IFRS 9 Assessment during pandemic period
IFRS 9 has been perceived as one of the complex financial reporting standards, considering the fact that many companies still face challenges in updating the assessments even after completing three reporting years, since the requirements of the standard became effective and mandatory. Also, it is apparent that the impacts of COVID-19, have added additional complications to the process of deriving reasonable results in the IFRS 9 assessments, especially in the calculations of ECL (Expected Credit Loss) provisions. Here we intend to discuss some of the major elements that need special attention when performing the evaluation of compliance with IFRS 9 accounting requirements during this pandemic period.
Why is it important to revisit the nature and classification of assets under IFRS 9 assessment?
The nature and classification of assets under IFRS 9 mainly depend on the intended use and expected flow of economic benefits from them. The impressions of the pandemic have struck in many unexpected ways across the organizations with an instant shift of projected growth models of various underlying assets to survival or recovery mode. This in turn has caused serious deviations from meeting the criteria of existing classifications by the assets which now necessitate periodic revaluation of asset categories by the companies to ensure they are in line with the IFRS 9 mandates and to make changes, if required.
What are the points to be noted in the assessment of significant increase in credit risk of assets under IFRS 9 ECL models?
The economic crisis driven by the pandemic has resulted in many consequences, one of which is the increase in the changes made to financial arrangements and credit terms across the business world, giving more allowance and flexibility to the borrowers. Again the responsibility of assessing the changes in credit risk of receivables by the lenders, has turned out as extremely challenging because of the level of uncertainties involved in the inputs for those assessments. Once the significant increase in credit risk is identified, reclassification of assets (from stage 1 to stage 2 or 3) might be required to calculate lifetime ECL, with probable increase in the amounts of values of exposure, PD (Probability of Default) and LGD (Loss Given Default).
How to evaluate the validity of variables and assumptions used as inputs in ECL calculations under IFRS 9?
It is extremely important to validate the reliability of the available information which are used as inputs for ECL calculation, by performing meaningful analysis in the format as applicable to each sector of business. There should be frequent checks to find out if any change in data published by accredited sources for macroeconomic factors such as GDP rates, which shall be considered to update the assumptions used in the ECL calculations. Also Government support and reliefs offered are to be evaluated to include their impacts on the ECL amounts. Sensitivity analysis by changing the variables/assumptions and implications of different scenarios shall be assessed to perform an informed decision making. Each of the variables/assumptions used in the ECL calculation may have far reaching inferences over the ECL numbers. Hence to proactively ensure the completeness and accuracy of the calculations, it is recommended to consult with experts in the field who can guide you in each step of the IFRS 9 assessment.
Is there a reasonable approach to incorporate judgements into the existing ECL calculation models under IFRS 9?
Because of the high level of uncertainty prevailing in the current period of time, it is not recommended to fully remodel the IFRS 9 models. Instead for the time being, an approach of overlay can be followed by incorporating adjustments to the results from the existing models of calculations. Based on the judgements over various economic factors as applicable to each industry, a range of possibilities and corresponding scenario based percentages can be formulated to apply the suitable percentage onto the results from the existing models.
How CDA can help you in your assessments under IFRS 9?
It is undeniable that the review of IFRS 9 calculation models calls for the deployment of a substantial amount of time, resources and efforts by the organizations. CDA has qualified accounting experts who have experience of successfully assisting various companies in performing the review of IFRS 9 calculations and assessments of multiple elements involved in those workings, based on the changes that have impacted the respective businesses and the economy. CDA can provide you with valuable insights which will ease your decision making over the complex judgements and estimates in the ECL models, ensuring compliance with the IFRS 9 accounting requirements.