COVID-19 poses a serious threat to public health and has led to a debilitating glob- al economic downturn. As the effects of the outbreak evolve, it may be difficult to
distinguish between information, facts and circumstances that should be incor- porated into measurements at the end of a financial reporting period – or indeed, may result in potential subsequent event disclosures supported by necessary changes to estimates, assumptions and other analyses.
It follows that the financial reporting implications for entities may be broad; and the precise implications will depend on the facts and circumstances con- fronting different businesses.
DEBT ACCOUNTING There’s now a need to account for debt moratoriums, loans and overdrafts at concessionary rates.
The extension of payment holidays to borrowers in particular classes of finan- cial instruments will not automatically result in them being considered to have a substantial increase in credit risk (SICR).
Consideration must also be given to whether the concessions under moratori- ums would enable certain borrowers to resume regular payments in the foresee- able future (i.e. who would otherwise have faced financial difficulties) such that substantial increases in credit risk would not occur over the expected remaining life of the receivables.
In terms of the modification of per- forming loans, interest should be accrued at the original effective interest rate (EIR), and modification losses have to be recognised in profit and loss state- ments (at the time of agreement with customers).
For substantial modifications, new loans are to be recognised, derecognis- ing original loans while the interest con- tinues to be recognised at revised EIRs without modification losses in profit and loss statements.
When it comes to non-performing loans, interest must be accrued at origi- nal EIRs on net carrying values after adjusting for expected credit losses (ECLs). Upon restructuring, revised estimated future cash flows are to be dis- counted, applying the original EIRs and any adjustments to the already recog- nised ECLs in profits or losses.
As for working capital loans, interest rates offered for these special products will be considered applicable market rates and no fair value adjustments are needed.
SEGMENTATION There will be a need to segment portfolios, ECL assessments and other disclosure requirements.
Due to the disruptions of operations, there may be an impact on credit quality across the value chains of some busi- nesses – and this could lead to issues of liquidity and credit quality. This may require segmenting portfolios and revis- ing ECL assessments.
For the purpose of measuring ECLs and determining whether SICRs have occurred, entities should group financial instruments on the basis of shared credit risk characteristics, and reasonable and supporting information available on a portfolio basis. This may call for a re- segmentation of portfolios.
However, in circumstances where rea- sonable and supporting information isn’t available in a structured format, man- agement teams may exercise their judgement, taking into account past experiences, business models and inter- nal credit risk management frameworks in determining whether the presumption as stated in SLFRS 9 can be rebutted.
Furthermore, in making such a deter- mination, regulatory provisions also need to be taken into consideration.
Changes in economic conditions shall be reflected in macroeconomic scenar- ios applied by entities and in their weightings. If the effects of COVID-19 cannot be reflected in models, post- model overlays or adjustments will need to be considered.
Extensive disclosure requirements need to be continued in financial state- ments. In addition, several temporary practical expedients would be issued in the application of SLFRS 9.
FAIR VALUES The measurement of fair value will also come into play. While volatility in financial markets may sug- gest that prices are aberrations and do not reflect fair value, it would not be appropriate for entities to disregard mar- ket prices at measurement dates – unless those prices are from transactions that are not orderly.
Therefore, it is permissible to apply appropriate valuation techniques to measure the fair value of financial instruments and non-financial assets.
However, such values calculated and used as fair values in financial statements for the 2019/20 period by using different valuation techniques are not expected to exceed market values reported at 31 December 2019.
Specifically, rates considered in these financial statements may continue to be used in the first quarter of 2020 for gov- ernment foreign currency bonds.
ASSET VALUES The possibility of declines in the recoverable value of assets should be assessed, and impairments incorpo- rated in the financial statements due to the decline of the stock market, lower interest rates and commodity prices, import and export barriers, the lock- down, idle assets, nonmoving stocks, non-operating properties or other manu- facturing plants, lower production and reductions of selling prices.
GOING CONCERN All available information with regard to the future should be con- sidered, which could be obtained after the reporting date, to assess whether they’re going concerns.
Accordingly, management teams may consider the foreseeable future beyond a 12 month period, updates to forecasts and sensitivities considering the risk factors identified under different possi- ble outcomes, reviewing projected loan covenant compliance in different scenar- ios and related implications on the avail- ability of future funding, and assessing plans to mitigate events or conditions that may cast significant doubt on enti- ties’ ability to continue as going con- cerns.
POST BALANCE SHEETS The effects of the coronavirus could be a ‘non-adjusting event’ for entities with an annual report- ing date of 31 December 2019. However, for annual reporting periods ending thereafter, the effects of the COVID-19 pandemic are likely to be adjusting events.
DEFERRED TAXATION An assessment of the effects of changes have to be made to profit projections or future forecasts due to the business implications of COVID- 19, and reassessments considered for deferred tax assets and liabilities at the end of the reporting period.
LEASE MODIFICATION The assessment of whether rent concessions or other bene- fits are offered by lessors to lessees will result in lease modifications based on the contractual terms. If so, lease liabili- ties should be remeasured by using revised incremental borrowing rates.
As a practical expedient, lessees may elect not to assess whether coronavirus related rent concessions are lease modi- fications upon complying with the con- ditions prescribed in the COVID-19 guidance.