The European Securities and Markets Authority (ESMA) issued a statement late last month to address the accounting implications of the coronavirus outbreak on financial instruments accounting.

The announcement is relevant for banks and pension schemes that account for their holdings of financial assets under International Financial Reporting Standard (IFRS) 9, Financial Instruments.

In the statement, ESMA noted: “[T]he principles-based nature of IFRS 9 includes sufficient flexibility to faithfully reflect the specific circumstances of the COVID-19 outbreak and the associated public policy measures.

“Issuers and their auditors should take this public statement into due consideration. ESMA will continue monitoring issuers’ practices in relation to IFRS 9 and in particular as regards the application of judgement in the current context.”

The intervention accompanied the release by the European Banking Authority of a reminder for issuers that they enjoy a “degree of flexibility” when assessing whether there has been a deterioration in credit quality under IFRS 9.

It also explained that they must “consider the current exceptional circumstances when determining which information can be considered reasonable and supportable information as foreseen under IFRS9,” and consider the impact of both the current market dislocation, as well as the lack of reliable information.

Meanwhile, the ESMA notice specified five factors that it said preparers must consider:

  • accounting for the modifications resulting from the introduction of government support measures;
  • assessment of significant increase in credit risk;
  • estimation of expected credit losses;
  • the effect of public guarantees on issuers’ exposures; and
  • transparency.

The International Accounting Standards Board (IASB) launched its project to develop IFRS 9 in 2009 in response to the complaint that the incurred loss model in its existing financial instruments rulebook had delayed the recognition of losses at financial institutions during the financial crisis.

Although IFRS 9 has an expected loss model for loan loss recognition, meaning banks must set aside an upfront allowance to cover likely future losses on their loan books, the Local Authority Pension Fund Forum has questioned whether the requirements go far enough.

In January 2017, those concerns came to a head when the LAPFF wrote to the European Commission and warned that its endorsement process for IFRS 9 was defective.

Separately on 26 March 2020, Prudential Regulation Authority chief Sam Woods sent a so-called Dear CEO letter to the chief executive officers of the institutions it supervises to offer advice on accounting issues arising out of IFRS 9, capital requirements and loan covenants.

The letter advised that: “Being overly prudent will not be helpful when it comes to economic recovery.”

It also advised that where a borrower takes advantage of loan forbearance, this should not normally trigger a default, while a modified audit report as a result of the coronavirus crisis, equally, should not necessarily amount to a breach of covenant.

IASB delays insurance standard

During its 17 March meeting, the International Accounting Standards board voted to defer the effective date of its insurance accounting standard IFRS 17, Insurance Contracts, for a further two years to 1 January 2023.

The board also extended the temporary exemption from applying IFRS 9 in conjunction with the new standard to 1 January 2023.

The new standard, which applies not just to insurers but also to all reporting entities that hold insurance contracts, is intended to plug a major gap in IFRS literature, which currently lacks a general insurance liabilities accounting standard.

The existing literature, IFRS 4, effectively directs preparers to continue to account for their insurance liabilities under their legacy local accounting rules when they adopt IFRSs.

During the course of the March meeting, IASB chair Hans Hoogervorst flagged up possible concerns about the impairment of available-for-sale securities by insurers under the board’s legacy financial instruments rule book IAS 39.

FRC successor awaits creating legislation

The UK’s Financial Reporting Council (FRC) has released its latest annual budget and plan detailing both its expenditure plans and progress in implementing the recommendations of the Kingman Review.

The document noted that the FRC has “fully implemented over 20 of the 83 recommendations of the Kingman Review” and has “begun to implement over 35 more”.

It added that the government will need to bring forward primary legislation to create its successor body, the Audit, Reporting and Governance Authority, and grant it the necessary powers to implement fully the Kingman recommendations.

The FRC’s document goes on to explain that the body has commenced “preparatory work in these areas and await[s] the Government’s decisions on whether it will implement those remaining areas of public policy that require legislation.”