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ESMA requires disclosures on forbearance practices

  • ESMA (European Securities and Markets Authority) (dark gray) Image

20 Dec 2012

The European Securities and Markets Authority (ESMA) has issued a 'Public Statement on the Treatment of Forbearance Practices in IFRS Financial Statements of Financial Institutions'. The statement deals with the definition of forbearance practices, their impact on the impairment of financial assets and also outlines the specific disclosures relating to forbearance activities that listed financial institutions should include in their IFRS financial statements for the year ending 31 December 2012.

The statement results from ESMA’s concerns that a lack of consistency amongst issuers in this area raises issues over the transparency and accuracy of their financial statements. It is intended to avoid the inadequate approach to forbearance and impairment that was visible in previous financial crises. ESMA believes that the consistent application of IFRS principles promotes comparability among listed financial institutions’ financial statements and thus fosters trust.

ESMA is of the view that the indicators of objective evidence of impairment in IAS 39 Financial Instruments: Recognition and Measurement cover forbearance measures, even though IFRS does not use the term forbearance. Paragraph 59(c) of IAS 39 states that objective evidence of impairment includes circumstances when the lender, for economic or legal reasons related to the borrower’s financial difficulty, grants to the borrower a concession that the lender would not otherwise consider. ESMA concludes:

Forbearance occurs when the borrower is considered to be unable to meet the terms and conditions of the contract due to financial difficulties and, based on these difficulties, it decides to modify the terms and conditions of the contract to allow the borrower sufficient ability to service the debt or refinance. Therefore, forbearance measures constitute objective evidence of impairment under IFRS.

As forbearance is objective evidence of impairment, ESMA expects issuers to carefully assess the impairment of the loans according to the IFRS principles and to disclose their forbearance practices. ESMA expects the following disclosures to be made in the financial statements:

  • details of the types of forbearance practices undertaken during the reporting period;
  • description of the risks related to the forbearance practices undertaken, and how these risks are managed and monitored for internal management purposes;
  • accounting policies applied in respect of the forborn assets;
  • description of any changes in these aspects from the prior period;
  • quantitative disclosures in order to enable users to evaluate the impact of forbearance measures on the credit risk profile of their loan portfolios and their financial position and performance.

ESMA has also announced that it will continue to monitor the level of transparency that issuers provide in their financial statements on forbearance related measures and their impact on impairment, and will consider whether further action is required.

The statement complements ESMA’s common enforcement priorities for the 2012 year-end IFRS financial statements which were published in November 2012.

Please click for the following documents on the ESMA website:

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