Page 190 - Bank-Muamalat-AR2020

188 BANK MUAMALAT MALAYSIA BERHAD About Us Our Leadership Our Strategy
ANNUAL REPORT FY2020

Notes to the fiNaNcial statemeNts
31 December 2020 (16 JamaDil awal 1442h)

2. SIGNIFICANT ACCOuNTING POLICIES (CONT’D.)
2.3 Summary of significant accounting policies (cont’d.)

(b) Financial assets (cont’d.)
(iii) Impairment of financial assets
The measurement of ECL involves increased complexity and judgement that include:

(1) Determining a significant increase in credit risk since initial recognition
The assessment of significant deterioration since initial recognition is critical in establishing the point
of switching between the requirement to measure an allowance based on 12-month ECL and one that
is based on lifetime ECL. The quantitative and qualitative assessments are required to estimate the
significant increase in credit risk by comparing the risk of a default occurring on the financial assets as at
reporting date with the risk of default occurring on the financial assets as at the date of initial recognition.
The Group and the Bank apply a 3-stage approach based on the change in credit quality since initial
recognition:

Stage 1 Stage 2 Stage 3
3-Stage Approach
Performing Under-perfoming Non-performing

ECL Approach 12-month ECL Lifetime ECL Lifetime ECL

No significant increase Credit risk
Criterion Credit-impaired assets
in credit risk increased significantly

Recognition of profit On gross carrying On gross carrying On net carrying
income amount amount amount

(2) ECL Measurement

There are three (3) main components to measure ECL, which include: (i) probability of default (”PD”)
model; (ii) loss given default (“LGD”) model; and (iii) exposure at default (”EAD”) model.
MFRS 9 does not distinguish between individual assessment and collective assessment. Therefore, the
Group and the Bank have decided to continue to measure the impairment mainly on an individual
transaction basis for financial assets that are deemed to be individually significant.
(3) Expected life

Lifetime ECL must be measured over the expected life of the financial asset. This is restricted to the
maximum contractual life and takes into account expected prepayment, extension, call and similar
options, except for certain revolving financial instruments such as overdraft. The expected life for these
revolving facilities generally refers to their behavioural life.