Investment trusts should also benefit from breathing space on IFRS 9 reporting rules, amid the coronavirus outbreak.
The new IFRS 9 accounting rules require some firms, such as banks, to take account of expected credit losses in their financial reports.
The Bank of England and Prudential Regulation Authority last week noted the high levels of uncertainty around how Covid-19 would impact the economy and accepted that it would be very challenging to prepare an accurate forecast of the impact at this stage – effectively giving firms more time to make adjustments to IFRS 9 provisions.
Research from analysts at brokerage Numis have noted that many alternative finance-focused trusts follow IFRS 9 and thus will also benefit from this breathing space.
“The announcement gives a bit breathing room before adjustments to IFRS 9 provisions need to be made, given the current uncertainty about the impact it would be hard to stand by estimates as reasonable and supportable. In addition, it expects a temporary shock to be reflected,” Numis said.
“That said, at some stage we would expect direct lending investment companies to have to increase expected credit losses to reflect the deteriorating outlook, we would urge them to be clear with their disclosures to reflect whether or not these provisions have been adjusted, as there will invariably been a timing difference between funds.
“Significantly, the process remains the same for provisioning when there is evidence of impairment, such as late payment, and we expect this may be the most significant driver for provisions in coming months.”
The move to IFRS 9 reporting has already caused many direct lending-focused investment trusts such as Honeycomb and VPC Specialty Lending to reveal lower net asset value returns.