KENANGA ANNUAL REPORT 2020

170 5 1 2 3 4 6 7 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 31 December 2020 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 technique which involves making assumptions based on market conditions and other factors as of the reporting date. (iii) The measurement of impairment losses under MFRS 9 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. Under MFRS 9, 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 LTECL 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. Overlays and adjustments for ECL amidst COVID-19 environment 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 ECL for the year ended and as at 31 December 2020. These overlay adjustments were taken to reflect the latest macroeconomic 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.