MISC Integrated Annual Report 2020

2. SIGNIFICANT ACCOUNTING POLICIES (CONT’D. ) 2.3 Summary of significant accounting policies (cont’d.) (l) Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. (m) Impairment of financial assets The Group and the Corporation recognise loss allowances for expected credit losses (“ECL”) on financial assets measured at amortised cost and finance lease receivables. The Group and the Corporation measure loss allowances on debt securities at an amount equal to lifetime ECL, except for debt securities that are determined to have low credit risk at the reporting date, other debt securities for which credit risk has not increased significantly since initial recognition and finance lease receivables, which are measured as 12 month ECL. Loss allowances for trade receivables and contract assets (amount due from customers on contracts) are always measured at an amount equal to lifetime ECL. When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECL, the Group and the Corporation 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 Corporation’s historical experience, informed credit assessment and forward-looking information. The Group and the Corporation assume that the credit risk on a financial asset has increased significantly if it is past due. The Group and the Corporation consider a financial asset to be in default when the borrower is unlikely to pay its credit obligations to the Group and the Corporation in full, without recourse by the Group and the Corporation to take actions such as realising security. Lifetime ECL are the ECL that result from all possible default events over the expected life of a financial instrument, while 12 month ECL are the portion of ECL that result from default events that are possible within the 12 months after the reporting date. ECL are measured as a function of probability of default and loss given default. Probability of default is the likelihood of default over a particular time horizon and is derived using external credit ratings, if they are available, or internal credit ratings based on quantitative or qualitative information for the counterparty. Loss given default is the assumption of the proportion of financial asset that cannot be recovered by conversion of collateral to cash or by legal process, and is assessed based on the Group’s and the Corporation’s historical experience. An impairment loss in respect of financial assets measured at amortised cost is recognised in profit or loss and the carrying amount of the asset is reduced through the use of an allowance account. An impairment loss in respect of debt investments measured at FVOCI is recognised in profit or loss and the allowance account is recognised in other comprehensive income. Information about the exposure to credit risk and ECL for financial assets as at 31 December 2020 is disclosed in Note 22 and Note 38(d). 2. SIGNIFICANT ACCOUNTING POLICIES (CONT’D. ) 2.3 Summary of significant accounting policies (cont’d.) (n) Derivative financial instruments and hedge accounting The Group uses derivative financial instruments such as interest rate swaps and currency hedge to hedge its interest rate risk and foreign currency risk. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value at each reporting date. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives during the year that do not qualify for hedge accounting and the ineffective portion of an effective hedge are recognised in the income statement. For the purpose of hedge accounting, hedges are classified as: • fair value hedges when hedging the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect the income statement; • cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or a liability or a highly probable forecast transaction and could affect the income statement; or • hedges of a net investment in a foreign operation. Cash flow hedges In a cash flow hedge, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income and the ineffective portion is recognised in income statement. Subsequently, the cumulative gain or loss recognised in other comprehensive income is reclassified from equity into income statement in the same period or periods during which the hedged forecast cash flows affect the income statement. If the hedge item is a non-financial asset or liability, the associated gain or loss recognised in other comprehensive income is removed from equity and included in the initial amount of the asset or liability. However, loss recognised in other comprehensive income that will not be recovered in one or more future periods is reclassified from equity into income statement. Cash flow hedge accounting is discontinued prospectively when the hedging instrument expires or is sold, terminated or exercised, the hedge is no longer highly effective, the forecast transaction is no longer expected to occur or the hedge designation is revoked. If the hedge is for a forecast transaction, the cumulative gain or loss on the hedging instrument remains in equity until the forecast transaction occurs. When the forecast transaction is no longer expected to occur, any related cumulative gain or loss recognised in other comprehensive income on the hedging instrument is reclassified from equity into income statement. 31 December 2020 NOTES TO THE FINANCIAL STATEMENTS 31 December 2020 NOTES TO THE FINANCIAL STATEMENTS 10 344 10 345 /// Leadership / Governance / Financial Statements / Additional Information / Annual General Meeting ////// /// Leadership / Governance / Financial Statements / Additional Information / Annual General Meeting ////// Section Section MISC Berhad / Integrated Annual Report 2020 MISC Berhad / Integrated Annual Report 2020