The assessment of credit risk is usually an integral part of measuring expected credit losses (ECLs) under IFRS 9 Financial Instruments. Except for some trade and lease receivables, a company needs to assess at each reporting date whether the credit risk on a financial instrument has increased significantly since initial recognition. If it has, then ECLs are recognised over the expected life of the exposure; if it has not, then ECLs are limited to those over the next 12 months of the life of the exposure. A company also needs to assess whether an exposure is credit-impaired.

Companies are required to incorporate forward-looking information that is available without undue cost or effort into their assessment of whether credit risk on a financial instrument has increased significantly. This may be particularly challenging to do for the economic impact of COVID-19.

Actions for management:

• whether it is possible to incorporate COVID-19-related changes in the risk of default into PDs for individual exposures on a timely basis;
• incorporating qualitative factors in identifying SICR – e.g. changes in customer behaviour or requests for payment holidays or limit increases;
• assessing SICR on a collective basis;
• whether modification of contractual terms of a financial instrument leads to recognising a gain or loss on derecognition, or a gain or loss on remeasurement; and
• whether assistance provided by a government means that government grant accounting is appropriate.