Updates provided by Clearwater’s Sabrina Wilson, CPA, FLMI; and Stephen Muncaster, ACA.
As the myriad impacts of coronavirus and COVID-19 have rippled through global financial markets and industries, investment and portfolio accounting regulators are responding quickly to mitigate negative impacts and make room for investors to address the situation.
Below are key and emerging guidance from the International Financial Reporting Standards (IFRS); the Financial Accounting Standards Board (FASB); the US’s National Association of Insurance Commissioners (NAIC); the U.S. Securities and Exchange Commission (SEC); and the EU’s supervisors: European Securities and Markets Authority (ESMA), European Insurance and Occupational Pensions Authority (EIOPA), the UK’s Financial Conduct Authority (FCA), Prudential Regulatory Authority (PRA), and the Financial Reporting Council (FRC).
IFRS 9 Expected Credit Losses
COVID-19 accounting impact guidance has been issued by the IASB, ESMA, PRA, and the FRC. The focus is on expected credit losses for amortized cost financial assets under IFRS 9 Financial Instruments Recognition and Measurement; IAS 1: Presentation of Financial Statements; and the need to disclose “material uncertainties” in Going Concern statements, increased focus on key judgments and assumptions, and IAS 10 Events after the Reporting Period for those with year-ends after 31 December 2019.
INTERNATIONAL ACCOUNTING STANDARDS BOARD
On 27 March the IASB issued a briefing paper on IFRS 9 and COVID-19 focusing on expected credit losses (ECL). The paper highlights that the standard does not contain a bright line test or a mechanistic approach for determining lifetime losses. It directs users to consider the impacts of government support and exceptional circumstances when ascertaining if a lifetime loss should be provided for as part of their Stage 2 Significant Increase in Credit Risk (SICR) assessments.
ESMA IFRS 9 GUIDANCE
ESMA, the EU regulator with responsibility for IFRS enforcement, issued a briefing paper on the impact of support measures on IFRS 9 focusing on the following:
Lifetime credit losses — significant increases to credit risk (SICR):
There is a 30-day arrears rebuttable presumption for Stage 2 Lifetime ECLs in IFRS 9. ESMA asks issuers to consider whether the specific support measures provided (including that from governments) constitutes enough evidence to rebut the presumption.
Modifications to cash flows:
IFRS 9 requires consideration of cashflow modifications to determine if an instrument should be de-recognized and a new one created at the date of the change.
Determining whether derecognition occurs depends on whether the modification of the terms of the instrument is considered substantial or not.
There is a risk that COVID-19 support measures could trigger de-recognition.
ESMA considers that if the support measures provide temporary relief to debtors affected by the COVID-19 outbreak and the net economic value of the loan is not significantly affected, the modification would be unlikely to be considered as substantial and the instrument would not be de-recognized.
Estimation of expected credit losses and the COVID-19 impact:
Stage 2 lifetime credit losses require consideration of events over the expected life of the instrument.
ESMA’s view, when making forecasts, is that issuers should consider the nature of this economic shock (i.e., whether the COVID-19 effect is expected to be temporary) and the impact that the economic support and relief measures (including debt moratoria) will have on the credit risk over the expected life of the instruments, which include, depending on the instruments’ maturities, longer-term estimates.
PRA ‘DEAR CEO’
On 26 March the PRA issued a ‘Dear CEO’ letter highlighting the risk of credit tightening form increases in expected credit loss provisions and asking firms to consider the exceptional circumstances of the pandemic and the support provided as mitigates in their ECL assessments.
Financial Accounting Standards Board (FASB)
According to US GAAP, a restructuring of a debt constitutes a Troubled Debt Restructurings (TDRs) if the creditor grants a concession to the debtor due to the debtor’s financial difficulties. FASB confirmed that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. However, the loan modifications shall be short term (e.g., six months) and the changes may include payment deferrals, fee waivers, extension of repayment terms, or other delays in payment that are insignificant.
FASB will discuss plans to support stakeholders who are impacted by COVID-19 on 8 April 2020. Discussion will include:
- Troubled Debt Restructurings and lease modifications
- Effective date for pending significant standards
- Sunset date for reference rate reform
- Potential impact to current project deliberations and standard setting as a result of the COVID-19 pandemic
National Association of Insurance Commissioners (NAIC)
The Statutory Accounting Principles (E) Working Group (SAPWG) currently has four exposed items with a comment deadline of April 2, 2020. Three of these items are related to COVID-19. The working group will adopt them by e-vote next week.
INT 20-01 (ASU 2020-04) REFERENCE RATE REFORM
This item proposes that entities be allowed to not remeasure derivative contracts or reassess a previous accounting determination for hedged items even though the contracts are modified to replace all references of interbank offering rates that are expected to be discontinued.
INT 20-02 EXTENSION OF NINETY-DAY RULE FOR CERTAIN ASSETS
Not directly related to investment accounting
This item proposes to extend the Ninety-Day Rule for Premium, Bills and Amounts Due From Agents and Brokers, Property & Casualty Contracts
INT 20-03 TROUBLED DEBT RESTRUCTURING DUE TO COVID-19
Financial Condition (E) Committee is the NAIC parent committee of all the solvency policy making task forces and working groups of the NAIC. The Committee issued a guidance that supports the use of prudent loan modifications that can mitigate the impact of COVID-19.
