IASB published an article, by Mary Tokar and Sid Kumar, that discusses the potential key financial reporting considerations for preparers, auditors, investors, and regulators as they tackle the complexities associated with the COVID-19 crisis. The discussion draws on views shared during a panel discussion at the IFRS Foundation Virtual Conference on September 28, 2020. The focus is on what information entities should consider when developing assumptions in preparing financial statements in times of heightened uncertainty and what information to disclose about the assumptions used. Most attendees at the conference agreed that disclosure requirements in IFRS standards are satisfactory but improvements are needed in their application.
During the panel discussion, the attendees were polled and asked about a financial reporting issue that was the most challenging in this period of uncertainty. The respondents identified reporting of impairment of financial assets and disclosure of significant judgments as the most challenging tasks. IASB received numerous questions on the application of IFRS 9 on financial instruments during the pandemic. In response to these questions, in March 2020, educational material was published reiterating the requirements in IFRS 9 on the expected credit losses (ECL) model. The educational material emphasized that entities should use all reasonable and supportable information that is available to an entity without undue cost or effort when applying IFRS 9, instead of relying on some mechanistic criterion to determine movements in ECL. In addition, the panel discussed disclosure requirements about assumptions and estimates for both annual and interim financial statements. For entities that report at the end of the calendar year, the impact of COVID-19 was first a reporting issue in their interim financial statement.
The panel also discussed the importance of better information about significant assumptions taking the example of ECL in IFRS 9. An ECL approach requires lenders such as banks to use forward-looking, macro-economic assumptions as inputs in models. These assumptions may be classified as general assumptions by some stakeholders because they may relate to factors outside the control of a bank. In contrast, entity-specific assumptions relate to an entity’s actions and characteristics. When two similar banks use similar general assumptions and arrive at different ECL balances relative to their gross loan books, users want additional information so they can assess the differences in the coverage ratios. For each bank, users want information that helps them understand the extent to which each ECL balance is driven by general assumptions or by entity-specific assumptions that may reflect differences in customer characteristics, loan products, collateral, or other loan terms. Without this information, users find it challenging to make meaningful comparisons. The requirements in IFRS 7 on disclosures related to financial instruments were developed considering user needs and IFRS 7 requires entities to explain the factors that affect measurement of their ECLs.
Keywords: International, Banking, COVID-19, IFRS 9, IFRS 7, ECL, Financial Instruments, Disclosures, Financial Reporting, IASB
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleCBB Launches Fintech Platform and Open Banking Framework in Bahrain
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.
The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers.
In a response to the questions posed by a member of the European Parliament, the President Christine Lagarde highlighted the commitment of the European Central Bank (ECB) to an ambitious climate-related action plan along with a roadmap, which was published in July 2021.
The Single Resolution Board (SRB) published a Communication on the application of regulatory technical standard provisions on prior permission for reducing eligible liabilities instruments as of January 01, 2022.
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization.
The French Prudential Control and Resolution Authority (ACPR) published the corrective version of the RUBA taxonomy Version 1.0.1, which will come into force from the decree of January 31, 2022.
The European Commission (EC) announced that Nordea Bank has signed a guarantee agreement with the European Investment Bank (EIB) Group to support the sustainable transformation of businesses in the Nordics.
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.