2. SUMMARY OF MATERIAL ACCOUNTING POLICIES (CONTINUED) 2.10 Impairment (continued) Impairment of financial assets (continued) (i) Impairment of financial assets (continued) General approach/three stage approach (continued) When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group and the Bank consider reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s and the Bank’s historical experience, informed credit assessment and including forward-looking information. The Group and the Bank assume that the credit risk on a financial asset has increased significantly when it is more than 30 days past due. The Group and the Bank also use its internal credit risk grading system and external risk rating to assess deterioration in credit quality of a financial assets. The Group and the Bank assess whether the credit risk on a financial asset has increased significantly on an individual or collective basis. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar risk characteristics, taking into account the asset type, industry, geographical location, collateral type, past-due status and other relevant factors. These characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the counterparty’s ability to pay all amounts due according to the contractual terms of the assets being evaluated. Simplified approach Measures the loss allowance at lifetime expected credit losses without the need to identify significant increase in credit risk. (ii) Measurement of ECL ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group and the Bank expect to receive). ECLs are discounted at the effective profit rate of the financial asset. (iii) Incorporation of forward-looking information Relevant macroeconomic factors are incorporated in the risk parameters as appropriate. The key macroeconomics variables (“MEV”) that are incorporated in determining ECLs include, Consumer Price Index (“CPI”), Gross Domestic Product (“GDP”), House Price Index (“HPI”), and Kuala Lumpur Composite Index (“KLCI”). Forward-looking macroeconomic forecasts are generated by the Group’s and the Bank’s Economist as part of the ECL process. An economic forecast is accompanied with three economic scenarios: a base case (60%), which is the median scenario, and two less likely scenarios, one upside (30%) and one downside (10%). 292 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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