TUNKU PUTERI INTAN SAFINAZ SCHOOL OF ACCOUNTANCY

BKAR 3033 FINANCIAL ACCOUNTING AND REPORTING III

FIRST SEMESTER 2020/2021 (201)

ASSIGNMENT (5%)

FAIR VALUE MEASUREMENT: MORATORIUM ON LOAN REPAYMENTS

BANK CHOSEN: HONG LEONG BANK BERHAD

GROUP: H/3

PREPARED FOR:

PROF. MADYA DR. NORIAH BT CHE ADAM

PREPARED BY:

NO. NAME MATRIC NO.

1. NIK NURIN ATHIRAH BINTI NIK FAIZUL 273031

2. IDZNIN ALISH BINTI MUHAMMAD AZIRUL ARIDI 273033

3. PHISAL A/L AI PLEM 273147

4. NURDINI SOFIA BINTI SAEMAN 273176

5. PIRAWEEN A/L BALAKRISNAN 273489

DATE OF SUBMISSION:

15 December 2020
1. Explain accounting treatment for modification of loan as prescribed by MFRS 9.

With specific reference to the modification of contractual terms of financial assets,

financial liabilities and embedded derivatives, MFRS 9 includes the following

guidance:

The accounting treatment for modification of loans or derecognition of financial

liabilities is stated in paragraph 3.3.2. An exchange between an existing borrower and

lender of debt instruments with substantially different terms shall be accounted for as

an extinguishment of the original financial liability and the recognition of a new

financial liability. Similarly, a substantial modification of the terms of an existing

financial liability or a part of it (whether or not attributable to the financial difficulty of

the debtor) shall be accounted for as an extinguishment of the original financial liability

and the recognition of a new financial liability.

For Modification of contractual cash flows, Paragraph 5.4.3 states that when the

contractual cash flows of a financial asset are renegotiated or otherwise modified and

such modification does not result in derecognition, the gross carrying amount of the

financial asset shall be recalculated as the present value of the modified contractual

cash flows discounted at the original effective interest rate (EIR) and a modification

gain or loss recognised in profit or loss.

For the purpose of paragraph 3.3.2 (modification of loans), in B3.3.6 stated the

terms are substantially different if the discounted present value of the cash flows under

the new terms, including any fees paid net of any fees received and discounted using

the original effective interest rate, is at least 10 per cent different from the discounted

present value of the remaining cash flows of the original financial liability. If an

exchange of debt instruments or modification of terms is accounted for as an

extinguishment, any costs or fees incurred are recognised as part of the gain or loss on
the extinguishment. If the exchange or modification is not accounted for as an

extinguishment, any costs or fees incurred adjust the carrying amount of the liability

and are amortised over the remaining term of the modified liability.

For reassessment of embedded derivatives, Paragraph B4.3.11 states that an

entity shall assess whether an embedded derivative is required to be separated from the

host contract and accounted for as a derivative when the entity first becomes a party to

the contract. Subsequent reassessment is prohibited unless there is a change in the terms

of the contract that significantly modifies the cash flows that otherwise would be

required under the contract, in which case reassessment is required. An entity

determines whether a modification to cash flows is significant by considering the extent

to which the expected future cash flows associated with the embedded derivative, the

host contract or both have changed and whether the change is significant relative to the

previously expected cash flows on the contract.

ended 30 June 2020 (refer to Bursa Malaysia website for interim financial

results)1. Describe how the bank report the effect of moratorium on repayment of

loans. Indicate the amount of modification loss reported by the bank.

To further support lending/financing activities, banking institutions are allowed

to drawdown on the capital conservation buffer of 2.5%, to operate below the minimum

liquidity coverage ratio of 100% and to reduce the regulatory reserves held against

expected losses to 0%. The implementation of the Net Stable Funding Ratio (“NSFR”)

which will be effective on 1 July 2020 is lowered to 80%. Banking institutions are

expected to restore their buffer to the minimum regulatory requirements and comply

with a 100% NSFR ratio from 30 September 2021. The moratorium should not

automatically result in stage transfer under MFRS 9 in the absence of other factors

relevant to the assessment.

HLB’s net profit whilst adversely affected from ongoing headwinds, OPR cuts

and one-off modification loss due to the loan/financing moratorium initiatives,

underlying performance was resilient with good contribution from loan/financing

growth and higher treasury and investment income. In anticipation of a deteriorating

asset quality cycle post the auto loan/financing moratorium period, HLB proactively

built up additional credit loss buffers of RM301 million since March 2020.

HLB’s total income for FY2020 recorded a 1.1% year-on-year growth to

RM4,778 million, on the back of loan/financing expansion and improved non-interest

income contribution, after the impact of the one-off modification loss and OPR cuts.

Correspondingly, net interest income for FY2020 ended at RM3,406 million. Net

modification loss arising from the modification of cash flows due to the automatic

moratorium on loan repayments/payments come in at RM142 million. Consequently,

million, a 6.9% year-on-year increase compared to the same period last year.

HLB report the effect of moratorium on repayment of loans is recognised a loss arising

from the modification of cash flows for the loan/financing. As part of Covid-19 relief,

HLB received benefits in fair value on concessionary funding to balance against the

loss occurred. The net modification loss will be eliminated through income statement

over the remaining tenure of the funding and loan/financing.

interest during the moratorium period.

Banks in Malaysia have begun providing additional information on the end of the

current automatic loan moratorium as well as the extended moratorium and targeted

financial assistance that’s coming after. The major banks are all treating the extended

moratorium differently. Some banks offer the option of making “step up payments” to

pay lower instalments and progressively pay more down the loan tenure, while others

offer a moratorium extension for longer periods.

The accrue interest is not appropriate during the moratorium period. This is

because during the moratoriums period, it helps in reducing financial stress, especially

during the COVID-19 outbreak. It gives the borrowers breathing space amid tight

liquidity conditions. Moreover, if the borrowers avail moratorium, their credit score

will not be affected and it will not be reported as a defaulter and not impact the credit

score and credit history. Thus, this will be beneficial for the future loans where they

can avail the loan easily. Besides that, the bank will not charge any penalty even if they

are not repaying the loan.

Other than that, some banks are also including new terms and clauses into loans

or financing that are restructured or rescheduled (R&R). For example, Hong Leong

Bank, in its FAQ, states that interest accrued from the 6-month automatic moratorium

will be added into the final instalment or full settlement amount for variable-rate hire

purchase loans. However, this does not apply to its fixed-rate hire purchase loans and

personal loans/financing.

At the same time, households do not need to make their monthly fixed payments

to the banks. This would be of tremendous benefits to consumers, as many are already

facing job loss and diminishing incomes. Further, the fear and concern for the family is
another burden weighing on the family. Thus, the reduction of their monthly

commitment will go a long way in helping many families, especially the low income

but also the middle income to face this difficult health and economic crises. Families

dipping into their savings to face the current crises, would have at least one less

financial burden, as well as more to spend on food and other essentials. However, the

interest will continue to accrue on the loans repayments that are deferred and consumers

will need to honour the deferred repayments in the future.

Loan repayments will resume after the deferment period as for conventional

loans, interests would continue to be charged on the outstanding balance comprising of

both principle and the interest portion that is compounded, during the moratorium. That

is the loan repayment is just deferred by six months, while the interests continue to be

accrued. FOMCA applauds some banks for making a policy not to compound the

interest during the moratorium six-month period. Consumers are already suffering from

loss of jobs, loss of income and a depressing economic future. Their fixed payments to

the banks for their various loans can be a substantial burden to the family. By not

compounding interests, the banks would be helping households and families, get back

on their feet after these economic and health crises.