335 ANNUAL REPORT 2022 ACCOUNTABILITY NOTES TO THE FINANCIAL STATEMENTS (CONT’D) For the financial year ended 31 January 2022 41. Financial risk management objectives and policies (continued) (b) Credit risk (continued) (i) Trade receivables and contract assets ECL for trade receivables and contract assets are measured using the simplified approach. The expected loss rates are based on the payment profiles of sales over a period of 36 months before reporting date and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The Group and the Company have identified the gross domestic product (“GDP”), GDP growth, oil price and country rating in which it sells its goods and services to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. No significant changes to estimation techniques or assumptions were made during the reporting period. The reconciliation of allowance for impairment and maximum exposure to credit risk are disclosed in Note 24(a) and Note 6(b). (ii) Debt instruments at amortised costs other than trade receivables and contract assets ECL for debt instruments at amortised costs other than trade receivables and contract assets are measured using the general 3-stage approach. The Group and the Company use three categories which reflect their credit risk and how the loss allowance is determined for each of those categories. A summary of the assumptions underpinning the Group’s and the Company’s ECL model is as follows: Category Group’s and Company’s definition of category Basis for recognising ECL Performing Debtors have a low risk of default and a strong capacity to meet contractual cash flows. 12 month ECL Underperforming Debtors for which there is a significant increase in credit risk or significant increase in credit risk if presumed the forward looking information and indicators available signify impairment to debtor’s ability to repay. Lifetime ECL Non-performing Debtor’s ability to repay or likelihood of repayment is determined as fully impaired according to the available indicators. Lifetime ECL (credit impaired) Based on the above, loss allowance is measured on either 12 month ECL or lifetime ECL using a PD x LGD x EAD methodology as follows: • PD (‘probability of default’) – the likelihood that the debtor would not be able to repay during the contractual period; • LGD (‘loss given default’) – the percentage of contractual cash flows that will not be collected if default happens; and • EAD (‘exposure at default’) – the outstanding amount that is exposed to default risk. In deriving the PD and LGD, the Group and the Company consider historical data by each debtor by category and adjusts for forward-looking macroeconomic data. The Group and the Company have identified the industry and geographical area which the debtor operates in, to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. Loss allowance is measured at a probability-weighted amount that reflects the possibility that a credit loss occurs and the possibility that no credit loss occurs. No significant changes to estimation techniques or assumptions were made during the reporting period.
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