Treatment of moratorium period for financial assets under IND AS-109 amidst COVID-19

Yash Panjwani | Last updated: 04 November 2020

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This article explains how to account for financial assets during moratorium periods granted due to COVID-19, as per Ind AS 109. It clarifies that interest continues to accrue at the contracted rate, meaning modification accounting isn't typically required as the effective interest rate remains unchanged. However, the pandemic's economic impact necessitates a review of Expected Credit Loss (ECL) calculations, considering forward-looking information to accurately reflect increased credit risk.

This article mainly covers business model for amortisation method and its accounting aspects under Ind AS 109. As notified by RBI, the entity may grant moratorium period as follows: The moratorium period will be granted for a period of three month for payment instalments due between March 1, 2

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FAQ :

No, typically it does not. As interest continues to accrue at the contracted rate during the moratorium, the effective interest rate (EIR) and the present value of carrying amounts remain consistent, thus avoiding the need for modification accounting.

COVID-19's economic impact increases the probability of default (PD) for borrowers. Entities must incorporate forward-looking information, including economic downturns and potential collateral value depreciation, into ECL calculations, leading to a higher loss allowance.

The key components are Exposure at Default (EAD), Probability of Default (PD), and Loss Given Default (LGD). All these components can be influenced by the economic effects of COVID-19.

The pandemic can cause financial assets to shift between stages. Assets previously showing no significant credit risk (Stage 1) might move to stages with higher ECL (Stage 2 or 3) due to increased default probabilities.

Entities should consider the economic impact of COVID-19 on borrowers' businesses, their net cash inflows, and the potential impairment of collateral values, without undue cost or effort.