United Cooperative Assurance Company (“the Company”) is a Saudi Joint Stock Company registered in the Kingdom of Saudi Arabia under Commercial Registration No. 4030179955 dated 6 Jamad-al-Thani 1429H, corresponding to 6 June 2008. Registered Office address of the Company is Al-Mukmal Centre (1st and 4th floor), Prince Saud Al Faisal Street, Al Khalidiyah District, P. O. Box 5019, Jeddah 21422, Kingdom of Saudi Arabia.

The activities of the Company are to transact cooperative insurance and reinsurance operations and related activities in the Kingdom of Saudi Arabia. On 29 Rabi Al Thani 1429H (5 May 2008), the Company received a license number (NMT/19/200812) from the Saudi Central Bank (“SAMA”) which is currently valid up to 29 Dhul Hijja 1445H corresponding to 6 July 2024 to engage in insurance business in Saudi Arabia. The Company started its operations on 1 January 2009.

On 11 February 2020 corresponding to 17 Jamad-ul-Thani 1441H, the Company has received SAMA approval upon the Company’s request for the cancellation of its Reinsurance License. From the date of SAMA Approval, the Company has not assumed any reinsurance business.

In accordance with the by-laws of the Company, the surplus arising from the insurance operations is distributed as follows:

In case of deficit arising from the insurance operations, the entire deficit is allocated and transferred to the shareholders’ operations in full.

In accordance with Article 70 of SAMA implementing regulations, the Company proposes to distribute, subject to the approval of SAMA, its annual net policyholders’ surplus directly to policyholders at a time, and according to criteria, as set by its Board of Directors.

1. 1. Statement of compliance

These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) that are endorsed in the Kingdom of Saudi Arabia (KSA), and other standards and pronouncements that are endorsed by the Saudi Organization for Chartered and Professional Accountant (“SOCPA”) (referred to as “IFRS as endorsed in KSA”).

There are no seasonal changes that may affect the insurance operations of the Company.

1. 2. Basis of presentation and measurement

These financial statements have been prepared under going concern basis and historical cost convention except for the measurement at fair value of investments held as available-for-sale (AFS) investment and employees’ defined benefit obligations which is recognized at the present value of future obligations using the projected unit credit method. The Company’s statement of financial position is not presented using a current/non-current classification. However, the following balances would generally be classified as current: cash and cash equivalents, premiums and reinsurers’ receivable - net, reinsurers’ share of unearned premiums, reinsurance share of outstanding claims, reinsurance share of claim incurred but not reported, deferred policy acquisition costs, prepaid expenses and other assets, policyholders payable, reinsurers balances payable, accrued and other liabilities, unearned premiums, unearned reinsurance commission, outstanding claims, claims incurred but not reported, premium deficiency reserve, other technical reserves and Zakat and income tax payable. All other financial statement line items would generally be classified as non-current unless stated otherwise.

2. BASIS OF PREPARATION – (continued)

(b) Basis of presentation and measurement – (continued)

The Company presents its statement of financial position broadly in order of liquidity. As required by Saudi Arabian Insurance Regulations “SAMA Implementing Regulations” the Company maintains separate books of accounts for “Insurance operations” and “Shareholders’ operations”. Accordingly, assets, liabilities, revenues and expenses clearly attributable to either activity are recorded in the respective accounts. The basis of allocation of expenses from joint operations is determined and approved by the management and the Board of Directors. The physical custody of all assets related to the insurance operations and shareholders’ operations are held by the Company. The statement of financial position, statement of income, statement of comprehensive income and statement of cash flows of the insurance operations and shareholders’ operations which are presented in note 33 have been provided as supplementary financial information and to comply with the requirements of the guidelines issued by SAMA Implementing Regulations and is not required by IFRS as endorsed in KSA. SAMA Implementing Regulations requires the clear segregation of the assets, liabilities, income and expenses of the insurance operations and the shareholders’ operations. In preparing the Company-level financial statements in compliance with IFRS as endorsed in KSA, the balances and transactions of the insurance operations are amalgamated and combined with those of the shareholders’ operations. Inter-operation balances, transactions and unrealized gains or losses, if any, are eliminated in full during amalgamation. The accounting policies adopted for the insurance operations and shareholders’ operations are uniform for like transactions and events in similar circumstances.

