APRA regulatory approach to loans subject to repayment deferral
The Australian Prudential Regulation Authority (APRA) has announced an extension of its temporary capital treatment for bank loans with repayment deferrals, as well as temporarily adjusting the capital treatment of loans where terms are modified or renegotiated (‘restructured’).
On 23 March 2020, APRA announced that banks that offered borrowers impacted by the COVID-19 pandemic an option to defer repayments for a period of up to six months need not treat the repayment deferral period as a period of arrears for capital adequacy and regulatory reporting purposes.
APRA will extend this regulatory approach to cover a maximum period of 10 months from the start of a repayment deferral, or until 31 March 2021, whichever comes first.
APRA’s expectation is that ADIs will only grant new or extended loan repayment deferral arrangements after undertaking an appropriate credit assessment to ascertain if an extension or new deferral is appropriate for the particular borrower given their circumstances.
APRA will also provide an adjustment to the normal regulatory treatment of loans that are restructured. Where an ADI restructures an affected borrower’s facilities before 31 March 2021 with a view to putting the borrower on a sustainable financial footing, the loan may continue to be regarded as a performing loan for capital and regulatory reporting purposes.
Given the volume of deferrals, APRA considers it reasonable to provide ADIs more time to determine the best approach for each borrower. While some customers are able to return to making normal payments in the near future, for others it may be preferable for an ADI to restructure or renegotiate the loan to provide a revised repayment schedule. In some cases, banks will need to recognise that loans are permanently impaired.
ADIs are expected to have a comprehensive plan that demonstrates how they will systematically work through the large volume of impacted customers, as well as avoid operational constraints as deferral periods come to an end.
To maintain transparency, APRA will also require ADIs to provide regular disclosures regarding the status of their deferred, restructured and impaired loan portfolios.
ASIC focus areas for financial reporting in the COVID-19 environment
ASIC has provided information on focus areas for financial reporting in the COVID-19 environment for years ending 30 June 2020
ASIC has previously extended the deadline for both listed and unlisted entities to lodge financial reports under Chapters 2M and 7 of the Corporations Act by one month for certain balance dates up to and including 7 July 2020 balance dates.
Given the adverse impacts on many entities from the COVID-19 pandemic, ASIC says directors, preparers and auditors should focus on:
- asset values:
- solvency and going concern assessments;
- events occurring after year-end and before completing the financial report;
- disclosures in the financial report and Operating and Financial Review (OFR).
ASIC says assumptions underlying estimates and assessments for financial reporting purposes should be reasonable and supportable. Assumptions should be realistic, and not overly optimistic or pessimistic.
Useful and meaningful disclosures about the business impacts and potential uncertainties will be vital. Uncertainties may lead to a wider range of valid judgments on asset values and other estimates. Disclosures in the financial report about uncertainties, key assumptions and sensitivity analysis will be important to investors.
The underlying drivers of the results and financial position should be explained, as well as risks, management strategies and future prospects.
ASIC no-action position to allow right-of-use lease assets to count in satisfying AFS licensee requirements
ASIC has issued a temporary no-action position for Australian financial services (AFS) licensees in relation to potential breaches of the financial resource requirements that arise from recent changes to the accounting treatment of lease assets. The no-action position will apply until further notice.
Under section 912A(1)(d) of the Corporations Act 2001, an AFS licensee is required to maintain adequate resources, including financial resources, to provide the financial services the AFS licensee is authorised to provide under the terms of its AFS licence.
Following the introduction of accounting standard AASB 16 Leases (AASB 16), all leases are now reflected on the balance sheet of a lessee by way of a lease liability and a right-of-use asset.
ASIC recognises that some AFS licensees may face difficulty in complying with their financial resource requirements because of the changes. While the lease liabilities are taken into account for the purposes of an AFS licensee’s financial resource requirements, the right-of-use assets are now generally treated as intangible assets and do not count towards meeting those requirements.
By issuing the temporary no-action position, ASIC:
- will allow licensees to use right-of-use lease assets to count towards their financial resource requirements; and
- will not take regulatory action against licensees in relation to past breaches of financial resource requirements, when the breach arises from right-of-use lease assets not being able to be counted towards meeting those requirements.
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Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.