Releases of MFRS Financial Instrument to Account for Expected Credit Losses During the COVID-19
MASB is working closely with regulators to monitor the developments of the coronavirus pandemic (COVID-19). MASB is also monitoring how much of an impact this is going to have on Malaysia’s financial markets, along with the what this means for accounting. The high level of uncertainty due to the COVID-19 pandemic will affect financial reporting judgements in a big way and MASB is aware of this.
MASB is assuring its clients that the Malaysian Financial Reporting Standards (MFRS) framework requires and accepts adjusted reporting for the COVID–19. This will address the challenges that come up in the accounting.
The MFRS Financial Instrument measures most financing receivable and loans payments are amortised. The costs of the payments will be subject to impairment testing.
Upon the initial identification, credit loss allowance is expected to be loss for 12-months. This is expected for financing receivables and loans. Credit risk on loan repayments for the next 12-months is expected to be affected. If that is the case, this is equal to the credit loss for the same amount of time of the receivable.
Measuring Expected Losses
In calculating expected losses, all information and data must be put into consideration. This includes forward-looking information. All information that is available and has been verified at the date of reporting, including future forecasts and past events, should be included when measuring expected credit losses.
Looking at how the COVID-19 is progressing, to determine whether sufficient data and information are available for forecasting and reporting, judgment needs to be made with the information available on hand. This is a requirement of the MFRS Financial Instrument. Reporting entities will most likely need to adjust the information they already have. The adjustment needs to consider the potential scenarios in which credit risks may become too high risk.
With all the uncertainty surrounding the situation, it is very important to estimate expected credit losses accordingly in the financial statements of reporting entities. The Reporting entities are advised to include all relevant information for the entire schedule of the MFRS Financial Instrument in their credit losses forecasting with all the supporting data that is available to them.
Credit loses forecasts made by reporting entities must include expected impacts, expected duration and the extent of the conditions due to measures taken by the government. If the condition is expected to be temporary and market conditions are likely to recover within the term of the receivables, the affected credit losses should be expected mainly for 12-months.
Usually, restructuring of receivables made by a lender could affect the credit risk significantly and recognising the loss of allowances for the duration of the expected losses is crucial. But with all that has been going on, it is not accurate to just assume that restructuring will affect all receivables when it comes to credit losses.
Further consideration is also needed for those who are directly affected by the outbreak to resume their regular payments in the future. This is to minimise a significant increase in credit risk for the remainder of the receivables. Because the risk involved is entity-specific, reporting entities exercise caution when considering the disclosures that they want to include in their financial statements in relation to the outbreak.