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NOTES TO AND FORMING
PART OF THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2020
206
PAKISTAN OILFIELDS LIMITED
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
TheGroupconsiders theprobabilityof default upon initial recognitionof asset andwhether
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).
Irrespective of the above analysis, in case of trade debts, the Group considers that default
has occurred when a the debt is more than 365 days past due, unless the Group has
reasonable and supportable information to demonstrate that a more lagging default
criterion is more appropriate.
Credit - impaired financial assets
A financial asset is credit-impaired when one or more events that have a detrimental
impact on the estimated future cash flows of that financial asset have occurred. Evidence
that a financial asset is credit-impaired includes observable data about the following
events: