KENANGA ANNUAL REPORT 2017

2. CHANGES IN ACCOUNTING POLICIES AND REGULATORY REQUIREMENT (CONT’D.) 2.2 Standards issued but not yet effective (cont’d.) MFRS 9 Financial Instruments (cont’d.) MFRS 9 will fundamentally change the loan loss impairment methodology. The standard will replace MFRS 139’s incurred loss approach with a forward-looking expected credit loss (“ECL”) approach. The impairment requirements based on ECL approach is applicable for all loans and other debt financial assets not held at FVTPL, as well as loan commitments and financial guarantee contracts. The allowance for expected losses shall be determined based on the expected credit losses associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination, in which case, the allowance is based on the probability of default over the lifetime of the asset. The impairment requirements are expected to result in a higher allowance for impairment losses by approximately RM1.0 million to RM2.0 million to the Group under the ECL approach upon adoption of MFRS 9 which will be recognised in retained earnings and reserves as at 1 January 2018. MFRS 15 Revenue from Contracts with Customers MFRS 15 establishes a new five-step model that will apply to revenue arising from contracts with customers. MFRS 15 will supersede the current revenue recognition guidance including MFRS 118 Revenue, MFRS 111 Construction Contracts and the related interpretations when it becomes effective. The core principle of MFRS 15 is that an entity should recognise revenue which depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under MFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e when “control” of the goods or services underlying the particular performance obligation is transferred to the customer. Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2018 with early adoption permitted. The Group and the Bank have assessed and determined that the existing policies applied by the Group and the Bank in respect of the recognition of revenue comply with the requirements of MFRS 15. Therefore, the Group does not expect any financial impact from the adoption of this standard. MFRS 16 Leases MFRS 16 introduces a single accounting model for a lessee and eliminates the distinction between finance lease and operating lease. All leases will be brought onto the balance sheet as recording certain leases as off-balance sheet leases will no longer be allowed except for some limited practical exemptions. The lessee is required to recognise assets and liabilites for all leases with a term of more than 12 months, unless the underlying assets are low-value assets. Upon adoption of MFRS 16, an entity is required to account for major part of operating leases in the balance sheet by recognising the ‘right-of-use’ assets and lease liability. MFRS 16 is effective for annual periods beginning on or after 1 January 2019, with early application permitted provided MFRS 15 is also applied. Based on the current assessment, the Group expects the rental of branch premises to be affected by this standard with future leases to be recognised on balance sheet. However, the Group does not expect the amount to be significant in relation to the size of our total assets. Kenanga Investment Bank Berhad 31 December 2017 100 notes to the financial statements