The European Securities and Markets Authority (ESMA) has issued a public statement addressing the financial reporting implications of the COVID-19 outbreak on the calculation of expected credit losses in accordance with IFRS 9 Financial Instruments.
ESMA is issuing this public statement in order to promote consistent application of International Financial Reporting Standards (IFRS) in the European Union (EU) and avoid divergence in practice on the application of IFRS 9. This public statement limits itself to addressing financial reporting aspects, ESMA has co-ordinated with the European Banking Authority (EBA) which issued a statement on the prudential framework in light of COVID-19 measures on 25 March 2020.
Consequent on the worldwide spread of COVID-19, a variety of measures have been, and continue to be, taken by European governments to prevent the transmission of the virus along with economic support and relief measures aimed at addressing the economic consequences of the outbreak on individuals, households and businesses. Such measures include moratoria on repayment of loans, overdraft facilities and mortgages, loan guarantees as well as other forms of business support targeted at individual firms or specific industries.
In addition, banks may be providing to the borrowers other measures on a voluntary basis to borrowers; these voluntary measures may take the form of renegotiations, rollovers or rescheduling of cash-flows that may or may not impact the net present value of cashflows.
Alleviation measures can take a variety of forms; nonetheless, they all require careful consideration by entities of the related impact on financial reporting and, in particular, with respect to the requirements of IFRS 9. Assessing these impacts requires a detailed assessment of conditions based on the facts and circumstances of individual entities.
Consequently, ESMA is issuing this public statement to address specific aspects related to the application of IFRS 9 in relation to the calculation of expected credit losses and related disclosure requirements under these circumstances in the upcoming periodic information of European issuers.
This public statement sets out considerations regarding:
assessment of significant increase in credit risk (SICR);
expected credit loss (ECL) estimation;
public guarantees on exposures; and
transparency and disclosures.
This public statement builds on the recommendations to market participants set out in ESMA’s statement of 11 March 2020.
ESMA’s public statement is available here.