DMIT Annual Report 2017

N OTES TO THE C ONSOLIDATED F INANCIAL S TATEMENTS Dar Al-Maal Al-Islami Trust 22 Impact of New Accounting Pronouncements New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2017 and not early adopted (continued) IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit and loss (FVTPL). The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities, there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value, through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually uses for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. IFRS 9 addresses the classification, measurement, recognition and de-recognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The Group is prepared for adherence to the requirements of IFRS 9 as at 1 January 2018 and has completed the measurement and classification of its financial assets and liabilities in accordance with business model as stipulated by IFRS 9. These classifications comprise FVOCI, FVTPL and amortised cost. The majority of financial assets and liabilities are classified as amortised cost in accordance with the Group’s business model. Accordingly, impact on the consolidated financial statements. The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than the incurred credit losses basis as is the case under IAS 39. It applies to financial assets classified as amortised cost, debt instruments measured at FVOCI, contract assets under IFRS 15 Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts. The Group has elected not to re-state comparative periods and the difference between the previous carrying amounts and the new carrying amounts at the date of initial application (i.e. effective date of 1 January 2018) will be recorded in retained earnings at 1 January 2018. The Group has also reviewed and completed its assessment of the impairment provision and methodology in accordance with IFRS 9 requirements. Retained earnings at 1 January 2018 will be reduced by approximate USD 90 million to recognise the incremental impairment provision under IFRS 9. The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group's risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. The adoption of IFRS 9 will not have any material impact on the Group financial statements as the Group did not apply hedge accounting and the use of derivatives is minimal. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group's disclosures about its financial instruments in 2018. IFRS 15 Revenue from contracts with customers: This standard replaces IAS 11, ‘Construction contracts’, IAS 18, ‘Revenue’ and related interpretations. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use of and obtain the benefits from the good or service. The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 also includes a cohesive set of disclosure requirements that will result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. Amendment to IFRS 15, ‘Revenue from contracts with customers’ These amendments comprise clarifications on identifying performance obligations, accounting for licenses of intellectual property and the principal versus agent assessment (gross versus net revenue presentation). The IASB has also included additional practical expedients related to transition to the new revenue standard. There is no material impact on the consolidated financial statements of the Group from the adoption of above new standard on 1 January 2018.