Mega Bank Annual Report 2017

47 Annual Report 2017 -47- asset or whether the individual asset has to be specially supervised. If no objective evidence of impairment exists for an individually assessed financial asset, the asset will be classified into a group of financial assets with similar credit risk characteristics for collective assessments. D. After assessed impairment of loans and re ceivables, the Bank and subsidiaries recognizes’ impairment loss measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows of credit enhancement factors discou nted at the asset’s original effective interest rate. The credit enhancement factors include financial guarantee and net of collateral. If, in a subsequent period, the amount of the impairment loss decreased and such decrease is objectively related to an event occurred after the impairment was recognized, the amount of impairment loss recognized previously shall be reversed by adjusting the allowance for doubtful debts. The reversal shall not cause a carrying amount of the financial asset that exceeds the amortized cost of the period before recognition of the impairment loss. The amount of reversal shall be recognized in profit or loss. E. Aforementioned assessment of loans and receivables were in accordance with “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing/Non- accrual Loans”, Financial -Supervisory-Banks Letter. No. 10300329440 of the FSC related to strengthening domestic banks’ tolerance of real estate mortgage risk on December 4, 2014 an d Financial-Supervisory-Banks Letter. No.104100 01840 of the FSC related to strengthening domestic banks’ controls and tolerance of risk exposure in Mainland China on April 23, 2015. ! F. Equity investments carried at cost The amount of the impairment loss is measured as the difference between the asset’s ca rrying amount and the present value of estimated future cash flows discounted at current market return rate of similar financial assets, and is recognized in profit or loss. Impairment loss recognized for this category shall not be reversed subsequently. Impairment loss is recognized by adjusting the carrying amount of the asset directly. ! (10) Derivatives Derivatives are initially recognized at fair value at the contract date and subsequently measured by fair value. The fair value includes the public quotation in an active market or the latest trade price (e.g., Exchange-traded options), and evaluation techniques such as cash flow discounting model or option pricing model (e.g., Swap contract and foreign exchange contracts). All derivatives are recognized as assets when the fair value is positive and as liabilities when the fair value is negative. Hybrid contract refers to financial instruments of the embedded derivatives. Economic characteristics and risks of the embedded derivatives and the economic characteristics of the main contract should be examined for the embedded derivatives. If the two are not closely correlated and the main contract is not a financial asset or liability at fair value through profit and loss, the main contract and embedded derivatives should be respectively recognized unless the overall hybrid contract is designated as assets or liabilities at fair value through profit and loss. The embedded derivatives are the financial assets or liabilities at fair value through profit and loss. (11) Investments accounted for under the equity method A. Associates are all entities over which the Bank and subsidiaries have significant influence but not control. In general, it is presumed that the investor has significant influence, if an investor holds, directly or indirectly 20 percent or more of the voting power of the investee. Investments in associates are accounted for using the equity method and are initially recognized at cost. B. The Bank and subsidiaries’ share of its associates’ post -acquisition profits or losses is recognized in profits or loss, and its share of post- acquisition movements in other comprehensive income is recognized in other comprehensive income. When the Bank and subsidiari es’ share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Bank and subsidiaries do not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. C. Unrealized gains on transactions between the Bank and subsidiaries and its associates are eliminated to the extent of the Bank and subsidiaries’ interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of a n impairment of the asset transferred. Accounting policies of associates have been adjusted where necessary to ensure consistency with the policies adopted by the Bank and subsidiaries. D. When changes in an associate’s equity that are not recognized in profit or loss or other comprehensive in come of the associates and such changes not affecting the Bank and subsidiaries’ ownership percentage of the associate, the Bank and subsidiaries recognized the Bank and subsidiaries’ share of change in equity of the associate in ‘capital reserve’ in propo rtion to its ownership. E. When the Bank and subsidiaries disposes its investment in an associate, if it loses significant influence over this associate, the amounts previously recognized as other comprehensive income in relation to the associate are transferred to profit or loss. If it still retains significant influence over this associate, then the amounts previously recognized as other comprehensive income in relation to the associate are transferred to profit or loss proportionately. (12) Property and equipment The property and equipment of the Bank and subsidiaries are recognized on the basis of the historical cost less accumulated depreciation. Historical cost includes all costs directly attributable to the acquisition of the assets. Such assets are subseque ntly measured using the cost model. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and subsidiaries and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred. Land is not affected by depreciation. Depreciation for other assets is provided on a straight-line basis over the estimated useful lives of the assets till residual value. If each part of an item of property and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately.