KENANGA ANNUAL REPORT 2019

150 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2019 3. ACCOUNTING POLICIES (CONT’D.) 3.4 Summary of significant accounting policies (cont’d.) (k) Impairment of financial assets (cont’d.) (i) Overview of the ECL principles (cont’d.) 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. • Stage 2: When a loan or an asset has shown a significant increase in credit risk (“SICR”) since origination, the Group and the Bank record an allowance for the LTECLs. Stage 2 loans or assets also include facilities, where the credit risk has improved and the loan has been reclassified from Stage 3. • Stage 3: Loans or assets which considered credit-impaired (as outlined in Note 50(a)). The Group and the Bank record an allowance for the LTECLs. • POCI assets are financial assets that are credit impaired on initial recognition. POCI assets are recorded at fair value at original recognition and interest income is subsequently recognised based on a credit-adjusted EIR. ECLs are only recognised or released to the extent that there is a subsequent change in the expected credit losses. For financial assets for which the Group and the Bank have no reasonable expectations of recovering either the entire outstanding amount, or a proportion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) derecognition of the financial asset. Simplified approach The simplified approach does not require tracking change in credit risk, but instead requires a loss allowance to be recognised based on lifetime ECLs at each reporting date. The simplified approach is required for trade receivables or contract assets that do not contain a significant financing component. However, either the general approach or the simplified approach can be applied separately, as an accounting policy choice, for: • All trade receivables or contract assets that result from transactions within the scope of MFRS 15 Revenue from Contracts with Customers and that contain a significant financing component. • All lease receivables that result from transaction that are within the scope of MFRS 16 Leases .