3.16 Provisions
A provision is recognized if, as a result of a past event, the Company has a present legal or constructive
obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required
to settle the obligation. If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the
time value of money and the risks specific to the liability. Where discounting is used, the increase in the
provision due to the passage of time is recognized as a finance cost.
3.17 Contingent liabilities & contingent assets
A disclosure for a contingent liability is made when there is a possible obligation or a present obligation that
may, but probably will not, require an outflow of resources. Where there is a possible obligation or a present
obligation in respect of which the likelihood of outflow of resources is remote, no provision or disclosure is
made.
Contingent assets are not recognised in the financial statements. However, contingent assets are assessed
continually and if it is virtually certain that an inflow of economic benefits will arise, the asset and related
income are recognised in the period in which the change occurs.
3.18 Financial instruments
a. Recognition and Initial recognition
The Company recognizes financial assets and financial liabilities when it becomes a party to the
contractual provisions of the instrument. All financial assets and liabilities are recognized at fair value on
initial recognition, except for trade receivables which are initially measured at transaction price.
Transaction costs that are directly attributable to the acquisition or issues of financial assets and
financial liabilities that are not at fair value through profit or loss, are added to the fair value on initial
recognition.
A financial asset or financial liability is initially measured at fair value plus, for an item not at fair value
through profit and loss (FVTPL), transaction costs that are directly attributable to its acquisition or issue.
b. Classification and Subsequent measurement
Financial assets
On initial recognition, a financial asset is classified as measured at
- amortised cost;
- FVTPL
Financial assets are not reclassified subsequent to their initial recognition, except if and in the period the
Company changes its business model for managing financial assets.
A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated
as at FVTPL:
- the asset is held within a business model whose objective is to hold assets to collect contractual cash
flows; and
- the contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
All financial assets not classified as measured at amortised cost as described above are measured at FVTPL.
On initial recognition, the Company may irrevocably designate a financial asset that otherwise meets the
requirements to be measured at amortised cost at FVTPL if doing so eliminates or significantly reduces an
accounting mismatch that would otherwise arise.
Financial assets: Business model assessment
The Company makes an assessment of the objective of the business model in which a financial asset is held at
a portfolio level because this best reflects the way the business is managed and information is provided to
management. The information considered includes:
- the stated policies and objectives for the portfolio and the operation of those policies in practice. These
include whether management’s strategy focuses on earning contractual interest income, maintaining a
particular interest rate profile, matching the duration of the financial assets to the duration of any related
liabilities or expected cash outflows or realising cash flows through the sale of the assets;
- how the performance of the portfolio is evaluated and reported to the Company’s management;
- the risks that affect the performance of the business model (and the financial assets held within that
business model) and how those risks are managed;
- how managers of the business are compensated - e.g. whether compensation is based on the fair value
of the assets managed or the contractual cash flows collected; and
- the frequency, volume and timing of sales of financial assets in prior periods, the reasons for such sales
and expectations about future sales activity.
Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not
considered as sales for this purpose, consistent with the Company’s continuing recognition of the assets.
Financial assets that are held for trading or are managed and whose performance is evaluated on a fair value
basis are measured at FVTPL.
Financial assets: Assessment whether contractual cash flows are solely payments of principal and interest
For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial
recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated
with the principal amount outstanding during a particular period of time and for other basic lending risks and
costs (e.g. liquidity risk and administrative costs), as well as a profit margin.
In assessing whether the contractual cash flows are solely payments of principal and interest, the Company
considers the contractual terms of the instrument. This includes assessing whether the financial asset
contains a contractual term that could change the timing or amount of contractual cash flows such that it would
not meet this condition. In making this assessment, the Company considers:
- contingent events that would change the amount or timing of cash flows;
- terms that may adjust the contractual coupon rate, including variable interest rate features;
- prepayment and extension features; and
- terms that limit the Company’s claim to cash flows from specified assets (e.g. non- recourse features).
A prepayment feature is consistent with the solely payments of principal and interest criterion if the
prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount
outstanding, which may include reasonable additional compensation for early termination of the contract.
Additionally, for a financial asset acquired at a significant discount or premium to its contractual par amount, a
feature that permits or requires prepayment at an amount that substantially represents the contractual par
amount plus accrued (but unpaid) contractual interest (which may also include reasonable additional
compensation for early termination) is treated as consistent with this criterion if the fair value of the
prepayment feature is insignificant at initial recognition.
Financial assets: Subsequent measurement and gains and losses
Financial assets at FVTPL: These assets are subsequently measured at fair value. Net gains and losses,
including any interest or dividend income, are recognised in profit or loss.
Financial assets at amortised cost: These assets are subsequently measured at amortised cost using the
effective interest method. The amortised cost is reduced by impairment losses. Interest income, foreign
exchange gains and losses and impairment are recognised in profit or loss. Any gain or loss on derecognition
is recognised in profit or loss.
Financial liabilities: Classification, Subsequent measurement and gains and losses
Financial liabilities are classified as measured at amortised cost or FVTPL. A financial liability is classified as at
FVTPL if it is classified as held- for- trading, or it is a derivative or it is designated as such on initial recognition.
Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest
expense, are recognised in profit or loss. Other financial liabilities are subsequently measured at amortised
cost using the effective interest method. Interest expense and foreign exchange gains and losses are
recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss.
c. Derecognition
Financial assets
The Company derecognises a financial asset when the contractual rights to the cash flows from the financial
asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which
substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the
Company neither transfers nor retains substantially all of the risks and rewards of ownership and does not
retain control of the financial asset.
If the Company enters into transactions whereby it transfers assets recognised on its balance sheet, but
retains either all or substantially all of the risks and rewards of the transferred assets, the transferred assets
are not derecognised.
Financial liabilities
The Company derecognises a financial liability when its contractual obligations are discharged or cancelled,
or expire.
The Company also derecognises a financial liability when its terms are modified and the cash flows under the
modified terms are substantially different. In this case, a new financial liability based on the modified terms is
recognised at fair value. The difference between the carrying amount of the financial liability extinguished and
the new financial liability with modified terms is recognised in profit
d. Offsetting
Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when and
only when, the Company currently has a legally enforceable right to set off the amounts and it intends either to
settle them on a net basis or to realise the asset and settle the liability simultaneously.
e. Impairment
The Company recognises loss allowances for expected credit losses on financial assets measured at
amortised cost;
At each reporting date, the Company assesses whether financial assets carried at amortised cost and debt
securities at fair value through other comprehensive income (FVOCI) are credit impaired. A financial asset is
‘credit- impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of
the financial asset have occurred.
Evidence that a financial asset is credit- impaired includes the following observable data:
- significant financial difficulty of the borrower or issuer;
- the restructuring of a loan or advance by the Company on terms that the Company would not consider
otherwise;
- it is probable that the borrower will enter bankruptcy or other financial reorganisation; or
- the disappearance of an active market for a security because of financial difficulties.
The Company measures loss allowances at an amount equal to lifetime expected credit losses, except
for the following, which are measured as 12 month expected credit losses:
- debt securities that are determined to have low credit risk at the reporting date; and
- other debt securities and bank balances for which credit risk (i.e. the risk of default occurring over the
expected life of the financial instrument) has not increased significantly since initial recognition.
Loss allowances for trade receivables are always measured at an amount equal to lifetime expected credit
losses.
Lifetime expected credit losses are the expected credit losses that result from all possible default events over
the expected life of a financial instrument.
12-month expected credit losses are the portion of expected credit losses that result from default events that
are possible within 12 months after the reporting date (or a shorter period if the expected life of the instrument
is less than 12 months).
In all cases, the maximum period considered when estimating expected credit losses is the maximum
contractual period over which the Company is exposed to credit risk.
When determining whether the credit risk of a financial asset has increased significantly since initial
recognition and when estimating expected credit losses, the Company considers reasonable and supportable
information that is relevant and available without undue cost or effort. This includes both quantitative and
qualitative information and analysis, based on the Company’s historical experience and informed credit
assessment and including forward- looking information.
Measurement of expected credit losses
Expected credit losses are a probability-weighted estimate of credit losses. Credit losses are measured as the
present value of all cash shortfalls (i.e. the difference between the cash flows due to the Company in
accordance with the contract and the cash flows that the Company expects to receive).
Presentation of allowance for expected credit losses in the balance sheet
Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount
of the assets.
Write-off
The gross carrying amount of a financial asset is written off (either partially or in full) to the extent that there is
no realistic prospect of recovery. This is generally the case when the Company determines that the trade
receivable does not have assets or sources of income that could generate sufficient cash flows to repay the
amounts subject to the write- off. However, financial assets that are written off could still be subject to
enforcement activities in order to comply with the Company’s procedures for recovery of amounts due.
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