This Joint Guidance proposes practical solutions to manage the impact of economic uncertainty on Expected Credit Loss, while remaining compliant with globally accepted financial reporting standards, IFRS. It is suggested to employ the flexibility embedded in the IFRS 9 framework to cope with the Covid-19 crisis.
Banks and finance companies are required to group clients that are part of the Targeted Economic Support Scheme (TESS). Such grouping will be performed according to the impact of the crisis on those clients as follows:
• Those that are temporarily and mildly impacted (“Group 1”); and
• Those that are significantly impacted (“Group 2”).
Group 1 clients are not expected to face substantial changes in their creditworthiness, beyond liquidity issues, over the duration of the TESS or the period during which they are subject to stresses arising from Covid-19, whichever is the shorter. Consequently, their assigned “stage” under IFRS 9 should remain the same, at least for the duration of the scheme or their distress, whichever is the shorter.
Group 2 clients are expected to face substantial changes in their creditworthiness, in addition to liquidity issues addressed by the TESS.
• Where there is sufficient deterioration in credit risk to trigger a migration to stage 2, this migration should take place.
• Due to the possibility of a future economic upturn, these clients will not normally be migrated to stage 3, based on their financial performance for the duration of the program. In exceptional circumstances, stage 3 migration can be triggered during the TESS program if clients’ business models are no longer sustainable.
• Banks and finance companies should continue to treat clients, that are not part of the TESS, as per their existing IFRS 9 policies for the purpose of determining their stage.
Banks and finance companies are not encouraged to recalibrate IFRS 9 models during the crisis, due to the high degree of uncertainty surrounding its economic consequences. Rather, input adjustments and judgmental overlays should be considered. Exposure at default should incorporate realized exceptional drawdowns occurring because of the crisis. Generally, banks and finance companies should also consider overlays to accounts for weaknesses in the predictive power of models during the crisis.
Banks and finance companies are not required to incorporate the updated macroeconomic forecasts into ECL until September 1, 2020. However, dedicated governance should be put in place to review thoroughly these forecasts before they are used to compute IFRS 9 Expected Credit Loss.
Finally, comprehensive specific disclosures are required to ensure transparency in the grouping process, the design of the economic forecasts, any adjustment to model input and/or any judgmental overlay.