Page 119 - Annual Report 2020

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Recognition and measurement
Financial assets are classified, at initial recognition, as
subsequently measured at amortised cost, fair value
through other comprehensive income (OCI), and fair
value through profit or loss. The classification of financial
assets at initial recognition depends on the financial
asset’s contractual cash flow characteristics and the
QFC Regulatory Authority’s business model for managing
them. The QFC Regulatory Authority initially measures
a financial asset at its fair value plus, in the case of a
financial asset not at fair value through profit or loss,
transaction costs.
In order for a financial asset to be classified and
measured at amortised cost or fair value through OCI, it
needs to give rise to cash flows that are “solely payments
of principal and interest (SPPI)” on the principal amount
outstanding. This assessment is referred to as the
SPPI test and is performed at an instrument level.
The QFC Regulatory Authority’s business model for
managing financial assets refers to how it manages its
financial assets in order to generate cash flows. The
business model determines whether cash flows will
result from collecting contractual cash flows, selling the
financial assets, or both.
Purchases or sales of financial assets that require
delivery of assets within a time frame established by
regulation or convention in the market place (regular
way trades) are recognised on the trade date, i.e., the
date that the QFC Regulatory Authority commits to
purchase or sell the asset.
Subsequent measurement
For purposes of subsequent measurement, financial
assets are classified in four categories:
• Financial assets at amortised cost (debt instruments)
• Financial assets at fair value through OCI with
recycling of cumulative gains and losses
(debt instruments)
• Financial assets designated at fair value through
OCI with no recycling of cumulative gains and
losses upon de-recognition (equity instruments)
• Financial assets at fair value through profit or loss
Financial assets at amortised
cost (debt instruments)
This category is the most relevant to the QFC Regulatory
Authority. The QFC Regulatory Authority measures
financial assets at amortised cost if both of the following
conditions are met:
• The financial asset is held within a business
model with the objective to hold financial assets
in order to collect contractual cash flows and
• The contractual terms of the financial asset
give rise on specified dates to cash flows that
are solely payments of principal and interest
on the principal amount outstanding
Financial assets at amortised cost are subsequently
measured using the effective interest (EIR) method
and are subject to impairment. Gains and losses are
recognised in the statement of comprehensive income
when the asset is de-recognised, modified or impaired.
The QFC Regulatory Authority’s financial assets at
amortised cost include interest receivables, other
receivables, financial penalties receivable, amounts
due from related parties, bank balances and
short-term deposits.
De-recognition
A financial asset (or, where applicable, a part of a
financial asset or part of a group of similar financial
assets) is primarily de-recognised when:
• The rights to receive cash flows from the asset
have expired
or
• The QFC Regulatory Authority has transferred its
rights to receive cash flows from the asset or has
assumed an obligation to pay the received cash flows
in full without material delay to a third party under a
“pass-through” arrangement; and either (a) the QFC
Regulatory Authority has transferred substantially
all the risks and rewards of the asset, or (b) the QFC
Regulatory Authority has neither transferred nor
retained substantially all the risks and rewards of
the asset, but has transferred control of the asset
When the QFC Regulatory Authority has transferred
its rights to receive cash flows from an asset or has
entered into a pass-through arrangement, it evaluates
if, and to what extent, it has retained the risks and
rewards of ownership. When it has neither transferred
nor retained substantially all of the risks and rewards
of the asset, nor transferred control of the asset, the
QFC Regulatory Authority continues to recognise
the transferred asset to the extent of its continuing
involvement. In that case, the QFC Regulatory Authority
also recognises an associated liability. The transferred
asset and the associated liability are measured
on a basis that reflects the rights and obligations
that the QFC Regulatory Authority has retained.
Continuing involvement that takes the form of a
guarantee over the transferred asset is measured at
the lower of the original carrying amount of the asset
and the maximum amount of consideration that the
QFC Regulatory Authority could be required to repay.
QF CR A ANNU AL REP OR T 2020
Impairment of financial assets
The QFC Regulatory Authority recognises an
allowance for expected credit losses (ECLs) for all
debt instruments. ECLs are based on the difference
between the contractual cash flows due in accordance
with the contract and all the cash flows that the QFC
Regulatory Authority expects to receive, discounted
at an approximation of the original effective interest
rate. The expected cash flows will include cash
flows from the sale of collateral held or other credit
enhancements that are integral to the contractual terms.
ECLs are recognised in two stages. For credit exposures
for which there has not been a significant increase in
credit risk since initial recognition, ECLs are provided
for credit losses that result from default events that
are possible within the next 12 months (a 12-month
ECL). For those credit exposures for which there has
been a significant increase in credit risk since initial
recognition, a loss allowance is required for credit
losses expected over the remaining life of the exposure,
irrespective of the timing of the default (a lifetime ECL).
The QFC Regulatory Authority considers a financial
asset in default when contractual payments are past
due. However, in certain cases, the QFC Regulatory
Authority may also consider a financial asset to be
in default when internal or external information
indicates that it is unlikely to receive the outstanding
contractual amounts in full before taking into account
any credit enhancements it holds. A financial asset is
written off when there is no reasonable expectation
of recovering the contractual cash flows.
T ABLE OF C ONTENT S