ANNUAL INTEGRATED REPORT 2021
ANNUAL INTEGRATED REPORT 2021 | AXTEL
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as other contingent liabilities. The Company applies its judgment to
evaluate the probability that a pending claim is effective, or results
in recognition of a liability, and to quantify the possible range of
the liquidation. Due to the uncertainty inherent to this evaluation
process, actual losses could differ from the provision originally
estimated.
Contingencies are recorded as provisions when a liability has
probably been incurred and the amount of the loss can be reasonably
estimated. It is not practical to conduct an estimate regarding the
sensitivity to potential losses, of all other assumptions have been
made to record these provisions, due to the number of underlying
assumptions and to the range of reasonable results possible,
in connection with the potential actions of third parties, such as
regulators, both in terms of probability of loss and estimates of
said loss.
e. Default probability and recovery rate to apply the expected
credit losses model in the impairment measurement of financial
assets
The Company assigns to customers with whom it has an account
receivable at each reporting date, either individually or as a group,
an allowance for the probability of default in the account receivable
and the estimated recovery rate, in order to reflect the cash flows
expected to be received from the outstanding balances as of that
date.
f. Estimation of the discount rate to calculate the present value of
future minimum lease payments
The Company estimates the discount rate to use in the determination
of the lease liability, based on the incremental borrowing rate ("IBR").
The Company uses a three-tier model, with which it determines the
three elements that comprises the discount rate: (i) reference rate,
(ii) credit risk component and (iii) adjustment for characteristics of
the underlying asset. In this model, management also considers its
policies and practices to obtain financing, distinguishing between
the one obtained at the corporate level (that is, the holding
company), or at the level of each subsidiary. Finally, for real estate
leases, or in which there is significant and observable evidence
of their residual value, the Company estimates and evaluates an
adjustment for characteristics of the underlying asset, based on
the possibility that said asset is granted as collateral or guarantee
against the risk of default.
g. Estimation of the lease term
The Company defines the lease term as the period for which
there is a contractual payment commitment, considering the
non-cancelable period of the contract, as well as the renewal and
early termination options that are probable to be exercised. The
Company participates in lease contracts that do not have a defined
non-cancellable term, a defined renewal period (in case it contains
a renewal clause), or automatic annual renewals, so, to measure
the lease liability, it estimates the contracts term considering their
contractual rights and limitations, their business plan, as well as
management's intentions for the use of the underlying asset.
Additionally, the Company considers the clauses of early termination
of its contracts and the probability of exercising them, as part of its
estimate of the lease term.
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