KENANGA INVESTMENT BANK BERHAD INTEGRATED ANNUAL REPORT 2024 WE ARE KENANGA OUR SUSTAINABILITY APPROACH LEADERSHIP STATEMENT HOW WE ARE GOVERNED SHAREHOLDERS’ INFORMATION NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2024 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2024 FINANCIAL STATEMENTS ADDITIONAL INFORMATION OUR VALUE CREATION APPROACH 199 198 4. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS (CONT’D.) (ii) The fair value of financial assets at fair value through profit or loss (Note 6), financial investments measured at FVOCI and at amortised cost (Note 7), derivative financial assets (Note 8) and derivative financial liabilities (Note 23) are derived from quoted and observable market prices. However, if the financial instruments are not traded in an active market, fair value may be established by using a valuation technique which includes but is not limited to using recent arm’s length market transactions between knowledgeable, willing parties, and reference to the current fair value of another instrument that is substantially the same. The Group and the Bank use acceptable valuation techniques which involves making assumptions based on market conditions and other factors as of the reporting date. Further information relating to the fair values are disclosed in Note 52. (iii) The measurement of impairment losses on financial assets subject to impairment assessment requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Group’s and the Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include: • The Group’s and the Bank’s internal credit rating model, which assigns PDs to the individual grades; • The Group’s and the Bank’s criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should be measured on a LTECLs basis and the qualitative assessment; • The segmentation of financial assets when their ECL is assessed on a collective basis; • Development of ECL models, including the various formulas and the choice of inputs; • Determination of associations between macroeconomic scenarios and economic inputs, such as unemployment levels and collateral values, and the effect on PDs, EADs and LGDs; and • Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models. It has been the Group’s and the Bank’s policy to regularly review its models in the context of actual loss experience and adjust when necessary. The impairment losses on financial assets are disclosed in Notes 7,9,10 and 11. Management overlays for ECL The management overlays were taken to reflect the latest macroeconomic outlook not captured in the modelled outcome and the potential impact to delinquencies and defaults after taking into account the uncertainties in the market. The management overlays involved significant level of judgement and reflect the management’s views of possible severities of the economic conditions and paths of recovery in the forward looking assessment for ECL estimation purposes. The management overlays were generally made at portfolio level in determining the sufficient level of ECL. Total management overlays for ECL inclusive of the macro-economic adjustments maintained by the Group and the Bank as at 31 December 2024 are RM0.8 million (2023: RM7.3 million). 4. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS (CONT’D.) Management overlays for ECL (cont’d.) The scenarios applied in the management overlays in estimating the reported ECL include: (i) Drop in counterparty ratings (ii) Stressed security values (iii) Uncertainties arising from macroeconomic factors (iv) The Group and the Bank estimate the useful lives of property, plant and equipment and software based on factors such as the expected level of usage due to physical wear and tear, future technological developments and legal or other limits on the use of the relevant assets. Future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the estimated useful lives of property, plant and equipment, and software would increase the recorded depreciation and decrease their carrying value. The total carrying amounts of property, plant and equipment, and software are disclosed in Notes 16 and 17 respectively. (v) Deferred tax assets are recognised for all unutilised tax losses and unabsorbed capital allowances to the extent that it is probable that taxable profit will be available against which the tax losses and unabsorbed capital allowances can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. As at financial year end, the total carrying value of unutilised tax losses and unabsorbed capital allowances are disclosed in Note 19. (vi) The Group and the Bank assess whether there is any indication that investments in subsidiaries and investments in associates may be impaired at each reporting date. If indicators are present, these assets are subject to impairment review. The impairment review comprises comparison of the carrying amount of the investment and the investment’s estimated recoverable amount. Judgements made by management in the process of applying the Group’s and the Bank’s accounting policies in respect of investments in subsidiaries and investments in an associate are as follows: - The Bank determines whether its investments are impaired following certain indications of impairment such as, amongst others, significant changes with adverse effects on the investments and deteriorating financial performance of the investments due to observed changes and fundamentals. - Depending on their nature and the industries in which the investments relate to, judgements are made by management to select suitable methods of valuation such as, amongst others, discounted cash flows and realisable net asset value. Once a suitable method of valuation is selected, management makes certain assumptions concerning the future to estimate the recoverable amount of the investment. These assumptions and other key sources of estimation uncertainty at the reporting date may have a significant risk of causing material adjustment to the carrying amounts of the investments within the next financial year. Depending on the specific individual investment, assumptions made by management may include, amongst others, assumptions on expected future cash flows, revenue growth, discount rate used for purposes of discounting future cash flows which incorporates the relevant risks, and expected future outcome of certain past events. Investments in subsidiaries and associates of the Group are disclosed in Notes 13 and 14 respectively.
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