Page 89 - ICD-AR22-English

Notes to the Separate Financial Statements
FOR THE YEAR ENDED 31 DECEMBER 2022
indicators, including the financed party’s payment performance against the modified contractual terms. If the credit risk remains significantly higher than what was expected at initial recognition the loss allowance will continue to be measured at an amount equal to lifetime ECL. If a forborne financing is credit impaired due to the existence of evidence of credit impairment (see above), the Corporation performs an ongoing assessment to ascertain if the problems of the exposure are cured, to determine if the financing is no longer credit- impaired. The loss allowance on forborne financing will generally only be measured based on 12-month ECL when there is evidence of the financed party’s improved repayment behaviour following modification leading to a reversal of the previous significant increase in credit risk.
Where a modification does not lead to derecognition the Corporation calculates the modification loss by comparing the gross carrying amount before and after the modification (excluding the ECL allowance). Modification losses, if any, for financial assets are included in the separate income statement in ‘Losses on modification of financial assets’. Then the Corporation measures ECL for the modified asset, where the expected cash flows arising from the modified financial asset are included in calculating the expected cash shortfalls from the original asset.
The Corporation derecognizes a financial asset only when the contractual rights to the asset’s cash flows expire (including expiry arising from a modification with substantially different terms), or when the financial asset
and substantially all the risks and rewards of ownership of the asset are transferred to another entity. If the Corporation neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Corporation recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Corporation retains substantially all the risks and rewards of ownership of a transferred financial asset, the Corporation continues to recognize the financial asset and also recognizes a collateralized funding for the proceeds received
Definition of default
Critical to the determination of ECL is the definition of default. The definition of default is used in measuring the amount of ECL and in the determination of whether the loss allowance is based on 12-month or lifetime ECL, as default is a component of the probability of default (PD) which affects both the measurement of ECLs and the identification of a significant increase in credit risk.
The Corporation considers the following as constituting an event of default:
– All contracts or obligors rated 21 in the Corporation’s internal scale (equivalent to C in Moody’s scale and D in both S&P’s and Fitch Ratings’ scale); or
– Moreover, the Corporation also uses a rebuttable presumption based on DPD. This rule is applied if the contractual payments are due for more than 180 days for sovereign contracts and 90 days for non-sovereign ones, unless there is reasonable and supportable information indicating that the contract is not credit- impaired.
This definition of default is used by the Corporation for accounting purposes as well as for internal credit risk management purposes. The definition of default is appropriately tailored to reflect different characteristics of different types of assets.
REINVIGORATING THE PRIVATE SECTOR TO SHAPE A BETTER FUTURE 87