Page 133 - Pakistan Oilfields Limited - Annual Report 2021

NOTES TO AND FORMING

PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2021

4.21 Impairment of financial assets

The Company assesses on a historical as well as on a forward looking basis the expected credit
losses (ECL) as associated with its trade debts, deposits and other receivables and cash and bank
balances carried at amortised cost. The impairment methodology applied depends on whether
there has been a significant increase in credit risk. For trade debts, the Company applies IFRS 9
simplified approach to measure the expected credit losses (loss allowance) which uses a lifetime
expected loss allowance while general 3-stage approach for deposits and other receivables and
cash and bank balances i.e to measure ECL through loss allowance at an amount equal to 12-month
ECL if credit risk on a financial instrument or a group of financial instruments has not increased
significantly since initial recognition.

Following are financial instruments that are subject to the ECL model:

- Trade debts
- Advances, deposits and other receivables
- Cash and bank balances
- Short term investments

(i) Simplified approach for trade debts

The Company recognises lifetime ECL on trade debts, using the simplified approach. The
measurement of ECL reflects:
- an unbiased and probability-weighted amount that is determined by evaluating a
range of possible outcomes;
- reasonable and supportable information that is available at the reporting date about
past events, current conditions and forecasts of future economic conditions.

Trade debts with individually significant balance are separately assessed for ECL
measurement. All other receivables are grouped and assessed collectively based on
shared credit risk characteristics and the days past due. The expected credit losses on these
financial assets are estimated based on the Company’s historical credit loss experience,
adjusted for factors that are specific to the debtors, general economic conditions and
an assessment of both the current as well as the forecast direction of conditions at the
reporting date, including time value of money where appropriate.

Where lifetime ECL is measured on a collective basis to cater for cases where evidence of
significant increases in credit risk at the individual instrument level may not yet be availa-
ble, the financial instruments are grouped on the following basis:

- Nature of financial instruments;
- Past-due status;
- Nature, size and industry of debtors; and
- External credit ratings where available.
The grouping is regularly reviewed by management to ensure that constituents of each
group continue to share similar credit risk characteristics.

ANNUAL REPORT 2021 131