ESMA has requested clarifications from the IFRS Interpretations Committee on accounting treatment for the third series of the ECB Targeted Longer-Term Refinancing Operations (TLTRO III). In a letter to the Interpretations Committee, ESMA highlights that it has identified diversity in the application of the requirements of IFRS 9 and IAS 20 in relation to the accounting treatment of the TLTRO III transactions by banks. Earlier, in January 2021, ESMA had also issued a public statement with aim of promoting transparency in the IFRS financial statements of banks and had pointed out the existence of diverse practices in the accounting treatment of these transactions by banks.
In its letter, ESMA seeks clarifications from the IFRS Interpretations Committee, on:
- how to assess whether the TLTRO III transactions involve loans at a below-market interest rate and, if so, whether the advantage of the below-market rate of interest needs to be accounted for according to the requirements of IFRS 9 or IAS 20.
- how to assess in which period the benefit of the TLTRO III transactions needs to be recognized, if the advantage of the below-market interest rate needs to be accounted for according to IAS 20.
- whether it is acceptable, in terms of presentation, to add the amount of the benefit of the TLRTO III loan when calculating the carrying amount of the TLTRO III liability.
- how to calculate the applicable effective interest rate and whether the changes in estimates of payments due to revised assessment of meeting the eligibility criteria should be accounted for in accordance with paragraph B5.4.6 of IFRS 9 requiring recalculation of the amortized cost of the financial liability or not.
- how to account for changes in cash flows related to the prior period resulting from the bank’s lending behavior or from changes in TLTRO III conditions by ECB.
ESMA is of the view that the lack of clarity of the wording of IFRS 9 and IAS 20 leads to divergent practices of the European banks. Given the overall volume of the TLTRO III operations, ESMA believes that this matter may have a material effect on the financial statements of banks and may be widespread across EU. ECB's TLTROs are intended to provide financing to credit institutions. The third TLTRO program, which consists of ten refinancing operations, each with a maturity of three years, started in September 2019. During 2020, certain transaction parameters were modified to support the continued access of bank credit to businesses and households in the face of disruptions and temporary funding shortages associated with the COVID-19 pandemic.
Keywords: Europe, EU, Banking, TLTRO, IFRS 9, COVID-19, ECB, ESMA
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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