The measurement of ECL reflects a probability-weighted outcome discounted with the time value of money based on the best available forward-looking information over a range of possible scenarios. However, the need to incorporate forward-looking information that is reasonable and supportable will require considerable judgement as to how changes in macroeconomic factors will affect ECL. Nevertheless, it is ultimately a judgement and it is never in this aspect, an easy one to make.
The economic disruption from COVID-19 will need to be reflected in modelling economic scenarios and its corresponding impact on its shifts in credit risk. Due to the pervasive nature of this pandemic, it will be necessary to consider the impact of COVID 19 on specific industry and geographic sectors that the Company operates in. Specifically, let us examine how would we incorporate the COVID-19 impact for a company in F&B and retail sales sector.
Based on the latest SingStat data, both F&B and retail sales across most categories registered a year-on-year (May 2021 over May 2020) increase of 46.4% and 79.7% respectively. This is in line with the recent MAS latest forecast that the Singapore’s 2021 economic growth could exceed forecast of 4% to 6%.
It is likely that a SME, given the limited accounting resources, would not be able to remodel the COVID-19 impact in the provision matrix without undue cost and effort. It could consider the adoption of the simplified way as a post model adjustment (“PMA”) or ‘overlay’ on the existing model and recalibrate the PMA as the situation develops with more reliable information.
The assessment of whether there has been a significant increase in credit risk (“SICR”) for trade receivables is carried out on the basis of the expected life of the trade receivables. Considering the severe effects of COVID-19 during the second and third quarters of 2020 and the associated significant phased government support as well as the recent indication of a significant economic recovery from mid 2021 onwards, there may not be a SICR for its trade receivables. In addition, in the COVID-19 economic environment, payment holidays and even arrears are not necessarily indicators of SICR as customers may simply have short-term liquidity constraints rather than an increase in their risk of defaulting on the debt altogether.
The standard does not expect companies to just adjust (or increase) its ECL solely because COVID-19 reliefs measures have been applied or is applicable to its trade receivables (ie trade debtors). Instead, companies should assess their debtors’ risk of default comprehensively, taking into account the mitigating effects of the relief measures, the debtors ability to make full payment as well as their credit worthiness over the long term.
Therefore, it is not unreasonable that on the basis of the above supportable and forward-looking macroeconomic indicators and considerations, that the company has taken the judgement call that COVID-19 PMA is not material.