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
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