KENANGA ANNUAL REPORT 2018

NOTES TO THE FINANCIAL STATEMENTS 31 December 2018 139 ANNUAL REPORT 2018 3. ACCOUNTING POLICIES (CONT’D.) 3.4 Summary of significant accounting policies (cont’d.) (k) Impairment of financial assets (Policy applicable from 1 January 2018) (i) Overview of the ECL principles As described in Note 2.1(a), the adoption of MFRS 9 has fundamentally changed the Group’s and the Bank’s loan and receivable impairment method by replacing MFRS 139’s incurred loss approach with a forward-looking ECL approach. From 1 January 2018, the Group and the Bank have been recording the allowance for expected credit losses for all loans and other debt financial assets not held at FVTPL, together with loan commitments contracts, in this section all referred to as ‘financial instruments’. Equity instruments are not subject to impairment under MFRS 9. The ECL allowance is based on the credit losses expected to arise over the life of the financial instruments (the lifetime expected credit loss or “LTECL”), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months’ expected credit loss (“12mECL”) as outlined in Note 3.4(k)(ii). The 12mECL is the portion of LTECLs that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Both LTECLs and 12mECLs are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments. The Group and the Bank have established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument. This is further explained in Note 50(a). General approach The Group and the Bank group their loans into Stage 1, Stage 2, Stage 3 and POCI, as described below: • Stage 1: When loans or assets are first recognised, the Group and the Bank recognise an allowance based on 12mECLs. Stage 1 loans or assets also include facilities where the credit risk has improved and the loan or the assets has been reclassified from Stage 2.