DMIT Annual Report 2017

N OTES TO THE C ONSOLIDATED F INANCIAL S TATEMENTS Dar Al-Maal Al-Islami Trust 33 consolidate Ithmaar Holding B.S.C. as a subsidiary based upon the Group’s assessment under IFRS 10. There is no history of other shareholders forming a group to exercise their votes collectively. The de facto control of Ithmaar Holding BSC is constantly assessed for changes in shareholding which may impact this assessment Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. The determination of whether an outflow is probable and the amount, which is assessed by Group management, in conjunction with the Group’s legal and other advisors, requires the judgement of the Group’s management. Impairment of associated companies The Group assesses at each statement of financial position date whether there is objective evidence that its investments in associated companies are impaired. In general, an investment in an associated company is impaired and an impairment loss incurred when the carrying amount of the investment exceeds its recoverable amount. The recoverable amount is defined as the higher of its fair value less costs to sell and its value in use. On assessing its investments for impairment at the year end, the Group has relied upon cash flow projections as approved by the board of the underlying associates that are based upon judgements and estimates related to future events which ultimately could have a significant impact on the recoverable amounts of these investments in the consolidated financial statements. Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment in accordance with the accounting policy stated in note 2. The recoverable amounts of cash-generating units have been determined based on estimated future cash flows and comparisons with market multiples. These calculations require the use of estimates, which are subject to judgement. Changes in the underlying assumptions may impact the reported numbers. Ithmaar Holding BSC During 2017 and 2016 the Group used a sum-of- the-parts approach to arrive at a business value of the Ithmaar Holding B.S.C. CGU as Ithmaar Holding B.S.C did not had any independent cash flow generating activity at its own level. Management has considered both PB multiple and value in use calculation for the impairment assessment. Level 2 PB multiple valuation method used instead of Level 1 listed share price as it did not consider that an active market existed for the shares of Ithmaar as the trading activity in the past years have been very minimal. The valuation methodology for the separately identified parts at Ithmaar Holding B.S.C. level based on the operational activities is the following:  Formerly Shamil Bank: value in use based on discounted cash flows; (2016: value in use based on discounted cash flows);  Faysal Bank Limited: value in use based on discounted cash flows; (2016: value in use based on discounted cash flows);;  BBK: Based on Market Approach using Relative Valuation (price to book multiple) for determine the (FVLCTS) as per IFRS 5 requirements (2016: average of residual income and price to book value multiple) for assessing the goodwill impairment included in the carrying amount of the associate as at 31 December 2017. Ithmaar Holding B.S.C. residual assets: investments measured at their carrying value adjusted for fair value changes. The management has also consider PB multiple approach for further assessing the impairment for both Ex-Shamil and Faysal bank Limited. Based on lower end PB multiple and this additional stress test has also not resulted in any impairment. Islamic Investment Company of the Gulf (Bahamas) Limited On the basis that the Group used a discounted cash flow model, for the next 5 years, and assuming a discount rate of 12.91%, to arrive at a value in use of Islamic Investment Company of the Gulf (Bahamas) Limited. 4. Financial instruments A. Strategy in using financial instruments By its nature, the Group’s activities are principally related to the use of financial instruments. The Group accepts investments from customers at varying rates of return and for various periods and seeks to earn above average profits by investing these funds in high quality assets. The Group seeks to increase these margins by consolidating short term funds and investing for longer periods at higher return potential whilst maintaining sufficient liquidity to meet all claims that might fall due. The Group also seeks to raise its profit margins by obtaining above average margins, net of provisions, through transactions with its commercial and retail customers. Such exposures involve not just on- balance sheet Islamic financings but the Group also enters into Islamically acceptable guarantees and other commitments such as letters of credit and performance and other bonds.