Expect the unexpected credit loss

AS businesses prepare to welcome the last quarter of 2021 with hope and silver linings, Covid-19 pandemic-related uncertainties and challenges persist to evolve and disrupt the balance that businesses are trying to strike. The pandemic did not spare financial accounting and reporting of all corporate entities as well. It has further elevated the use of accounting judgements and estimates due to its fluid nature and limited experience in addressing its financial impact. The Covid-19 pandemic is the first economic crisis since the Philippine Financial Reporting Standard (PFRS) 9, Financial Instruments, was adopted and applied for the first time in 2018. PFRS 9 specifies how an entity should calculate expected credit loss (ECL), the estimated expected cash shortfalls on credit exposures such as receivables and other financial assets.

This article focuses on the expectations on how entities will measure ECL moving toward Dec. 31, 2021. We reflect on what we have observed and learned from the 2020 financial reporting cycle and other relevant experiences and visualize how entities would use them in their ECL assessments. We do not discount that these expectations may evolve as the Covid-19 situation continues to unravel. New operational and application challenges will continue to rise and the extent may depend on the underlying facts and circumstances. ECL models need also to evolve in response to these developments to avoid creation of false sense of financial performance.