A common saying in the political field is that “elections have consequences.” This adage has been made clearer by the current storm that “Tinubunomics” has brought to Nigeria and its people. There is no doubt that the impact of the policy announcement is far-reaching, and the macroeconomic outlook is a loud demonstration of the “pain and hardship” that Nigerians are experiencing. As is often said in the financial industry, “If you listen, the numbers speak.” Whether this hardship is a sufficient condition for future greatness for Nigerians remains a major topic of economic debate among analysts. The most profound and interesting aspect of financial reporting is that it also addresses external factors that affect the reporting entity, in this case Tinubunomics.
“This means trade receivables are more susceptible to credit losses, which could result in higher ECL estimates for the current year.”
The current economic situation poses significant financial reporting challenges for businesses in Nigeria, making IFRS 9 an important standard, particularly for businesses in the financial services sector. IFRS 9 came into effect on January 1, 2018 and is now a major issue for reporting practitioners as very few financial statements are prepared without financial instruments included in the statement of financial position, also known as the balance sheet. It is a general standard.
IFRS 9 requires financial instruments measured at ‘amortized cost’ and ‘debt instruments’ measured at fair value in other comprehensive income (FVTOCI) to undergo an expected credit loss (ECL) assessment. I am. This valuation essentially uses forward-looking information to estimate a financial asset’s loss reserve. The significant disruption caused by the unification of exchange rates and the removal of subsidies could cause liquidity concerns for some companies, with a concomitant impact on the quality of credit issued to these companies. Extends. This means that trade receivables are more susceptible to credit losses, which could result in higher ECL estimates for the current year.
Looking at the ECL model, companies must also consider the impact of macroeconomic variables that correlate with historical loss rates. These interest rates (e.g. inflation rates, exchange rates, oil prices, unemployment rates, etc.) have shown a decline compared to previous years and may impact ECL production and may differ from previous year’s figures. there is. The collateral amount may need to be adjusted due to changes in the valuation. Auditors may be interested in potential adjustments to the reporting entity’s ECL model and whether they result in overlays.
Businesses affected by the current administration’s economic policies may be experiencing liquidity concerns due to significant increases in operating costs and declines in revenue. This could lead these companies to seek amendments to their current debt covenants with their financial institutions, leading to discussions about modifying financial liabilities under IFRS. Similarly, this arrangement constitutes financial assets for the financial institution that issued the loan, and these financial assets may have changed. IFRS 9 states that for a financial liability, if the cash flows are extinguished (i.e. the obligations specified in the contract are settled, canceled or expired) or the terms of the financial instrument change significantly; Companies are required to derecognize the liability.
In the case of a significant modification of a financial liability, a company compares the cash flows before and after the modification discounted at the original effective interest rate (EIR). This is commonly referred to as the “10% test.” If the difference between these discounted cash flows exceeds 10%, the product is derecognized. Although the standard does not explicitly specify the treatment of financial assets, it does allow companies the freedom to apply accounting policies, including applying the “10 percent test.”
Furthermore, volatility and uncertainty around foreign exchange rates and interest rates may have led to changes in business models for financial products, potentially leading companies to sell financial products they normally hold or vice versa. be. The classification of financial instruments basically depends on the business model in which they are held.
For accountants who may be tempted to “cook the books,” selling due to increased credit risk remains a goal of a “hold for collection” business model, as the credit quality of a financial asset is related to its creditworthiness. Possible match. the company’s ability to collect contractual cash flows; Selling a financial asset because it no longer meets the credit criteria specified in the company’s business model policy is an example of a sale consistent with a “collection pending” business model. Financial reporters must consider this assessment and present it accordingly in the financial statements.
When uncertainty exists, firms engage in more hedging transactions. Many of these in Nigeria will be fair value hedges. This has implications for reporting on the recognition, measurement and disclosure of financial instruments.
A financial reporter’s primary responsibility is to assess the impact of the current economic outlook on financial statements and consider changes to governance, processes, and policies without compromising the purpose of finance for each user.
Side note: ECL is calculated as Exposure Given Default x Probability of Default x Loss Given Default.
Sobur Olamilekan Bello, ACA, AAIA, aka Your IFRS Pal, Auditing and Financial Reporting Expert.
