Page 88 - ICD-AR22-English

Notes to the Separate Financial Statements
FOR THE YEAR ENDED 31 DECEMBER 2022
Modification and derecognition of financial assets
A modification of a financial asset occurs when the contractual terms governing the cash flows of a financial asset are renegotiated or otherwise modified between initial recognition and maturity of the financial asset. A modification affects the amount and/or timing of the contractual cash flows either immediately or at a future date.
A financing forbearance is granted in cases where although the financed party made all reasonable efforts to pay under the original contractual terms, there is a high risk of default or default has already happened and the financed party is expected to be able to meet the revised terms. The revised terms in most of the cases include an extension of the maturity of the financial asset, changes to the timing of the cash flows of the financial asset (principal and profit repayment), reduction in the amount of cash flows due (principal and profit forgiveness).
When a financial asset is modified the Corporation assesses whether this modification results in derecognition. In accordance with the Corporation’s policy a modification results in derecognition when it gives rise to substantially different terms. To determine if the modified terms are substantially different from the original contractual terms the Corporation considers the following:
A quantitative assessment is performed to compare the present value of the remaining contractual cash flows under the original terms with the contractual cash flows under the revised terms, both amounts discounted at the original effective profit rate. If the difference in present value is greater than 10% the Corporation deems the arrangement is substantially different leading to derecognition. When performing a quantitative assessment of a modification or renegotiation of a credit-impaired financial asset or a purchased or originated credit- impaired financial asset that was subject to a write-off, the Corporation considers the expected (rather than
the contractual) cash flows before modification or renegotiation and compares those with the contractual cash flows after modification or renegotiation.
In the case where the financial asset is derecognized the loss allowance for ECL is remeasured at the date
of derecognition to determine the net carrying amount of the asset at that date. The difference between this revised carrying amount and the fair value of the new financial asset with the new terms will lead to a gain or loss on derecognition. The new financial asset will have a loss allowance measured based on 12-month ECL except in the rare occasions where the new financial asset is considered to be originated- credit impaired. This applies only in the case where the fair value of the new financial asset is recognized at a significant discount to its revised par amount because there remains a high risk of default which has not been reduced by the modification. The Corporation monitors credit risk of modified financial assets by evaluating qualitative and quantitative information, such as if the client is in past due status under the new terms.
When the contractual terms of a financial asset are modified and the modification does not result in derecognition, the Corporation determines if the financial asset’s credit risk has increased significantly since initial recognition by comparing:
– the remaining lifetime PD estimated based on data at initial recognition and the original contractual terms; with
– the remaining lifetime PD at the reporting date based on the modified terms.
For financial assets modified as part of the Corporation’s forbearance policy, where modification did not result in derecognition, the estimate of PD reflects the Corporation’s ability to collect the modified cash flows taking into account the Corporation’s previous experience of similar forbearance action, as well as various behavioural
86 ICD ANNUAL REPORT 2022