CFSL Integrated Report 2025

FINANCIAL

160

Risk Management

Corporate Governance

Statutory Disclosures

The mechanics of the ECL method are summarised below: Stage 1 The 12mECL is calculated as the portion of LTECLs that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date. The Group and the Company calculate the 12mECL allowance based on the expectation of a default occurring in the 12 months following the reporting date. These expected 12-month default probabilities are applied to a forecast EAD and multiplied by the expected LGD and discounted by an approximation to the original EIR. Stage 2 When a loan has shown a significant increase in credit risk since origination, the Group and the Company record an allowance for the LTECLs. The mechanics are similar to those explained above, including the use of multiple scenarios, but PDs and LGDs are estimated over the lifetime of the instrument. The expected cash shortfalls are discounted by an approximation to the original EIR. Stage 3 For loans considered credit-impaired, the Group and the Company recognise the lifetime expected credit losses for these loans and interest is computed on the net carrying amount of the loan. The method is similar to that for Stage 2 assets, with the PD set at 100%. Undrawn Commitments When estimating LTECLs for undrawn commitments, the Group and the Company estimate the expected portion of the commitment that will be drawn down over its expected life. The ECL is then based on the present value of the expected shortfalls in cash flows if the facility is drawn down. The expected cash shortfalls are discounted at an approximation to the expected EIR on the loan. c. Credit card and other revolving facilities For credit card facilities and other revolving facilities that include both a loan and an undrawn commitment component, the Group and the Company measure ECL over a period longer than the maximum contractual period if the Group and the Company and the contractual ability to demand repayment and cancel the undrawn commitment does not limit the Group and the Company and the exposure to credit losses to the contractual notice period. These facilities do not have a fixed term or repayment structure and are managed on a collective basis. The Group and the Company can cancel them with immediate effect but this contractual right is not enforced in the normal day-to-day management, but only when the Group and the Company become aware of an increase in credit risk at the facility level. This longer period is estimated taking into account the credit risk management actions that the Group and the Company expect to take and that serve to mitigate ECL. These may include a reduction in limits, cancellation of the facility and/or turning the outstanding balance into a loan with fixed repayment terms and set-offs against balances in case of factoring. For revolving facilities that include both a loan and an undrawn commitment, ECLs are calculated and presented together with the loan. A capped lifetime approach of 12 months is used on credit card and other revolving facilities. d. Forward looking information In its ECL models, the Group and the Company rely on a broad range of forward-looking information as macroeconomic factors inputs using weighted average forward projection scenarios which are adjusted in the base model. The inputs and models used for calculating ECLs may not always capture all characteristics of the market at the date of the financial statements. To reflect this, qualitative adjustments or overlays are occasionally made as temporary adjustments when such differences are significantly material. Detailed information about these inputs is provided in Note 4.1 (d). e. Collateral valuation The Group and the Company seek to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as cash, securities, guarantees, real estate, receivables, other non-financial assets and credit enhancements such as netting agreements. The fair value of collateral is generally assessed, at a minimum, at inception and when the Group and the Company determine there is a requirement to do so. To the extent possible, the Group and the Company use active market data for valuing financial assets held as collateral. Other financial assets which do not have readily determinable market values are valued using models. Non-financial collateral, such as real estate, is valued based on data provided by independent surveyors. f. Modification of financial assets A modification of a financial asset occurs when the contractual terms governing the cash flows of a financial asset are renegotiated or otherwise modified between initial recognition and maturity of the financial asset. A modification affects the amount and/or timing of the contractual cash flows either immediately or at a future date. The Group and the Company renegotiate loans to customers in financial difficulties to maximise collection and minimize the risk of default. Indicators of financial difficulties include default on covenants, bankruptcy, or significant concerns raised. Once the terms have been renegotiated, any impairment is measured using the original interest rates as calculated before the modification of terms. In the case where the financial asset is derecognised, the loss allowance for ECL is remeasured at the date of derecognition to determine the net carrying amount of the asset at that date. If modifications are substantial either quantitatively or qualitatively, the loan is derecognised as explained under write-offs.