significant increase in credit risk (or when that significant increase reverses) and so assets move from 12-month to lifetime ECLs, or vice versa, but it can also occur within portfolios that continue to be measured on the same basis of 12-month or lifetime ECLs but the amount of ECL changes because the credit risk of the portfolios differs. There has been a refresh in historical data used for ECL methodology (refer to Risk and Capital management report). (d) Fair value estimation The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e., an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of valuation models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimation is required in establishing fair values. (e) 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. (f) Impairment of non-financial assets Goodwill is considered for impairment at least annually. Investment in subsidiaries and associate, equipment, rightof-use- assets and intangible 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 cashgenerating unit. Information about the specific techniques and inputs is disclosed in note 20, 21 and 24. (g) 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. Refer to note 25 (h) 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. 3. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS Continued (c) Calculation of ECL allowance Continued EXPLANATORY NOTES 30 SEPTEMBER 2023 128 CIM FINANCE ANNUAL REPORT
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