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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
in comprehensive income. Changes
in the fair value of monetary and
non-monetary securities classified
as available-for-sale are recognised
in comprehensive income.
Impairment of Financial
Assets
(a) Assets carried at amortised cost
The Group assesses at each
reporting date whether there is
objective evidence that a financial
asset or group of financial assets is
impaired. A financial asset or a
group of financial assets is impaired
and impairment losses are incurred
only if there is objective evidence of
impairment as a result of one or
more events that occurred after
the initial recognition of the asset
(a “loss event”) and that loss event
(or events) has an impact on the
estimated future cash flows of the
financial asset or group of financial
assets that can be reliably estimated.
The criteria that the Group uses
to determine that there is objective
evidence of an impairment include:
i) Delinquency in contractual
payments of principal or
return;
ii) Cash flow difficulties
experienced by the borrower
(for example, equity ratio,
net income percentage of
sales);
iii) Breach of loan covenants or
conditions;
iv) Initiation of bankruptcy
proceedings;
v) Deterioration of the
borrower’s competitive
position;
vi) Deterioration in the value of
collateral; and
vii) Downgrading below
investment grade level.
The Group first assesses whether
objective evidence of impairment
exists individually for financial
assets that are individually
significant, and individually or
collectively for financial assets
that are not individually significant.
If the Group determines that no
objective evidence of impairment
exists for an individually assessed
financial asset, whether significant
or not, it includes the asset in
a group of financial assets with
similar credit risk characteristics
and collectively assesses them
for impairment. Assets that are
individually assessed for impairment
and for which an impairment loss
is or continues to be recognised
are not included in a collective
assessment of impairment.
The amount of the loss is measured
as the difference between the asset’s
carrying amount and the present
value of estimated future cash flows
(excluding future credit losses that
have not been incurred) discounted
at the financial asset’s original
effective profit rate. The carrying
amount of the asset is reduced
through the use of an allowance
account and the amount of the loss
is recognised in the consolidated
statement of income. If a loan or
held-to-maturity investment has a
variable profit rate, the discount rate
for measuring any impairment loss
is the current effective profit rate
determined under the contract. As a
practical expedient, the Group may
measure impairment on the basis of
an instrument’s fair value using an
observable market price.
The calculation of the present value
of the estimated future cash flows of
a collateralised financial asset
reflects the cash flows that may
result from foreclosure less costs for
obtaining and selling the collateral,
whether or not foreclosure is
probable.
For the purposes of a collective
evaluation of impairment, financial
assets are grouped on the basis of
similar credit risk characteristics
(i.e, on the basis of the Group’s
grading process that considers
asset type, industry, geographical
location, collateral type, past-due
status and other relevant factors).
Those characteristics are relevant to
the estimation of future cash flows
for groups of such assets by being
indicative of the debtors’ ability to
pay all amounts due according to
the contractual terms of the assets
being evaluated.
Future cash flows in a group of
financial assets that are collectively
evaluated for impairment are
estimated on the basis of the
contractual cash flows of the assets
in the Group and historical loss
experience for assets with credit risk
characteristics similar to those in the
Group. Historical loss experience is
adjusted on the basis of current
observable data to reflect the
effects of current conditions that did
not affect the period on which the
historical loss experience is based
and to remove the effects of
conditions in the historical period
that do not currently exist.
Estimates of changes in future
cash flows for groups of assets
should reflect and be directionally
consistent with changes in related
observable data from period to
period (for example, changes in
unemployment rates, property
prices, payment status, or other
factors indicative of changes
in the probability of losses in the
Group and their magnitude). The
methodology and assumptions
used for estimating future cash
flows are reviewed regularly by the
Group to reduce any differences
between loss estimates and actual
loss experience.
When a loan is uncollectible, it
is written off against the related
provision for loan impairment.
Such loans are written off after all
the necessary procedures have been
completed and the amount of the
loss has been determined.
If, in a subsequent period, the
amount of the impairment loss
decreases and the decrease can
be related objectively to an event
occurring after the impairment
was recognised (such as an
improvement in the debtor’s credit
rating), the previously recognised
impairment loss is reversed by
adjusting the allowance account.
The amount of the reversal is
recognised in the consolidated
statement of income.
In the case of Islamic financings to
customers in countries where there
is an increased risk of difficulties
in servicing external debt, an
assessment of the political and
economic situation is made and
additional country risk provisions
may be established.
24
Dar Al-Maal Al-Islami Trust
Annual Report 2011