60 FGV HOLDINGS BERHAD NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2022 4 FINANCIAL RISK MANAGEMENT (CONTINUED) (a) Financial risk management policies (continued) Market risk (continued) (iii) Finance rate risk (continued) If discount rate on LLA liability increased/decreased by 50 basis points and finance rate on borrowings decreased/ increased by 100 basis points with all other variables held constant, the profit after tax of the Group will increase by RM143,836,000 (2021: RM188,579,000) and decrease by RM154,177,000 (2021: RM110,421,000) respectively. Other financial assets and financial liabilities are non-interest bearing, and therefore are not affected by changes in finance rates. Credit risk Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk arises from cash and cash equivalents, contractual cash flows of debt investments carried at amortised cost and at fair value through other comprehensive income (“FVOCI”), favourable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to from outstanding receivables. The Group adopts the policy of dealing with customers with an appropriate credit history, and obtaining sufficient security where appropriate, including payments in advance, security in the form of guarantees, deeds of undertaking or letters of credit which can be called upon if the counterparty is in default under the terms of the agreement. This has lower down the probability of default by customers. Receivables and amounts due from intercompany exposure are closely monitored and continuously followed up. The Group’s and Company’s deposits, cash and bank balances were largely placed with major financial institutions in Malaysia. The Directors are of the view that the possibility of non-performance by these financial institutions, including those non-rated financial institutions, is remote on the basis of their financial strength. (i) Impairment of financial assets The Group’s financial assets that are subject to the expected credit loss (ECL) model include trade receivables, contract assets, other receivables, amounts due from intercompany, debt investments carried at amortised cost and FVOCI. While cash and cash equivalents are also subject to the impairment requirements of MFRS 9, the impairment loss is expected to be immaterial. a) Trade receivables, trade amounts due from intercompany and contract assets using simplified approach The Group applies the MFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables, trade amounts due from intercompany and contract assets. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to amounts due from customers on contracts and unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets.
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