Affin Bank Berhad | Annual Report 2020

264 ORGANISATION EXECUTIVE SUMMARY CORPORATE GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION (AE) COMMODITY GOLD (CONTINUED) The fair value of gold bullion as at the reporting date is determined by reference to prices published by the London Bullion Market Association (‘LBMA’). Differences arising from changes in gold prices are recorded in profit or loss. The commodity is derecognised when the risks and rewards of ownership have been substantially transferred. (AF) CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group’s and the Bank’s accounting policies. This note provides an overview of the areas that involve a higher degree of judgement or complexity, and major sources of estimation uncertainty that have a significant risk of resulting in a material adjustment within the next financial year. Detailed information about each of these estimates and judgements is included in the related notes together with information about the basis of calculation for each affected line item in the financial statements. Measurement of the expected credit losses (‘ECL’) allowance The measurement of the expected credit losses allowance for financial assets measured at amortised cost and FVOCI is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour (i.e. the likelihood of customers defaulting and the resulting losses). Explanation of the inputs, assumptions and estimation techniques used in measuring ECL is further detailed in Note 51, which also sets out key sensitivities of the ECL to changes in these elements. A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as: • Determining criteria for significant increase in credit risk; • Choosing appropriate models and assumptions for the measurement of ECL; • Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and the associated ECL; and • Establishing groups of similar financial assets for the purposes of measuring ECL. Impact arising from Covid-19 on ECL As the current MFRS 9 models are not expected to generate levels of ECL with sufficient reliability in view of the unprecedented and on.going Covid-19 pandemic, overlays have been applied to determine a sufficient overall level of ECLs for the year ended and as at 31 December 2020. These overlays were taken to reflect the latest macro-economic outlook not captured in the modelled outcome and the potential impact to delinquencies and defaults when the various relief and support measures are expiring in 2021. The overlays involved significant level of judgement and reflect the management’s views of possible severities of the pandemic and paths of recovery in the forward looking assessment for ECL estimation purposes. The borrowers and customers who have received repayment supports remain in their existing stages unless they have been individually identified as not viable or with subsequent indicators of significant increase in credit risk from each of their pre Covid-19 status. The overlays were made at the account and portfolio level. Estimated impairment of goodwill The Group performs an impairment review on an annual basis to ensure that the carrying value of the goodwill does not exceed its recoverable amounts from cash generating units to which the goodwill is allocated. The recoverable amount represents the present value of the estimated future cash flows expected to arise from continuing operations. Therefore, in arriving at the recoverable amount, management exercise judgement in estimating the future cash flows, growth rate and discount rate. The recoverable amounts of the cash generating units to which goodwill is allocated were determined based on discounted cash flows valuation model. The calculations require the use of estimates as set out in Note 22 to the financial statements. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2020