Pursuant to SSAP No. 36, a debt restructuring is not necessarily considered a troubled debt restructuring and a creditor must assess whether the debtor is experiencing financial difficulties. It also indicates that a delay in payment that is insignificant is not a concession.
INT 20-04 MORTGAGE LOAN IMPAIRMENT ASSESSMENT DUE TO COVID-19
This item proposes to defer assessments of impairment for mortgage loans and investments which predominantly hold underlying mortgage loans which are impacted by forbearance or modifications in response to COVID-19; and the borrowers were current prior to December 31, 2019. This new guidance is applicable for Q1 and Q2 2020-only and will be expired on September 29, 2020.
Affected investments include:
- Mortgage Loans on Schedule B;
- SEC-registered Investments with Underlying Mortgage Loans, e.g. Mortgage-Backed Mutual Fund on Schedule D Part 2 Section 2;
- RMBS/CMBS/CRTs and other Structured Securities with Underlying Mortgage Loans on Schedule D;
- JV/Partnership/LLC with Underlying Characteristics of Mortgage Loans & Private Equity Mortgage Loan Funds on Schedule BA
The Financial Condition Committee published this guidance on March 27, 2020.
GUIDANCE FOR TROUBLED DEBT RESTRUCTURINGS FOR 2020 Q1 & Q2 STATUTORY FINANCIAL STATEMENTS AND RELATED INTERIM RISK-BASED CAPITAL FILINGS (WHERE REQUIRED)
If the mortgage loans are impacted by forbearance or modifications in response to COVID-19 and the borrowers were current prior to December 31, 2019, the reporting entities are permitted to report those affected investment with the same RBC Category, CM Ratings or NAIC Designation from 2019 year-end.
Financial Reporting Deadlines in the UK and Europe
SOLVENCY II
On 20 March EIOPA issued recommendations to member state regulators on the relaxation of reporting deadline for financial years ending 31 December 2019 and for Q1 2020 reporting.
The UK’s insurance regulator, the PRA, issued its interpretation of the guidelines on 23 March. This is sumarised in the following table assuming the maximum permitted extension and the latest original permitted submission dates is applied:
For year-end 2019 reports, a maximum extension of eight weeks for the QRTs are permitted and two weeks for the other reports. Q1 2020 reports have maximum extensions of four weeks.
Click here for more information from the PRA.
ESMA RELAXATION OF TRANSPARENCY DIRECTIVE (TD) DEADLINES
On 27 March, ESMA issued a statement providing guidance to local regulators on relief from the reporting deadlines for financial statements covered by the Transparency Directive (TD).
ESMA recommended a 2-month extension for annual and a 1-month extension for half-yearly financial reports referring to a reporting period ending on or after 31 December 2019 but before 1 April 2020.
The two-month annual report extension has been endorsed as a temporary relief by the UK’s FCA for listed firms covered by the TD. The FCA has noted that is not a waiver or rule change as the regulator is able to exercise forbearance in circumstances where it deems this appropriate.
The FCA wrote to firms who were planning on releasing preliminary results, requesting they observe a 2-week delay. Its purpose was to ensure listed companies and their boards are not rushed into preliminary financial statements during the fast-changing circumstances presented by coronavirus.
This delay ends on 5 April 2020. Click here for more details.
EXTENDED FILING DEADLINE WITH UK COMPANIES HOUSE
Companies House Scotland and England and Wales has extended the deadline for filing accounts with the registrar by 3 months.
Financial Reporting Deadlines in the US
SEC PROVIDES CONDITIONAL REGULATORY RELIEF AND ASSISTANCE FOR COMPANIES AFFECTED BY COVID-19
On 4 March, the SEC issued an order to provide publicly traded companies with an additional 45 days to file certain disclosure reports provided that the companies convey through a current report a summary of why the relief is needed, specific to their circumstances. The original deadline was between 1 March and 30 April 2020.
Division of Investment Management said they would not recommend enforcement action if fund boards do not adhere to certain in-person voting requirements under the Investment Act of 1940.
On 26 March, SEC announced additional temporary regulatory relief for the following:
Form ID notarization requirement for filing on EDGAR system — filers are allowed to not provide the required notarization between 26 March and 1 July if they indicate on the form that they couldn’t provide it due to circumstances relating to COVID-19 and also submit a PDF copy of the notarized manually signed document within 90 days of obtaining an EDGAR account.
Compliance with Regulation A and Crowdfunding — the filers are provided with an additional 45 days to file certain disclosure reports that would otherwise have been due between 26 March and 31 May. The companies must disclose they are relying on the temporary final rules and state the reasons why such report or form could not be filed on a timely basis.
Annual Update to Form MA for Municipal Advisors — the filers are provided with an additional 45 days to file annual update filing (Form MA) that would otherwise have been due between 26 March and 30 June if they provide a brief description of the reasons why they couldn’t file in a timely manner.
Other COVID Issues of Note
LIBOR TRANSITION TO SONIA
The FCA issued an update on the transition to the new benchmark rate on 25 March. The central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed.
FCA UPDATE ON OPEN ENDED COMMERCIAL REAL ESTATE (CRE) FUNDS
Certain Standing Independent Valuers have noted that they are unable to establish a fair and reasonable valuation at present. Impacted funds have put in place suspensions.