The accounting treatment of expected credit losses by South African banks during COVID-19

Orientation: The coronavirus disease 2019 (COVID-19) pandemic negatively affected borrowers' ability to repay debt, which is expected to influence banks' calculation of their expected credit loss (ECL) allowance. Comprehensive disclosure regarding the application of managerial judgement in calculating ECLs would produce decision-useful financial information. Research purpose: This study explored the effects of the COVID-19 pandemic on the measurement and disclosure of ECL allowances by South African listed banks. Motivation for the study: It is unknown whether decision-useful financial information regarding South African banks' ECLs was produced during the pandemic, mirroring developed countries. Research approach/design and method: Content analysis of quantitative and qualitative data from annual financial statements was employed for a sample of listed banks. Main findings: Banks employed a variety of relief measures to accommodate borrowers, but these relief measures did not automatically trigger a significant increase in credit risk. More loans were subject to lifetime ECLs, causing the ECL allowance to increase substantially during the first year of the pandemic. Forward-looking information as well as postmodel adjustments were employed to measure the ECL allowance. Practical/managerial implications: The ECL allowances of South African listed banks increased during the pandemic. Disclosure in the annual financial statements and identifying ECLs as a key audit matter provided evidence of adequate consideration of the credit risk and forward-looking information influencing ECLs by banks and their auditors. Improved disclosure regarding postmodel adjustments is required. Contribution/value-add: During the COVID-19 pandemic, decision-useful financial information regarding the calculation of banks' ECL allowances was available for South African banks, mirroring developed countries.

Investigation into the International Financial Reporting Standards 9 model flaws exposed during the pandemic

Orientation: Market events during the coronavirus disease 2019 (COVID-19) pandemic exposed flaws in the econometric models used to derive International Financial Reporting Standards (IFRS) 9 impairments. Models were unable to capture the level of government intervention or predict the economic recovery process because of the unprecedented nature of the pandemic. Research purpose: This study examines the causes of the challenges experienced with the IFRS 9 models during the pandemic and approaches to minimise this risk in the future. Motivation for the study: Structural correlation breaks forced banks to replace the IFRS 9 models with expert overlays or rapidly rebuild the models to reduce impairment volatility and manage the impact on earnings. Expert judgement may lead to biased outcomes. Research approach/design and method: Behavioural finance theory suggests that emotion and cognitive biases often lead to irrational investment decisions with disastrous consequences to the market. The link between market sentiment and economic outcomes is tested with natural language processing. Archimedean copulas are used to compare the dependence structures of market variables between different stress periods. Main findings: Market sentiment is closely related to the trends observed in major macroeconomic indicators. The nature of the dependence structures differs between stress periods. Practical/managerial implications: Sentiment may be a valuable exogenous variable to incorporate into economic forecast models. Learnings from one stress period are not necessarily applicable to another. Contribution/value-add: Government intervention and market sentiment had a significant impact on the economic outcomes and correlation breaks observed during the pandemic. Developing bespoke models for the different phases of the economic cycle may not necessarily lead to improved outcomes.

The effects of IFRS 9 valuation model on cost of risk in commercial banks – the impact of COVID-19

The aim of this paper is to analyse the variables determining the cost of risk in banks after the implementation of IFRS 9 with a particular focus on the COVID-19 pandemic in terms of the quality of credit portfolio. To achieve this we propose a panel research model with quarterly variables determining the cost of risk in commercial banks. The research data was taken from the domestic and European banking sector in 2018–2020 during the initial phase of the COVID-19 pandemic. We show that contrary to regulatory assumptions, procyclical tendencies with a cliff effect have not been eliminated in commercial banks under the IFRS 9 framework. In addition, we observe significant differences in the recognition of loan impairment in the domestic banks versus the EU ones under IFRS 9. However, we demonstrate that IFRS 9 did allow banks to recognise loan impairment reasonably fast in the most acute phase of the COVID-19 pandemic. © 2022 Narodowy Bank Polski. All rights reserved.

The Governance and Disclosure of IFRS 9 Economic Scenarios

Extraordinary economic conditions during the COVID-19 pandemic caused many IFRS 9 impairment models to produce unreliable results. Severe market reactions, resulting from unprecedented events, prompted swift action from the regulatory authorities to maintain the financial system's stability. Banks managed the uncertainty and volatility in the models with expert overlays, increasing the risk of biased outcomes. This study examines new ways of enhancing the governance and transparency of the IFRS 9 economic scenarios within banks and suggests additional financial disclosures. Benchmarking is proposed as a useful tool to evaluate the IFRS 9 economic scenarios and ensure effective challenge as part of a model risk governance framework. Archimedean copulas are used to generate objective economic benchmarks. Ideas around benchmarking are illustrated for a set of South African economic variables, and the outcomes are compared to the IFRS 9 scenarios published by the six biggest South African banks in their annual financial statements during the pandemic.

