The Malaysian Accounting Standards Board (MASB) issued a statement on 25 March 2020 relating to considerations in measuring expected credit losses (ECLs) under MFRS 9, Financial Instruments. MASB emphasised that the principles-based nature of MFRS 9 requires and allows for judgement in addressing the accounting challenges arising from COVID-19.
On 27 March 2020, the International Accounting Standards Board (IASB) issued its statement on IFRS 9, affirming that the standard does not set “bright lines or a mechanistic approach” to determining when lifetime losses are required to be recognised.
Although information is still limited under the current circumstances, MFRS 9 requires reporting entities to assess potential scenarios involving general deterioration in credit risk. Reporting entities will require a holistic assessment that should capture the changes in the lifetime risk of default – i.e. over the entire expected life of the instrument.
The assessment may require significant judgement and should consider both quantitative and qualitative factors – e.g. changes in customer behaviour or requests for payment holidays or limit increases. Stress testing scenarios will need to be sufficiently robust in order to cover events to the scale of COVID-19.
ECLs are measured reflecting an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes. It takes into account reasonable and supportable information on-hand that is available without undue cost and effort at the reporting date about past events, current conditions and forecasts of future economic conditions.
MFRS 9 includes a rebuttable presumption that a loan that is more than 30 days past due has undergone a deterioration in credit risk. Reporting entities may need to adapt the supportable information on-hand on potential scenarios and make judgements in estimating the ECLs.
If COVID-19 impacts on credit risk cannot be identified at an individual instrument level, then it may be necessary to assess credit risk deterioration on a collective basis – e.g. for a group or part of a group of loans.
Forecasts of future conditions
• The impact of temporary shocks could be determined to affect mainly the 12-month ECLs.
• Reporting entities need to consider how much the current uncertainty and changes in the short-term economic outlook are expected to result in impacts over the entire life of a financial instrument.
Stage transfer criteria
Moratoriums provided to borrowers should not automatically result in a stage transfer under MFRS 9 in the absence of other factors relevant to the assessment of whether there has been a significant increase in credit risk.
Potential Day 1 modification loss
There is potential Day 1 modification loss on loans with payment moratorium if lenders do not compound interest on the deferred payments.