On Wednesday 25 March, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) issued clarifications on the application of the IFRS 9 international standard on accounting for financial instruments in the context of the COVID-19 crisis, particularly with regard to the calculation of expected credit losses.
Since the beginning of the crisis, Member States have adopted a series of support measures for businesses, including moratoria on repayment of loans, overdraft facilities and loan guarantees, which will have an impact on the calculation of expected credit losses.
In ESMA’s view, IFRS 9 includes “sufficient flexibility to faithfully reflect the specific circumstances of the COVID-19 outbreak and the associated public policy measures”.
It states that measures taken in the context of the crisis regarding the suspension or delays in payments should not be regarded as automatically having an impact on the assessment of whether loans have suffered a significant increase in credit risk (SICR).
Whereas ESMA's statement focuses solely on financial reporting, the EBA called in a separate statement for “flexibility and pragmatism” in the application of the prudential framework.
For example, it states that, as part of national measures taken during the crisis, late payment should not lead to automatic classification as “in default”.
The EBA also called on credit institutions to exercise “a certain degree of judgment” in applying IFRS 9, particularly by distinguishing between borrowers who are temporarily vulnerable because of the crisis, but who will be able to cope in the long term, and those who are unlikely to become solvent again.
To read the ESMA statement, go to: https://bit.ly/2UktE6G , and to read the EBA statement, go to: https://bit.ly/2QIoWgC (Original version in French by Marion Fontana)