Integrated Report 2020

INTEGRATED REPORT 2020 CIM FINANCIAL SERVICES LTD Explanatory Notes 30 SEPTEMBER 2020 2. ACCOUNTING POLICIES (CONT’D) 2.7 Significant accounting policies (Cont’d) (m) Post employment benefits (Cont’d) (iii) 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) Date of recognition Financial assets and liabilities, with the exception of 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. Other borrowed funds are recognised when funds reach the Group’s account. (ii) Initial measurement of financial instruments The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments. All financial instruments are measured initially at their fair value, except in the case of financial assets and financial liabilities recorded at FVTPL transaction costs are added to, or subtracted from, this amount. When the fair value of financial instruments at initial recognition differs from the transaction price, the Group accounts for the Day 1 profit or loss, as described below. (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 profit or loss. 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) Measurement categories of financial assets and liabilities The Group classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms, measured at either: • Amortised cost • Fair value through other comprehensive income (FVTOCI); • Fair value through profit or loss (FVTPL). The Group does not hold any financial assets measured at FVTOCI. The measurement of amortised cost is explained in note (n)(v) and fair value through profit of loss is explained in note (n)(ix). The Group’s Financial liabilities are measured at amortised cost except for derivatives which are classified as financial assets as fair value through profit or loss. (v) Deposits with banks, loans and advances, and receivables. Deposits with banks and loans, advances to customers and receivables consisted of non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, amounts due from these financial assets are subsequently measured at amortised cost using the EIR methodology, less allowances for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of EIR. Therefore, the Group recognises interest income using a rate of return that represents the best estimate of a constant rate of return over the expected behavioural life of the loan, hence, recognising the effect of potentially different interest rates charged at various stages, and other characteristics of the product life cycle (prepayments, penalty interest and charges). 87