MICB Annual Report 2015

Annual Report 2015

-31-

Financial liabilities

Financial liabilities held by the Bank and its subsidiaries comprise financial liabilities at fair value through profit or loss (including

financial liabilities designated as at fair value through profit or loss on initial recognition) and financial liabilities measured at amortized

cost.

(A)

Financial liabilities at fair value through profit or loss

This category includes financial liabilities held for trading or financial liabilities designated as at fair value through profit or loss on

initial recognition.

A financial liability shall be classified as held for trading, if it is incurred principally for the purpose of repurchasing it in the near

term; or on initial recognition, is part of a portfolio of identified financial instruments that are managed together and for which there

is evidence of a recent actual pattern of short-term profit-taking. A derivative is also classified as held for trading, except for a

derivative that is a financial guarantee contract or a designated and effective hedging instrument. Financial liability held for trading

also includes the obligations of delivery of financial assets borrowed by the seller. Above financial liability is shown as “financial

liability at fair value through profit or loss” in the consolidated balance sheet.

At initial recognition, it is not revocable if a debt instrument is designated at fair value through profit and loss. When the fair value

method is adopted, the main contract and the embedded derivative need not be recognised respectively.

Any changes in fair value of financial liabilities at fair value through profit or loss and financial liabilities designated as at fair value

through profit or loss on initial recognition are recognised under the ‘gain/loss on financial assets and liabilities at fair value through

profit or loss’ account in the consolidated statement of comprehensive income.

(B)

Financial liabilities measured at amortized cost

All other financial liabilities that are not classified as financial liabilities at fair value through profit or loss are classified as financial

liabilities measured at amortized cost.

Determination of fair value

Fair value and level information of financial instruments are provided in Note 7.

Derecognition of financial instruments

The Bank and its subsidiaries derecognizes a financial asset when one of the following conditions is met:

(A)

The contractual rights to receive cash flows from the financial asset expires.

(B)

The contractual rights to receive cash flows from the financial asset have been transferred and the Bank and its subsidiaries has

transferred substantially all risks and rewards of ownership of the financial asset.

(C)

The contractual rights to receive cash flows from the financial asset have been transferred; however, it has not retained control of

the financial asset.

A financial liability is derecognised when the obligation under the liability specified in the contract is discharged or cancelled or expires.

In case of securities lending or borrowing by the Bank and its subsidiaries or provision of bonds or stocks as security for repo trading, the

Bank and its subsidiaries does not derecognize the financial asset, because substantially all risks and rewards of ownership of the financial

asset are still retained in the Bank and its subsidiaries.

(8)

Offsetting financial instruments

Financial assets and liabilities are offset and reported in the net amount in the balance sheet when (A) there is a legally enforceable right to

offset the recognised amounts and (B) there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously.

(9)

Financial asset-evaluation, provision and reversal of impairment losses

The Bank and its subsidiaries would presume that a financial asset or a group of financial assets is impaired and recognize the impairment

losses only if there is objective evidence that a financial asset or a group of financial assets is impaired as a result of a loss event that

occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset

or group of financial assets.

The criteria that the Bank and its subsidiaries use to determine whether there is objective evidence of an impairment loss is as follows:

(A)

Significant financial difficulty of the issuer or debtor;

(B)

A breach of contract, such as a default or delinquency in interest or principal payments;

(C)

The Bank and its subsidiaries, for economic or legal reasons relating to the borrower’s financial difficulty, granted the borrower a

concession that a lender would not otherwise consider;

(D)

It becomes probable that the borrower will enter bankruptcy or other financial reorganization;

(E)

The disappearance of an active market for that financial asset because of financial difficulties;

(F)

Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets

since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial asset in the

group, including adverse changes in the payment status of borrowers in the group or national or local economic conditions that

correlate with defaults on the assets in the group;