*Source SNG Grant Thornton
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Measurement of expected credit losses
Under IFRS 9 ‘Financial Instruments’, expected credit losses (“ECLs”) must be recognised for debt-type financial assets not measured at fair value through profit or loss (FVTPL) based on information about past events, current conditions and forecasts of future economic conditions. In other words, even possible future outcomes that may or may not come to pass should be factored into an entity’s ECLs on a probability-weighted basis. The negative economic outlook and cash flow difficulties experienced by customers as a result of COVID-19 must be factored into an entity’s forecasts of future conditions, which may result in an increase in its provision for ECLs to reflect (a) a greater probability of default across many borrowers, even those that currently do not exhibit significant increases in credit risk but may in the future; and (b) a higher magnitude of loss given default, due to possible decreases in the value of collateral and other assets. ECL applies to trade receivables, loans, debt securities, contract assets and assets arising from costs to obtain or fulfil a sales contract, as well as the losses recognised in measuring loan commitments and financial guarantee contracts. Regardless of whether the simplified approach or the 3-stage model set out in IFRS 9 is being applied to assess ECL, the impact on the ECL calculation as a result of COVID-19 needs to be very carefully assessed.
To the extent that information about the impact of COVID-19 that becomes available after the reporting date provides more evidence about conditions at the reporting date, entities will need to revisit their estimates of ECL at the reporting date. For example, if a customer files for bankruptcy subsequent to the period end:
• an entity should consider whether the new information reflects credit conditions that already existed at the reporting date and, if so, review the loss percentage in its provision matrix for all other receivables
• an entity should consider whether the bankruptcy is simply confirming conditions that already existed for the customer at the reporting date
Even if estimates do not require revision, full disclosure of circumstances taken into consideration is recommended.