12. Net allowances for expected credit losses

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 include observable data about the following events:

1. significant financial difficulty of the issuer or the borrower,
2. a breach of contract, such as a default or past due event,
3. the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider,
4. it is becoming probable that the borrower will enter bankruptcy or other financial reorganization,
5. the disappearance of an active market for that financial asset because of financial difficulties, or
6. the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.

The Group recognises a loss allowance for expected credit losses on a financial asset that is measured at amortised cost or at fair value through other comprehensive income, a financial lease receivable, a contract asset or a loan commitment and a financial guarantee contract.

A loss allowance for financial assets that are measured at fair value through other comprehensive income is recognised in other comprehensive income and is not reducing the carrying amount of the financial asset in the statement of financial position.

If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the Bank measures the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses.

At each reporting date, the Bank measures the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition.

For financial instruments in Stage 3, the Group measures the expected credit losses in the amount equal to the expected credit losses over the life of such instruments.

The Group recognises in profit or loss, changes in expected credit losses and impairment losses occurring in the reporting period.

For loan commitments and financial guarantee contracts, the date that the Group becomes a party to the irrevocable commitment shall be considered to be the date of initial recognition for the purposes of applying the impairment requirements.

Since initial recognition of POCI assets, the Group recognises the cumulative changes in lifetime expected credit losses as a loss allowance for purchased or originated credit-impaired financial assets. At each reporting date, the Group recognises in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. An entity shall recognise favourable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition.

The Group measures the loss allowance at an amount equal to lifetime expected credit losses for:

1. trade receivables or contract assets that result from transactions that are within the scope of IFRS 15,
2. receivables that result from transactions that are within the scope of IFRS 16 (other than receivables from finance lease). Expected credit losses are not recognized for impairment of equity instruments.

The methodology for calculating expected credit losses is described in detail in ‘The description of the model for impairment allowance’ in  Note 46.2.