13
change to the contract that significantly modifies the cash flows.
There is no expected material impact on the Bank Group’s financial statements arising from this new INT
FRS. INT FRS 110: Interim Financial Reporting and
Impairment INT FRS 110 becomes effective for financial years
beginning on or after 27 October 2006. It prohibits the impairment losses recognised in an interim period on
goodwill, investments in equity instruments and investments in financial assets carried at cost to be
reversed at a subsequent balance sheet date. There is no expected material impact on the Bank
Group’s financial statements arising from this new INT FRS.
4 Critical Accounting
Estimates
The Bank Group’s accounting policies and use of estimates are integral to the reported results. Certain
accounting estimates require exercise of management’s judgement in determining the
appropriate methodology for valuation of assets and liabilities. In addition, procedures are in place to ensure
that methodologies are reviewed and revised as appropriate. The Bank Group believes its estimates for
determining the valuation of its assets and liabilities are appropriate.
The following is a brief description of the Bank Group’s critical accounting estimates involving management’s
valuation judgement.
4.1 Impairment allowances on claims
It is the Bank Group’s policy to establish, through charges against profit, specific and general allowances
in respect of estimated and inherent credit losses in its portfolio.
In determining specific allowances, management considers objective evidence of impairment. When a
loan is impaired, a specific allowance is assessed by using the discounted cash flow method, measured as
the difference between the asset’s carrying amount and the present value of estimated future cash flows
discounted at the original effective interest rate. The amount of specific allowance also takes into account
the collateral value, which may be discounted to reflect the impact of a forced sale or timely liquidation.
In determining general allowance, the Bank Group has applied the transitional arrangements under Notice to
Banks No. 612, “Credit Files, Grading and Provisioning” issued by the Monetary Authority of Singapore. These
arrangements will be in place until the Bank Group believes that the incurred loss concept under FRS 39
can be robustly determined. 4.2
Fair value of financial instruments
Fair value is defined as the value at which positions can be closed or sold in a transaction with a willing and
knowledgeable counterparty over a time period that is consistent with the Bank Group’s trading or investment
strategy. The majority of the Bank Group’s financial instruments reported at fair value are based on quoted
and observable market prices or on internally developed models that are based on independently
sourced market parameters, including interest rate yield curves, option volatilities and currency rates.
Management exercises judgement in determining the risk characteristics of various financial instruments,
discount rates, estimates of future cash flows, future expected loss experience and other factors used in the
valuation process. Judgement may also be applied in estimating prices for less readily observable external
parameters. Other factors such as model assumptions, market dislocations and unexpected correlations can
also materially affect these estimates and the resulting fair value estimates.
4.3
Impairment review of goodwill on consolidation
The Bank Group performs an impairment review to ensure that the carrying value of the goodwill does not
exceed its recoverable amount from the CGU to which the goodwill is allocated. The recoverable amount
represents the present value of the estimated future cash flows expected to arise from continuing
operations. Therefore, in arriving at the recoverable amount, management exercises judgement in
estimating the future cash flows, growth rate and discount rate.
4.4 Income taxes
