To answer the question, it is necessary to assess whether the state guarantee can qualify as a financial guarantee under IFRS and, if so, whether it constitutes a credit enhancement that is integral to the contractual terms of the loans. If the answers are positive, the state guarantee could be included in the measurement of the expected credit losses (ECL) in accordance with IFRS 9. If the answers are negative, the state guarantee would have to be recognised separately of IFRS9 ECL allowances.

Determining whether the state guarantee qualifies as a financial guarantee that is integral to the contractual terms of the loan involves professional judgement, based on the specific factual features of the state guarantee. Several factors or criteria may be considered and weighted to arrive at a reasonable accounting answer. Since the two state guarantee programs are different, they need to be assessed separately.

a)         First guarantee scheme

The first state guarantee meets the IFRS definition of a financial guarantee as it only covers losses incurred by the banks because debtors fail to make payment when due in accordance with the terms of the loans.

When assessing whether the guarantee is integral to the loans, some elements may be considered as leading to a positive conclusion: 

The loan contracts in scope of the COVID-19 guarantee scheme refer explicitly to the cover by the state guarantee
The state aid fee to be collected and paid is mentioned explicitly in the loan contract.

In contrast other considerations could lead to a negative conclusion:

The non-transferability of the guarantee: while the loans are transferable, the guarantee would be lost for the loans that would be transferred (other than as collateral as defined in the law).
The fact that the final recovery under the portfolio-based guarantee will only be determined and settled when most of the loans will already have been derecognised. The guarantee is indeed structured in such a way that it does not cover single loans but rather a portfolio or pool of loans with tranching. The reimbursement amount expected will thus depend on the performance of the other loans of the portfolio

Considering the importance of these elements, it seems a reasonable conclusion for the first state guarantee to be recognized separately, outside IFRS9 ECL allowances in accordance with IAS 37.53. In practice, it would be acceptable to recognize a recovery asset that is representative of the reimbursement amount expected to be received from the government under the financial guarantee.  The contra entry would be in P&L. Under IAS 37 a reimbursement asset can be recognised only when it is virtually certain that the reimbursement will be received if the entity settles the obligation.  Such a certainty can reasonably be considered as achieved when the level of impairment exceeds the lower threshold of the second loss tranche (loss rate of 3%) – after deduction of other collaterals.

b)         Second guarantee scheme

Unlike the first state guarantee, the second one is optional which means that the loans benefiting from the guarantee are identified as such at origination with the agreement of the borrower. As a result, the guarantee is closely, and individually linked to each loan contract. This is a key difference with the first state guarantee.

The other features relevant for assessing the “integral part” of the loan contracts criterion are the same like for the first state guarantee (NB: the loans may also serve as collateral for financing transactions with the central bank and in this case the collateral may be the loans themselves or the instruments issued by the securitization vehicle encompassing the guaranteed loans).

Considering these factual elements, it can be considered that the second state guarantee is a credit enhancement that is integral to the contractual terms of the loans and may therefore be included in the measurement of the expected credit losses (ECL) in accordance with IFRS 9 B5.5.55 (i.e. as a reduction of the impairment allowance, where relevant as part of LGD-type parameters).

This analysis is also in line with the prudential treatment of the state guarantee (see above).