Global assessment of the COVID-19 impact on IFRS 9 loan loss provisions

PurposeThis article aims to analyze the impact of COVID-19 measures by governments and central banks on International Financial Reporting Standards (IFRS) 9 loan loss provisions (LLPs). Changes in the total amount of LLPs, distribution of outstanding loan balance among IFRS 9 stages and credit risk parameters used for calculation are investigated for each world region where banks report under IFRS.Design/methodology/approachData for a global selection of 105 banks reporting under IFRS were collected from 2019 to 2020 annual reports, financial statements, and Pillar III reports. These data provide the basis to empirically analyze the impact of COVID-19 on LLPs.FindingsIn most world regions Stage 2 balances increase while Stage 3 balances remain comparatively stable. The credit risk parameters used for computing LLPs remained stable in 2020. However, in China, the impact of COVID-19 on banks was not detected. Mean Stage 1 balances for Chinese banks increased slightly during the pandemic. Aside from the COVID-19 impact, we find that LLPs, credit risk parameters, and loss absorption capacities are significantly lower for banks in Canada, Oceania and Western Europe compared to those in the rest of the world.Originality/valueThere exists previous research examining the COVID-19 impact on financial stability, implementation of emergency rules and country-wide analyses to anticipate default rates depending on recovery scenarios. However, this is the first global study on the immediate impact of COVID-19 on LLPs. It reveals the significant differences between world regions and provides implications about their resilience against future credit shocks.

Global assessment of the COVID-19 impact on IFRS 9 loan loss provisions

Purpose: This article aims to analyze the impact of COVID-19 measures by governments and central banks on International Financial Reporting Standards (IFRS) 9 loan loss provisions (LLPs). Changes in the total amount of LLPs, distribution of outstanding loan balance among IFRS 9 stages and credit risk parameters used for calculation are investigated for each world region where banks report under IFRS. Design/methodology/approach: Data for a global selection of 105 banks reporting under IFRS were collected from 2019 to 2020 annual reports, financial statements, and Pillar III reports. These data provide the basis to empirically analyze the impact of COVID-19 on LLPs. Findings: In most world regions Stage 2 balances increase while Stage 3 balances remain comparatively stable. The credit risk parameters used for computing LLPs remained stable in 2020. However, in China, the impact of COVID-19 on banks was not detected. Mean Stage 1 balances for Chinese banks increased slightly during the pandemic. Aside from the COVID-19 impact, we find that LLPs, credit risk parameters, and loss absorption capacities are significantly lower for banks in Canada, Oceania and Western Europe compared to those in the rest of the world. Originality/value: There exists previous research examining the COVID-19 impact on financial stability, implementation of emergency rules and country-wide analyses to anticipate default rates depending on recovery scenarios. However, this is the first global study on the immediate impact of COVID-19 on LLPs. It reveals the significant differences between world regions and provides implications about their resilience against future credit shocks. © 2022, Emerald Publishing Limited.

Impact of IFRS 9 in Light of Uncertainty Caused by Corona Pandemic

This study aimed to highlight the impact of the application of the International Financial Instrumentation Standard (IFRS 9) in light of the uncertainty caused by the Corona pandemic. The results of the study concluded that IFRS 9 contributes to determining the expected credit losses that need to be recognized under the Corona pandemic in Palestinian banks listed in the Palestine Stock Exchange and that Palestinian banks listed in the Palestine Stock Exchange are working to prove the expected credit losses of financial instruments when credit risk increases in accordance with the requirements of the International Accounting Standard (IFRS 9). The researchers recommended that Palestinian banks listed in the Palestine Stock Exchange should further disclose financial instruments and estimate their financial impact in accordance with the requirements of the International Accounting Standard (IFRS 9) in case of uncertainty as a result of the Corona pandemic. © 2022 DAR Publishers/The University of Jordan.

The Impact of Applied of IFRS (9) Standard on the Financial Performance of Jordanian Commercial Banks in Light of the Corona Pandemic

This research aimed to clarify the impact of the application of IFRS 9 standard on the financial performance of Jordanian Commercial Banks (JCB) under the Corona pandemic, to achieve the goal of this research Descriptive analytical method was used the Population consisted Of all Jordanian commercial banks, While the research sample consisted of the following commercial banks (Housing Bank, Arab Bank, Jordan Bank, Jordan Kuwaiti Baank, union Bank and Cairo Amman Bank) during the period of 2018 till the end of the third quarter of 2021 where the owners’ equity was used to select the research simple and SPSS was used to analyze the research data. The financial performance was measured through financial indicators (profitability, financial strength, liquidity, financial risks), and the independent financial variable was measured through the provision for declining credit facilities and government accounts. One of the most prominent results of the research in the level of significance (α ≤ 0.05) and the trademark (9) IFRS on the financial performance of JCB in light of the Corona pandemic. In addition, the atmosphere of the exemplary research in postgraduate studies and benefit from the application of the IFRS (9) criterion as much as possible, in addition to following up on updates and amendments on a regular basis. © 2023, The Author(s), under exclusive license to Springer Nature Switzerland AG.