Virus Impact Won’t Derail International Bad-Debt Rules

International accounting standards are flexible enough to cope with the uncertainty about bad debt provisioning caused by the new coronavirus pandemic, the global standard setter says.

In guidance issued Friday, the International Accounting Standards Board clarified how bad debts should be reported under International Financial Reporting Standard 9 Financial Instruments in light of the economic uncertainty from the pandemic. In particular, the existence of government aid programs mean that banks do not necessarily have to write off debts that were not being paid as a result of the virus.

“For example, the extension of payment holidays to all borrowers in particular classes of financial instruments should not automatically result in all those instruments being considered to have suffered an SICR,” the guidance said, referring to significant increases in credit risk.

The IASB announcement came soon after the Federal Reserve said U.S. regulators would let banks reduce the demands of the current expected credit loss, or CECL, accounting standard when figuring out how much capital they need to maintain. Banks required under U.S. accounting rules to adopt CECL in 2020 can mitigate the estimated cumulative regulatory capital effects for up to two years, the Federal Reserve and other banking agencies said in a Friday statement.

• Under IFRS 9, introduced in 2018, banks must set aside money for likely loan losses if credit conditions worsen, threatening a surge in bad debts as companies and individuals stop work because of the pandemic.
• The IASB pointed to recent IFRS 9 guidance published by bodies including the European Banking Authority and the U.K.’s Prudential Regulation Authority that said banks did not necessarily need to write down debts because of coronavirus. The standard setter emphasized that it had not changed IFRS 9.