2. SUMMARY OF MATERIAL ACCOUNTING POLICIES (CONTINUED) 2.5 Financial instruments (continued) Financial assets – Assessment whether contractual cash flows are solely payments of principal and profit (“SPPI”) (continued) A prepayment feature is consistent with the SPPI criterion if the prepayment amount substantially represents unpaid amounts of principal and profit on the principal amount outstanding, which may include reasonable additional compensation for early termination of the contract. Additionally, for a financial asset acquired at a discount or premium to its contractual par amount, a feature that permits or requires prepayment at an amount that substantially represents the contractual par amount plus accrued (but unpaid) contractual profit (which may also include reasonable additional compensation for early termination) is treated as consistent with this criterion if the fair value of the prepayment feature is insignificant at initial recognition. Derivative financial instruments The Group and the Bank hold derivative financial instruments to hedge its foreign currency and profit rate exposures. However, the Group and the Bank elect not to apply hedge accounting. Hence, foreign exchange trading positions, including spot and forward contracts, are revalued at prevailing market rates at statement of financial position date and the resultant gains and losses for the financial year are recognised in the profit or loss. An embedded derivative is recognised separately from the host contract and accounted for as a derivative if, and only if, it is not closely related to the economic characteristics and risks of the host contract and the host contract is not categorised at fair value through profit or loss. In the event of an embedded derivatives, the host contract that is not a financial assets are recognised separately and accounted for in accordance with the policy applicable to the nature of the host contract. Financial liabilities All financial liabilities are subsequently measured at amortised cost other than those categorised as fair value through profit or loss. The financial liabilities measured at amortised cost are deposit from customers, investment accounts of customers, recourse obligations on financing sold to Cagamas, bills and acceptance payables, Subordinated Sukuk Murabahah and other liabilities. Fair value through profit or loss category comprises financial liabilities that are derivatives or financial liabilities that are specifically designated into this category upon initial recognition. Financial liabilities categorised as fair value through profit or loss are subsequently measured at their fair values with the gain or loss recognised in profit or loss. 284 Notes to the Financial Statements for the financial year ended 31 December 2023 Bank Islam Malaysia Berhad ◆ Integrated Annual Report 2023
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