CFSL - Annual report 2018

77 CIM FINANCIAL SERVICES LTD ANNUAL REPORT 2018 EXPLANATORY NOTES 30 SEPTEMBER 2018 2. ACCOUNTING POLICIES (CONT’D) 2.6 Significant accounting policies (Cont’d) (m) Post employment benefits (Cont’d) (ii) Defined benefit pension plans and other retirement benefits (Cont’d) Service costs comprising current service cost, past service cost, as well as gains and losses on curtailments and settlements are recognised immediately in profit or loss. For employees who are not covered or who are insufficiently covered by the current pension plan, the net present value of gratuity on retirement payable under the Employment Rights Act 2008 (as amended) is calculated by an actuary and provided for. The obligations arising under this item are not funded. Gratuity on retirement The net present value of gratuity on retirement payable under the Employment Rights Act 2008 (as amended) has been provided for in respect of those employees who are not covered or who are insufficiently covered by the above retirement benefit plan. The obligations arising under this item are not funded. The Employment Rights Act stipulates that the gratuity paid on retirement should be based on the remuneration (which is inclusive of payment for extra work, productivity bonus, attendance bonus, commission in return for services and any other regular payment) of the employee instead of the earnings. The amount due per year of service is 15 days remuneration based on a month of 26 days (15/26). (n) Financial instruments - Initial recognition and subsequent measurement (i) Initial recognition Financial assets and liabilities, with the exception of deposits from customers and other borrowed funds, are initially recognised on the trade date, i.e., the date that the Group becomes a party to the contractual provisions of the instrument. Deposits from customers and other borrowed funds are recognised when funds are transferred to the Group’s account by the counterparty. (ii) Initial measurement of financial instruments The classification of financial instruments at initial recognition depends on their purpose and characteristics and the management’s intention when acquiring them. All financial instruments are measured initially at their fair value plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss. (iii) Day 1 Profit or loss When the transaction price differs from the fair value of other observable current market transactions in the same instrument, or based on a valuation technique with the variables including only data from observable markets, the Group immediately recognises the difference between the transaction price and fair value (a Day 1 profit or loss) in net trading income. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognised in profit or loss when the inputs become observable, or when the instrument is derecognised. (iv) Effective interest rate The effective interest rate (EIR) is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate a shorter period, to the net carrying amount of the financial asset or financial liability. The amortised cost of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted amortised cost is calculated based on the original or latest re-estimated EIR and the change is recorded as ‘interest income’ for financial assets and ‘interest expense’ for financial liabilities.