Financial Authorities: "COVID-19 Impact Must Be Considered When Applying Financial Product Impairment Regulations"

"Flexible Judgment Needed Over Mechanical Application of Accounting Standards"
Government's Financial Stability Measures Mitigate Default Risk

[Asia Economy Reporter Minji Lee] Financial authorities have advised that companies and auditors need to exercise flexible judgment when applying financial asset impairment regulations amid the spread of the novel coronavirus infection (COVID-19).

On the 12th, the Financial Services Commission and the Financial Supervisory Service explained that as the time approaches for the preparation of first-quarter reports and review reports, it is inappropriate for companies to mechanically apply existing methods to calculate impairment amounts of financial assets in the context of the COVID-19 pandemic.

This means that allowing debtors payment deferrals on certain financial products should not automatically be considered as those financial products experiencing a significant increase in credit risk.

The financial authorities judged that the loan repayment deferrals by financial institutions for small and medium-sized enterprises (SMEs) supported by policy measures due to the spread of COVID-19 do not immediately increase the default risk of the financial institutions' loan receivables.

They emphasized that even if Company A is facing difficulties in raising funds due to COVID-19, and payment deferral measures are applied to accounts receivable related to Company B, which has received government financial support, it cannot be immediately regarded that the accounts receivable are impaired.

Furthermore, they stated that various government support measures should be comprehensively and sufficiently considered. This is based on the judgment that government measures for financial stability and corporate support amid the COVID-19 spread will mitigate the default risk of financial assets.

Earlier, the International Accounting Standards Board (IASB) also announced similar guidance regarding the application of IFRS 9 (Financial Instruments) impairment regulations under the current uncertainties caused by the COVID-19 pandemic.

A financial authority official said, “Concerns have been raised about impairment issues, suggesting that if losses are expected mainly on financial assets held by companies due to the COVID-19 pandemic, these should be reflected in the financial statements,” adding, “Companies and auditors must correctly apply the impairment regulations.”

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