Page 199 - Pakistan Oilfields Limited - Annual Report 2021

NOTES TO AND FORMING

PART OF THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2021

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 available,
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 the constituents of each group
continue to share similar credit risk characteristics.
Recognition of loss allowance

The Group 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 Group write off financial assets, in whole or in part, when it has exhausted all practical
recovery efforts and has concluded 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 Group 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.

ANNUAL REPORT 2021 197