As the Covid-19 virus spreads across the globe, economic consequences will follow, both in the short- and long-term. The Central Bank of the UAE (the “CBUAE”) has already taken relief measures under the Targeted Economic Support Scheme (“TESS”), effective from 15th March 2020. The economic disruption and the relief measures will have an effect on the financial accounts of banks and finance companies operating in the UAE, including the Dubai International Financial Centre (“DIFC”) and Abu Dhabi Global Market (“ADGM”), and this effect needs to be appropriately reflected by the existing financial reporting framework. Given that the principles-based nature of International Financial Reporting Standards (“IFRS”) are open to significant interpretations, the CBUAE, together with the Dubai Financial Services Authority (the “DFSA”) and the Financial Services Regulatory Authority (the “FSRA”), as the banking regulators in the UAE’s financial free zones (collectively the “Regulators”), believe that additional guidance is needed.
This Joint Guidance is issued pursuant to the powers vested, respectively, in (i) the CBUAE under the Central Bank Law, No. (14) of 2018 regarding the Central Bank & Organization of Financial Institutions and Activities (the “Central Bank Law”), (ii) the DFSA under Article 36 of the Regulatory Law, DIFC Law No.1 of 2004 and (iii) the FSRA under section 15 of the Financial Services and Markets Regulations 2015.
Paragraph 5.5.17 of the IFRS 9 standard states that expected credit loss (“ECL”) used as to determine accounting provisions must be “an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes”. It must be based upon “reasonable and supportable information that is available without undue cost or effort at that date about past events, current conditions and forecasts of future economic conditions”. In other words, the ECL must be point-in-time and forward looking in a way that is not overly optimistic nor overly pessimistic. However, the exceptional circumstances surrounding the Covid-19 crisis make this exercise challenging because of the uncertainty regarding its economic consequences.
This Joint Guidance is necessary to ensure (i) harmonization across the UAE banking sector and (ii) that provisions are appropriately calculated. This Joint Guidance proposes practical solutions to manage the impact of economic uncertainty on ECL, while remaining compliant with globally accepted financial reporting standards, IFRS. This implies meeting the accounting requirements of an accurate and point-in-time estimation of risk, while recognizing that this decision process needs to be adjusted in the current environment. The Regulators hold the view that the flexibility embedded in IFRS 9 framework should be employed to cope with the current crisis. This Joint Guidance presents a mixture of adjustments offered by the IFRS 9 principles, such as individual assessment, portfolio assessment, macroeconomic adjustment and management overlay.
At this point-in-time, banks and finance companies are not required to update model parameters to account for this crisis. Rather, banks and finance companies are required to adjust inputs, consider model outputs critically and make use of temporary, judgmental overlay if necessary.
For foreign banks operating in Financial Free Zones as branches, they can choose to follow this Joint Guidance or guidance issued by their home country relevant authorities, if any.