KENANGA ANNUAL REPORT 2018

NOTES TO THE FINANCIAL STATEMENTS 31 December 2018 118 KENANGA INVESTMENT BANK BERHAD 2. CHANGES IN ACCOUNTING POLICIES AND REGULATORY REQUIREMENT (CONT’D.) 2.1 New and amended Malaysian Financial Reporting Standards (“MFRSs”) adopted (cont’d.) (a) MFRS 9 Financial Instruments (cont’d.) (i) Changes to classification and measurement To determine their classification and measurement category, MFRS 9 requires all financial assets, except equity instruments and derivatives, to be assessed based on a combination of the entity’s business model for managing the assets and the financial instruments’ contractual cash flow characteristics. The MFRS 139 measurement classifications of financial assets (fair value through profit or loss (“FVTPL”), available-for-sale (“AFS”), held-to-maturity and amortised cost) have been replaced by: - Debt instruments at amortised cost; - Debt instruments at fair value through other comprehensive income (“FVOCI”), with gains or losses recycled to profit or loss on derecognition; - Equity instruments at FVOCI, with no recycling of gains or losses to profit or loss on derecognition; and - Financial assets at FVTPL. The classification and measurement requirements for financial liabilities under MFRS 9 are largely consistent with MFRS 139 with the exception that for financial liabilities designated as measured at fair value, gains or losses relating to changes in the entity’s own credit risk are included in other comprehensive income except where doing so would create or enlarge an accounting mismatch in profit or loss. Under MFRS 9, embedded derivatives are no longer separated from a host financial asset. Instead, financial assets are classified based on the business model and their contractual terms, as explained in Note 3.4(g)(i)(1). The accounting for derivatives embedded in financial liabilities and in non-financial host contracts has not changed. The Group’s and the Bank’s accounting policies for embedded derivatives are set out in Note 3.4(g)(iii). The Group’s and the Bank’s classification of their financial assets and liabilities is explained in Note 3.4(f)(iii). (ii) Changes to the impairment calculation The adoption of MFRS 9 has fundamentally changed the Group’s and the Bank’s accounting for loss impairments by replacing MFRS 139’s incurred loss approach with a forward-looking expected credit loss (“ECL”) approach. MFRS 9 requires the Group and the Bank to record an allowance for ECLs for all loans and other debt financial assets not held at FVTPL, together with loan commitments and financial guarantee contracts. The allowance is based on the ECLs associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination. If the financial asset meets the definition of purchased or originated credit impaired (“POCI”), the allowance is based on the change in the ECLs over the life of the asset. Details of the Group’s and the Bank’s impairment method are disclosed in Note 3.4(k).