CIM FINANCE. INTEGRATED REPORT 2022 | 131 EXPLANATORY NOTES 30 SEPTEMBER 2022 3. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS (CONT’D) (d) Effective Interest Rate (EIR) method The Group’s and the Company’s EIR methodology, recognise interest income using a rate of return that represents the best estimate of a constant rate of return over the expected behavioural life of loans and deposits and recognises the effect of potentially different interest rates charged at various stages and other characteristics of the product life cycle (including prepayments and penalty interest and charges). This estimation, by nature, requires an element of judgement regarding the expected behaviour and life-cycle of the instruments, as well expected changes in the base rate and other fee income/ expense that are integral parts of the instrument. (e) Impairment of non-financial assets Assets are considered for impairment if there is a reason to believe that impairment may be necessary. Future cash flows expected to be generated by an asset or cash-generating assets are projected, taking into account market conditions and the expected useful lives of the assets. The present value of these cash flows, determined using an appropriate discount rate, is compared to the current net asset value and, if lower, the assets are impaired to the present value. The impairment loss is first allocated to goodwill and then to the other assets of a cash-generating unit. (f) 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. Any changes in these assumptions will impact the carrying amount of pension obligations. (g) 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. Judgment 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. (h) Asset lives and residual values 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. (i) 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. Themajor considerations that theGroup and the Company take 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. (j) Limitation of sensitivity analysis Sensitivity analysis in respect of market risk demonstrates the effect of a change in a key assumptionwhile other assumptions remain unchanged. In reality, there is correlation between the assumptions and other factors. It should be noted that these sensitivities are non-linear and larger or smaller impacts should not be interpolated or extrapolated from these results. Sensitivity analysis does not take into consideration that the Group’s and the Company’s assets and liabilities are managed. Other limitations include the use of hypothetical market movements to demonstrate potential risk that only represent the Group’s and the Company’s view of possible near-termmarket changes that cannot be predicted with any certainty.
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