NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2023 169 OUR SUSTAINABILITY APPROACH HOW WE ARE GOVERNED FINANCIAL STATEMENTS SHAREHOLDERS’ INFORMATION ADDITIONAL INFORMATION 3. ACCOUNTING POLICIES (CONT’D.) 3.4 Material accounting policy information (cont’d.) (k) Impairment of financial assets (cont’d.) (i) Overview of the ECL principles (cont’d.) Simplified approach The simplified approach does not require tracking change in credit risk, but instead requires a loss allowance to be recognised based on LTECLs 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 . (ii) The calculation of ECLs The Group and the Bank calculate ECLs based on a three probability-weighted scenarios to measure the expected cash shortfalls, discounted at original EIR. A cash shortfall is the difference between the cash flows that are due to the Group and the Bank in accordance with the contract and the cash flows that the Group and the Bank expect to receive. The key elements of the ECL calculations are outlined as follows: • PD The Probability of Default ("PD") is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognised and is still in the portfolio. The concept of PD is further explained in Note 51(a). • EAD The Exposure at Default (“EAD”) is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued interest from missed payments. The EAD is further explained in Note 51(a). • LGD The Loss Given Default (“LGD”) is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realisation of any collateral. It is usually expressed as a percentage of the EAD. The LGD is further explained in Note 51(a).
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