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Notes to the Consolidated Financial Statements
23
Dar Al-Maal Al-Islami Trust
Annual Report 2014
Offsetting financial
instruments
Financial assets and liabilities are
offset and the net amount reported
in the balance sheet when there is
a legally enforceable right to offset
the recognised amounts and there
is an intention to settle on a net
basis or realise the asset and settle
the liability simultaneously. The
legally enforceable right must not
be contingent on future events and
must be enforceable in the normal
course of business and in the event
of default, insolvency or bankruptcy
of the company or the counterparty.
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