THE Public Accountants and Auditor’s Board (PAAB) has unveiled guidance to ensure that entities prudently assess the impact of the economic support and relief measures on recognised financial instruments and their conditions assessing whether such measures will result in modification of the financial assets.
BY FIDELITY MHLANGA
According to a circular by PAAB titled “Accounting Implications of the COVID-19 Pandemic on the Calculation of Expected Credit Losses in Accordance with IFRS 9, Financial Instruments”, companies must ensure that modifications perpetuated by relief measures and support do not lead to derecognition.
Derecognition is the removal of a previously recognised financial asset or financial liability from an entity’s balance sheet.
“It is prepared for the purpose of highlighting requirements within IFRS 9 financial instruments that are relevant for entities in considering how the COVID-19 pandemic affects their accounting for expected credit losses (ECLs).
It does not change, remove nor add to, the requirements in the standard. Instead, it is intended to support the consistent and robust application of requirements in IFRS Standards,” PAAB secretary Admire Ndurunduru said in a circular to companies.
In determining whether derecognition occurs, it depends on whether the modification of the terms of the instrument is considered substantial or not. PAAB reminded entities of the need to disclose their accounting policy for determining when a modification is done and its relevance in understanding financial statements.
Companies have been urged to release judgments made that have the most significant effect on the amounts recognised in their financial statements.
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“It is noted that such assessment should include both qualitative and quantitative criteria and, especially given the current situation, might be subject to significant judgment. In light of the current circumstances, if the support measures provide temporary relief to debtors affected by the COVID-19 pandemic and the net economic value of the financial instrument is not significantly affected, the modification would be unlikely to be considered as substantial,” Ndurunduru said.
On the assessment of significant increase in credit risk (SICR), IFRS 9 requires entities to assess at each reporting date whether the credit risk of a financial instrument has increased significantly since its initial recognition.
“Entities should note that assessing whether there is a SICR is a holistic assessment of a number of quantitative and qualitative indicators [IFRS 9, paragraph B5.5.17] and should capture the changes in the lifetime risk of default, i.e, over the entire expected life of the instrument,” Ndurunduru said.
IFRS 9 is an international reporting standard that requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument.
PAAB highlighted that entities should note that the government, through the pronouncements by Finance and Economic Development minister Mthuli Ncube, is establishing economic support programmes for impacted individuals, businesses or industries.
“These programmes are designed to mitigate the adverse impact of COVID-19 and related economic consequences. When these support programmes impact (i.e, reduce) the lifetime risk of default on a financial instrument they should be considered in the assessment of the SICR of that financial instrument,” Ndurunduru noted.
“Entities should note that the measures taken in the context of the COVID-19 pandemic which permit, require or encourage suspension or delays in payments, should not be regarded as automatically having a one-to-one impact on the assessment of whether a financial instrument has suffered a SICR. In the context of the SICR assessment, an analysis is necessary of the conditions under which these measures are implemented.”
However, it is noted that while there is a rebuttable presumption that payment defaults of more than 30 days provide evidence of a significant increase in credit risk in applying IFRS 9, this presumption can be rebutted that’s according to IFRS 9, paragraph B5.5.20.
“Entities are reminded to carefully consider whether the specific circumstances related to the COVID-19 pandemic and associated economic support and relief measures provided in individual circumstances, constitute sufficient justification to rebut this presumption and disclose the judgment in this respect,” Ndurunduru said.
On ECLs estimation, PAAB urged entities to assess the extent to which, among other facts, the high degree of uncertainty and any sudden changes in the short-term economic outlook are expected to result in impacts over the entire expected life of the financial instrument.
“Such considerations are integral to the functioning of the ECLs model under IFRS 9. In particular, given the scarcity of available and reliable information in the current context, entities may face problems in generating reasonable and supportable short-term economic forecasts,” Ndurunduru said.
