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Effects of COVID-19 on expected credit losses calculations

Effects of COVID-19 on expected credit losses calc...

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Ágnes Rakó

Partner

KPMG Tanácsadó Kft.

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IFRS 9 Financial instruments requires expected credit losses (ECLs) to be measured as an unbiased, probability-weighted amount, using reasonable and supportable information that is available without undue cost or effort at the reporting date.

Evaluating ECLs requires companies to consider a range of possible outcomes and their respective probabilities, and to apply judgement when determining what constitutes reasonable and supportable forward-looking information.

Furthermore a company is required to disclose the nature and extent of risks arising from financial instruments and how it manages those risks. It will need to use judgement to determine the specific disclosures that are relevant to its business and necessary to meet these objectives.

ECLs are usually material for banks and other financial institutions and these companies are likely to face the greatest challenges and will need to put the most resources into updating ECLs to reflect changing conditions.

Actions for management:

Consider the following when measuring ECL:

  • whether additional economic scenarios are needed;
  • whether adjustments to model results, based on expert credit judgement, are necessary;
  • whether the measurement appropriately captures the types of customers/issuers or regions that are particularly impacted by the economic effects of COVID-19;
  • changes in customer behaviour such as drawing more extensively on credit lines and holding on to cash;
  • the impact of any assistance to borrowers from a government or regulator; and
  • the impact of any actions planned by the company (e.g. modification, forbearance, limit increases) on the expected cash flows.

© 2020 KPMG Tanácsadó Kft., a Hungary limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity.  Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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