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  • Will IFRS 9 impact your holding company's group loan?

    Industry Issues

Industry issue:

Will IFRS 9 impact your holding company's group loan?

25 June 2018

IFRS 9, Financial Instruments, could have a very significant impact on the reported carrying values of intercompany loans and advances. Holding companies in the Natural Resources sector should give this issue urgent attention.

The long term and capital-intensive nature of Natural Resources projects often give rise to large long-term loans with uncertain dates of repayment.  These characteristics pose particular challenges for the application of IFRS 9. For groups publishing parent company information, including most UK parent companies, the first time application of IFRS 9 for the financial year ending 31 December 2018 is likely to give rise to additional financial reporting and auditing challenges.

 

Practical application of IFRS 9 to group loans

The practical application of IFRS 9 to group loans will vary depending on specific arrangement and circumstances. In Natural Resources companies where loans are usually held long-term for eventual collection and repayments are solely the principal and interest, two new assessment criteria will be relevant;

  • Has there been a Significant Increase in Credit Risk (SICR) since inception of the loan?
  • The Expected Credit Loss (ECL) to be recognised in the financial statements.

 

Expected Credit Loss and Significant Increase in Credit Risk (SICR)

IFRS 9 requires entities to consider a range of possible scenarios when assessing the ECL for each financial period end and weight them for their respective probabilities. For instance, full recovery through successful development; full recovery through successful sale; partial recovery scenarios and abandonment with no recovery.

Whilst the credit risk remains unchanged, the ECL is that which is anticipated to arise in the following 12 months. However, if there is a SICR, the ECL to be recognised is that for the whole lifetime of the loan. This could reasonably be expected to be significantly greater than the 12 month ECL. These adjustments could  also affect distributable profits and corporation and/or income tax.

 

Action on IFRS 9

These are just some of the issues that can arise from IFRS 9. It is clear from this that application of IFRS 9 has the potential to cause practical difficulties. We would highly recommend considering the impact of this IFRS immediately so that you can address any issues with practical application as well as any knock-on effects.

Please get in touch to discuss these issues further or find out how we can help.

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