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ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments

Tarn plc's finance director proposes to reduce the year-end ECL allowance on a loan portfolio by using unduly optimistic forecasts, so that a bank covenant on profit is met. Credit risk indicators have clearly worsened. Which is the most appropriate response by the group accountant under IFRS 9 and professional ethics?

The accountant should refuse to use the optimistic forecasts, because IFRS 9 requires unbiased, probability-weighted ECL estimates based on reasonable and supportable information. Biasing them to meet a covenant breaches integrity and objectivity, so the matter should be escalated if pressure continues. Disclosure alone cannot fix it.

  1. ARefuse to apply the optimistic forecasts, as ECL must use reasonable and supportable information without bias, and escalate if the pressure continuesCorrect
  2. BAccept the forecasts since ECL is a matter of management judgement
  3. CApply the forecasts but disclose the covenant in the notes
  4. DUse the 12-month ECL for all loans to reduce the allowance

Explanation

IFRS 9 requires an unbiased, probability-weighted estimate using reasonable and supportable information. Manipulating forecasts to meet a covenant breaches the integrity and objectivity principles. Disclosure does not cure a misstatement, and staging must reflect actual credit deterioration, so reverting to 12-month ECL is wrong.

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