Page 217 - Pakistan Oilfield Limited - Annual Report 2022

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Annual Report 2022

(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 Group 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 Group
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.

The following indicators are considered while assessing credit risk:
- actual or expected significant adverse changes in business, financial or economic conditions
that are expected to cause a significant change to the debtor’s ability to meet its obligations;
- actual or expected significant changes in the operating results of the debtor;
- significant increase in credit risk on other financial instruments of the same debtor; and
- significant changes in the value of the collateral supporting the obligation or in the quality
of third-party guarantees, if applicable.

Definition of default
The Group considers the following as constituting an event of default for internal credit risk
management purposes as historical experience indicates that receivables that meet either of
the following criteria are generally not recoverable.

- when there is a breach of financial covenants by the counterparty; or
- information developed internally or obtained from external sources indicates that the
debtor is unlikely to pay its creditors, including the Group, in full (without taking into
account any collaterals held by the Group).