Measurement of ECLs
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. This includes information about past events, current conditions and forecasts of future economic conditions. [IFRS 18.104.22.168]
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. [IFRS 9.B5.5.42]
Companies may find this particularly difficult for emerging issues:
However, a company cannot assert that reasonable and supportable information about a matter is unavailable simply because modelling its effects appears difficult or because it would involve a wider than usual range of possible results. [Insights 7.8.238]
The challenge for companies is to incorporate into their measurement of ECLs the forward-looking information relating to the economic impact of COVID-19 that is available without undue cost or effort at the reporting date.
ECL measurements need to incorporate forward-looking information that is available without undue cost or effort at the reporting date. This may be particularly challenging to do for the economic impact of COVID-19.
The COVID-19 coronavirus outbreak is already having severe economic impacts across many jurisdictions compared with 31 December 2019. The economic shocks may become more severe and spread to other jurisdictions. Many governments, central banks and economists have been revising their economic forecasts to try to capture the likely impacts. However, the economic outlook is highly uncertain and may change quickly.
Companies are required to update the economic forecasts that they use to measure ECLs at each reporting date by incorporating the reasonable and supportable information available at that time. The effort and sophistication required will depend on the company’s exposures. 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. [IFRS 22.214.171.124]
The following factors may be particularly relevant when measuring ECLs.
A company is required to disclose the nature and extent of risks arising from financial instruments and how it manages those risks. Therefore, a company will need to explain the significant impacts of COVID-19 on the risks arising from financial instruments and how it is managing 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. [IFRS 7.31]
Examples of specific disclosures include the following.
Our annual Guides to financial statements, which help you to prepare financial statements in accordance with IFRS® Standards, this year include a COVID-19 supplement illustrating additional disclosures that entities may need to provide on accounting issues arising from the pandemic.
Find out more in our podcast on the accounting and disclosure implications for companies, and the actions management can take now.
The International Accounting Standards Board has published guidance on the application of IFRS 9 in the context of COVID-19.
References to ‘Insights’ mean our publication Insights into IFRS
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