Page 231 - Bank Muamalat_AR24

ANNUAL REPORT 2024 1 2 3 4 5 6 7 Our Numbers 8 229

3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of financial statements requires the Management to make judgments, estimates and assumptions that
affect the application of policies and reported amounts of assets, liabilities, income and expenses. Although these estimates
are based on the Management’s best knowledge of current events and actions, actual results may differ from those
estimates. Critical accounting estimates and assumptions used that are significant to the financial statements and areas
involving higher degree of judgment and complexity, are as follows:

3.1 Impairment of financial investments portfolio (Notes 5 and 32)
The Group and the Bank review their debt instruments at FVOCI, and financial investments at amortised cost under
MFRS 9 Financial Instruments, which requires the recognition of ECL at each reporting date to reflect change in
credit risk of the financial investments not at FVTPL. MFRS 9 Financial Instruments incorporates forward-looking and
historical, current and forecasted information into ECL estimation.

In carrying out the impairment review, the following Management’s judgements are required:
(i) Determination whether the investment is impaired based on certain indicators, such as, amongst others, difficulties
of the issuers or obligors, deterioration of the credit quality of the issuers or obligors; and

(ii) Determination of ECL that reflect:
(a) An unbiased and probability-weighted amount that is determined by evaluating a range of possible
outcomes;
(b) The time value of money; and

(c) Reasonable and supportable information that is available without undue cost or effort at the reporting date
about past events, current conditions and forecasts of future economic conditions.
3.2 Impairment of financing of customers (Notes 7 and 31)

The Group and the Bank review individually its significant financing of customers at each reporting date to assess
whether an impairment loss should be recorded in the statement of profit or loss. In particular, Management’s judgement
is required in the estimation of the amount and timing of future cash flows when determining the impairment loss.
In estimating these cash flows, the Group and the Bank make judgements about the customer’s financial situation and
the net realisable value of collateral. These estimates are based on assumptions on a number of factors and actual results
may differ, resulting in future changes to the allowances.
The Group’s and the Bank’s ECL calculations under MFRS 9 Financial Instruments are outputs of complex models with
a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of
the ECL models that are considered accounting judgements and estimates include:
(i) Criteria for assessing if there has been a significant increase in credit risk and the qualitative assessment;

(ii) The segmentation of financial assets when ECL is assessed on a collective basis;
(iii) Development of ECL models, including the various formulas and the choice of inputs;

(iv) Determination of associations between macroeconomic scenarios and economic inputs, such as, unemployment
levels and collateral values, and the effect on PDs, LGDs, and EADs including macroeconomic factors as disclosed
in Note 47(a)(iii); and

(v) Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic
inputs into the ECL models.