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NOTES TO AND FORMING
PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2020
134
PAKISTANOILFIELDS LIMITED
Following are financial instruments that are subject to the ECL model:
- Trade debts
- Deposits and other receivables
- Cash and bank balances
(i)
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.
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.