172 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2022 Additional Information We Are Kenanga Message From Our Leaders Our Sustainability Approach How We Are Governed Financial Statements Shareholders’ Information 3. ACCOUNTING POLICIES (CONT’D.) 3.4 Summary of significant accounting policies (cont’d.) (k) Impairment of financial assets (cont’d.) (ii) The calculation of ECLs (cont’d.) The mechanics of the ECL method are summarised below (cont’d.): • Stage 3: For loans or assets considered credit-impaired, the Group and the Bank recognise the LTECLs for these loans or assets. The method is similar to that for Stage 2 assets, with the PD set at 100%. • POCI: POCI assets are financial assets that are credit impaired on initial recognition. The Group and the Bank only recognise the cumulative changes in LTECLs since initial recognition, based on a probability-weighting of the three scenarios, discounted by the credit adjusted EIR. • Loan Commitments: When estimating LTECLs for undrawn loan commitments, the Group and the Bank estimate the expected portion of the loan commitment that will be drawn down over its expected life. The ECL is then based on the present value of the expected shortfalls in cash flows if the loan is drawn down, based on a probability-weighting of the three scenarios. The expected cash shortfalls are discounted at an approximation to the expected EIR on the loan. For revolving facilities that include both a loan and an undrawn commitment, ECLs are calculated and presented together with the loan. (iii) Debt instruments measured at FVOCI The ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. The accumulated loss recognised in OCI is recycled to the profit or loss upon derecognition of the assets. (iv) Purchased or originated credit impaired financial assets (“POCI”) For POCI financial assets, the Group and the Bank only recognise the cumulative changes in LTECLs since initial recognition in the loss allowance. (v) Forward looking information In their ECL models, the Group and the Bank rely on a broad range of forward looking information as economic inputs, such as: • Gross Domestic Products (“GDP”) growth rate; and • Kuala Lumpur Composite Index (“KLCI”)
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