line with those set out by the IASB and ESMA, but also looks at how they could interact with regulatory capital. Whilst the BCBS position is persuasive, the Capital Requirements Regulation must be amended for the announcement to change the capital treatment. 
There are two key aspects to avoiding a capital hit from the additional lending and other support practices: risk-weighting of loans and the transitional measures which allow banks not to take the full capital impact of expected credit losses in the initial years of moving to the new standard. 
The BCBS has suggested:

  •  Loans subject to government guarantees should use the sovereign risk-weight rather than that associated with the business 
  • Payment holidays granted voluntarily due to regulatory or other policy encouragement should not count toward counting of days past due when looking at default triggers 
  • Credit risk should be assessed based on rescheduled payments
  • Accepting a holiday or other relief does not (automatically) mean a loan is forborne
  • Transitional measures should be relaxed so banks can take greater advantage of them.

Read more on the Basel Committee on Banking Supervision’s suggestions here.

For further support on COVID-19 and financial reporting, please visit our dedicated coronavirus resources hub.