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Section 06 Financial Statements
121

3. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENT (CONT’D.)
3.1 Judgements (cont’d.)
(a) Expected credit losses on loans, advances and financing and commitments and contingencies (cont’d.)

(v) Determination of associations between macroeconomic scenarios and, economic inputs, such as unemployment
levels and collateral values, and the effect on PDs, EADs and LGDs; and

(vi) Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic
inputs into the ECL models.
The allowance for expected credit losses on loans, advances and financing is disclosed in Note 7(ix) and commitments
and contingencies is disclosed in Note 20.
(b) Valuation of derivatives and hedge accounting
The Group and the Bank value the derivative instruments and apply the hedge accounting to manage the exposures
to interest/profit rate and foreign currency risks. In order to manage particular risk, the Group and the Bank apply
hedge accounting for transactions which meet specified criteria. At the inception of each hedge relationship, the
Group and the Bank formally designate and document the relationship between the hedged item and the hedging
instruments, including the nature of the risk, the risk management objective and strategy for undertaking the
hedge and the method that will be used to assess the effectiveness of the hedging relationship at inception and
ongoing basis.
3.2 Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that
have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next
financial year, are described below. The Group and the Bank based its assumption and estimates on parameters available
when the financial statements were prepared. Existing circumstances and assumptions about future developments,
however, may change due to market changes or circumstances arising that are beyond the control of the Group and the
Bank. Such changes will be reflected in the assumptions when they occur.

(a) Uncertainty in accounting estimates for credit insurance/Takaful business
The principal uncertainty in the credit insurance/Takaful business arises from the technical provisions which include
the premium/contribution liabilities, claims liabilities and expense liabilities. The premium/contribution liabilities
comprise unearned premium reserves and unexpired risk reserves while claim liabilities comprise provision for
outstanding claims. The estimation bases for unearned premium/contribution reserves and unexpired risk reserves
are explained in the related accounting policy statement.

Generally, claim liabilities are determined based upon previous claims experience, existing knowledge of events,
the terms and conditions of the relevant policies and interpretation of circumstances. Particularly relevant is past
experience with similar cases, historical claims development trends, legislative changes, judicial decisions and
economic conditions. It is certain that actual future premiums/contribution and claims liabilities will not exactly
develop as projected and may vary from the projections.

The estimates of premiums/contribution and claims liabilities are therefore sensitive to various factors and
uncertainties. The establishment of technical provisions in an inherently uncertain process and, as a consequence
of this uncertainty, the eventual settlement of premiums/contribution and claims liabilities may vary from the
initial estimates.
There may be significant reporting lags between the occurrence of an insured event and the time it is actually
reported. Following the identification and notification of an insured loss, there may still be uncertainty as to the
magnitude of the claim. There are many factors that will determine the level of uncertainty such as inflation,
inconsistent judicial interpretations, legislative changes and claims handling procedures.