Page 134 - Pakistan Oilfields Limited - Annual Report 2021

NOTES TO AND FORMING

PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2021

Recognition of loss allowance

The Company recognizes an impairment gain or loss in the statement of profit or loss
for all financial instruments with a corresponding adjustment to their carrying amount
through a loss allowance account, except for investments in debt instruments that are
measured at FVTOCI, for which the loss allowance is recognised in other comprehensive
income and accumulated in the investment revaluation reserve, and does not reduce the
carrying amount of the financial asset in the statement of financial position.

Write-off

The Company writes off financial assets, in whole or in part, when it has exhausted all
practical recovery efforts and has concluded that there is no reasonable expectation
of recovery. The assessment of no reasonable expectation of recovery is based on
unavailability of debtor’s sources of income or assets to generate sufficient future cash
flows to repay the amount.

The Company may write-off financial assets that are still subject to enforcement activity.
Subsequent recoveries of amounts previously written off will result in impairment gains.

(ii) General approach for short term investment, deposits and other receivables and
cash and bank balances.

The measurement of expected credit losses is a function of the probability of default,
loss given default (i.e. the magnitude of the loss if there is a default) and the exposure
at default. The assessment of the probability of default and loss given default is based
on historical data adjusted by forward-looking information (adjusted for factors that are
specific to the counterparty, 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). As for the exposure at default for financial assets, this
is represented by the assets’ gross carrying amount at the reporting date. Loss allowances
are forward looking, based on 12 month expected credit losses where there has not been
a significant increase in credit risk rating, otherwise allowances are based on lifetime
expected losses.

Expected credit losses are a probability weighted estimate of credit losses. The probability
is determined by the risk of default which is applied to the cash flow estimates. In the
absence of a change in credit rating, allowances are recognised when there is reduction
in the net present value of expected cash flows. On a significant increase in credit risk,
allowances are recognised without a change in the expected cash flows, although
typically expected cash flows do also change; and expected credit losses are rebased from
12 month to lifetime expectations.

Significant increase in credit risk

The Company considers the probability of default upon initial recognition of asset and
whether there has been a significant increase in credit risk on an ongoing basis throughout
each reporting period. To assess whether there is a significant increase in credit risk, the
Company compares the risk of a default occurring on the instrument as at the reporting
date with the risk of default as at the date of initial recognition. It considers available
reasonable and supportable forward-looking information.

132 PAKISTAN OILFIELDS LIMITED