Investor Presentaiton
MORGAN STANLEY BANK ASIA LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2020
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f.
Impairment of financial instruments
The Company recognises loss allowances for ECL for the following financial instruments that are not
measured at FVPL:
financial assets measured at amortised cost; and
• financial assets measured at FVOCI.
Measurement of ECL
For financial assets, ECL are the present value of cash shortfalls (i.e. the difference between contractual
and expected cash flows) over the expected life of the financial instrument, discounted at the asset's EIR.
Where a financial asset is credit-impaired at the reporting date, the ECL is measured as the difference
between the asset's gross carrying amount and the present value of future cash flows, discounted at the
original EIR.
The Company applies a three stage approach to measuring ECL based on the change in credit risk since
initial recognition:
Stage 1: if the credit risk of the financial instrument at the reporting date has not increased
significantly since initial recognition then the loss allowance is calculated as the lifetime cash
shortfalls that will result if a default occurs in the next 12 months, weighted by the probability of
that default occurring.
Stage 2: if there has been a significant increase in credit risk ("SICR") since initial recognition,
the loss allowance is calculated as the ECL over the remaining life of the financial instrument. If
it is subsequently determined that there has no longer been a SICR since initial recognition, then
the loss allowance reverts to reflecting 12-month expected losses.
Stage 3: if there has been a SICR since initial recognition and the financial instrument is deemed
credit-impaired (see below for definition of credit-impaired), the loss allowance is calculated as
the ECL over the remaining life of the financial instrument. If it is subsequently determined that
there has no longer been a SICR since initial recognition, then the loss allowance reverts to
reflecting 12-month expected losses.
Assessment of significant increase in credit risk
When assessing SICR, the Company considers both quantitative and qualitative information and analysis
based on the Company's historical experience and expert credit risk assessment, including forward-
looking information.
The probability of default ("PD") is derived from internal credit rating grades (based on available
information about the borrower) and multiple forward-looking macroeconomic scenarios which are
probability weighted. Credit risk is considered to have increased significantly if the PD has significantly
increased at the reporting date relative to the PD of the facility, at the date of initial recognition. The
assessment of whether a change in PD is "significant" is based both on a consideration of the relative
change in PD and on qualitative indicators of the credit risk of the facility, which indicate whether a loan
is performing or in difficulty. In addition, as a backstop, the Company considers that SICR has occurred
in all cases when an asset is more than 30 days past due.
The Company's accounting policy is to not use the 'low' credit risk practical expedient. As a result, the
Company monitors all financial instruments which are subject to impairment for SICR, with the
exception of loans and advances and the corresponding interest receivable, for which a lifetime ECL is
always calculated.
In general, ECL are measured so that they reflect:
• A probability-weighted range of possible outcomes;
•
The time value of money; and
•
Relevant information relating to past, current and future economic conditions
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