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20 March 2020

What’s the issue?

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]

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:

  • that have not previously been included in a company’s planning and forecasting process; and 
  • whose future economic consequences are particularly challenging to determine. 

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.

Getting into more detail

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]

The following factors may be particularly relevant when measuring ECLs.

  • The increased uncertainty about potential future economic scenarios and their impact on credit losses may require companies to explicitly consider additional economic scenarios when measuring ECLs. [IFRS 9.B5.5.42]
  • Existing ECL models will use historical experience to derive links between changes in economic conditions and customer behaviour, and ECL parameters such as loss rates, probabilities of default and loss given default. However, these historical relationships are unlikely to read across to the COVID-19 pandemic. Therefore, adjustments to model results, based on expert credit judgement, could be necessary to reflect the information available at the reporting date appropriately.
  • Certain types of customers, industries or regions may be particularly severely affected by the economic effects of COVID-19. Companies with exposure to these customers, industries or regions will need to consider whether this is appropriately captured in their ECL measurements.
  • Governments and central banks are launching measures to mitigate the adverse impact of COVID-19 on banks and borrowers. Companies may need to consider this when estimating ECLs. 
  • Many borrowers are drawing down credit lines or holding on to cash to obtain additional liquidity to help them weather the economic storms. This will be relevant for estimating exposures from loan commitments and prepayable or extendable loans. 
  • The expected cash flows used in measuring ECLs may also be affected by any actions planned by the company (e.g. modification, forbearance, limit extensions). [IFRS]
  • In addition, limit increases for credit cards may impact the period of exposures assessed under paragraph 5.5.20 of IFRS 9.


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.

  • Information about a company’s credit risk management practices and how they relate to the recognition and measurement of ECLs. A company may have changed its risk management practices in response to COVID-19 – e.g. by extending debt relief to borrowers or by following specific guidance issued by governments or regulators. [IFRS 7.35F]
  • The methods, assumptions and information used to measure ECLs – e.g. a company may need to explain how it has incorporated updated forward-looking information into measuring ECLs, in particular: 
    • how it has dealt with the challenge of ECL models that were not designed for the current economic shocks; and 
    • how it has calculated overlays and adjustments to these models. 
  • Quantitative and qualitative information that allows evaluation of the amounts arising from ECLs; the types of analysis disclosed previously may need to be adjusted or supplemented to clearly convey impacts arising from COVID-19. [IFRS 7.35H-L]
  • Information on the assumptions that the company has made about the future and other major sources of estimation uncertainty at the reporting date that have a significant risk of resulting in material adjustment within the next financial year. [IAS 1.125]  

Actions for management to take now

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.

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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