Annual Report 2019

Explanatory Notes 30 SEPTEMBER 2019 3. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS (CONT’D) Impairment losses on loans and advances, and leases and other credit agreements (Cont’d) Policy applicable before 1 October 2018 The Company’s impairment methodology for assets carried at amortised cost results in the recording of provisions for impairment is as follows: • Specific impairment by reviewing individually significant or specifically identified exposures at each reporting date to assess whether an impairment loss should be recorded in profit or loss. • Collective impairment for individually not significant exposures and incurred but not yet identified losses (IBNI) assumptions. All assumptions are reviewed at each reporting date. All categories include an element of management’s judgement, in particular for the estimation of the amount and timing of future cash flows and collaterals values when determining impairment losses. These estimates are driven by a number of factors, the changing of which can result in different levels of allowances. Additionally, judgements around the inputs and calibration of the collective and IBNI models include the criteria for the identification of smaller homogenous portfolios, the effect of concentrations of risks and economic data (including the repayment trends, collateral values and the performance of different individual groups, bankruptcy trends) and for determination of the emergence period. The methodology and assumptions are reviewed regularly in the context of actual loss experienced. Valuation of properties The Group carries its investment properties at fair value, with changes in fair value being recognised in profit or loss. In addition, it measures land and buildings at revalued amounts with changes in fair value being recognised in Other Comprehensive Income. The Group engaged independent valuation specialists to determine fair value. The valuers used depreciated replacement cost approach for buildings and the sales comparison approach for land. The key assumptions used to determine the fair value are further explained in Notes 22 and 23. Pension Benefits The cost of the defined benefit pension plan and other post-employment medical benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these. Deferred tax assets Deferred tax assets are recognised in respect of deductible temporary differences to the extent that it is probable that future taxable profit will be available which these temporary differences can be utilised. Judgement is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing and level of future taxable profits, together with future tax-planning strategies. The investment properties consisting of land and buildings are held within a business model whose objective is to consume substantially all of the economic benefits embodied in the building over time through rental, rather than through sale. The presumption that the Group will recover the carrying amount of the investment properties entirely through sale is rebutted for the buildings which are depreciable. Accordingly deferred tax has been provided for on the fair value gain arising on the building. However, since the land is not depreciable, the recovery through sale would not be rebutted for the land. No deferred tax has been recognised on the land as there is no capital gains tax imposed on sale of land. Asset lives and residual values Property, plant and equipment are depreciated over their useful lives taking into account residual values, where appropriate. The actual lives of the assets and residual values are assessed annually and may vary depending on a number of factors. In reassessing asset lives, factors such as technological innovation, product life cycles and maintenance programmes are taken into account. Residual value assessments consider issues such as future market conditions, the remaining life of the asset and projected disposal values. Consideration is also given to the extent of current profits and losses on the disposal of similar assets. Classification of lease The extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee determined the classification of the lease. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. The major considerations that the Company takes into account in determining the classification of a lease as a finance lease include the transfer of ownership to the lessee at the end of the lease, the option to purchase the asset at a price significantly lower than the fair value, the present value of minimum lease payment is almost the fair value of the leased asset, and the lease term covers the major part of the economic life of the asset.  The Group distinguishes other credit agreements from finance lease based on the nature of the underlying asset being financed, the terms of the financing arrangements, and the timing of transfer of title of the assets. CIM FINANCIAL SERVICES LTD / ANNUAL REPORT 2019 96