These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) that are endorsed in the Kingdom of Saudi Arabia (KSA), and other standards and pronouncements that are endorsed by the Saudi Organization for Chartered and Professional Accountant (“SOCPA”) (referred to as “IFRS as endorsed in KSA”).

There are no seasonal changes that may affect the insurance operations of the Company.

Standards and interpretation issued but not yet effective up to the date of issuance of the Company’s financial statements are listed below.A number of new standards are effective for annual periods beginning after 1 January 2022 and earlier application is permitted. However, United Cooperative Assurance Company Insurance Company (“the Company”) has not early adopted the new standards in preparing the financial statements. The listing is of standards and interpretations issued, which the Company reasonably expects to be applicable at a future date. The Company intends to adopt these standards when they become effective.

There are no other relevant IFRS or IFRS interpretations that are not yet effective that would be expected to have a material impact on the Company’s financial statements.

The Company will apply IFRS 17 and IFRS 9 for the first time on 1 January 2023. Although, these standards will bring significant changes to the operational accounting for insurance and reinsurance contracts and financial instruments and presentation of financial statement.

IFRS 17 Insurance contracts

IFRS 17 replaces IFRS 4 Insurance Contracts and is effective for annual periods beginning on or after 1 January 2023, with early adoption permitted. The company expects to first apply IFRS 17 on that date. IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts, reinsurance contracts and investment contracts with direct participation features (“DPF”).

Structure and status of the Implementation project

IFRS 17 implementation project still in the process (validation process) implementation process which is managed internally through a dedicated IFRS 17 team and governed by a steering audit committee. The preparation for IFRS 17 has required significant changes to the Company’s reporting systems. The Company will be ready to support the reporting requirements from the implementation date onwards.

As part of the four-phase approach for the transition from IFRS 4 to IFRS 17 mandated by SAMA and concluded during the year ended 31 December 2022, the Company has submitted the operational gap assessment, financial impact assessment, implementation plan and multiple dry runs using the FY20, FY21 and June 2022 data to SAMA.

a)Contracts within/outside the scope of IFRS 17

The Company does not write any products that would fall entirely outside the scope of IFRS 17:

The Company does not issue or hold any contract that meets the definition of an insurance contract but has as their primary purpose the provision of services for a fixed fee. All insurance contracts issued by the Company except for self-insurance contracts meet the definition of insurance contracts for which IFRS 17 should be applied. Furthermore, taking into account the non-material share of these self-insurance contracts within the total portfolio and the existing market practice they can be treated under IFRS17.

All outwards reinsurance agreements held by the Company meet the definition of reinsurance contracts held according to IFRS 17 definition. At the date of assessment, the Company does not issue any inwards reinsurance agreement. No insurance contracts acquired by the entity in a transfer of insurance contracts or a business combination other than reinsurance contracts held was identified.

The preparation of the Company’s financial statements requires the use of estimates and judgements that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates and judgements are based on management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates.

Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The preparation of financial statements requires the use of estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as at the reporting date and the reported amounts of revenue and expenses during the reporting year. Although these estimates and judgments are based on management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates.

These financial statements have been prepared under going concern basis and historical cost convention except for the measurement at fair value of investments held as available-for-sale (AFS) investment and employees’ defined benefit obligations which is recognized at the present value of future obligations using the projected unit credit method. The Company’s statement of financial position is not presented using a current/non-current classification. However, the following balances would generally be classified as current: cash and cash equivalents, premiums and reinsurers’ receivable - net, reinsurers’ share of unearned premiums, reinsurance share of outstanding claims, reinsurance share of claim incurred but not reported, deferred policy acquisition costs, prepaid expenses and other assets, policyholders payable, reinsurers balances payable, accrued and other liabilities, unearned premiums, unearned reinsurance commission, outstanding claims, claims incurred but not reported, premium deficiency reserve, other technical reserves and Zakat and income tax payable. All other financial statement line items would generally be classified as non-current unless stated otherwise.

2.BASIS OF PREPARATION – (continued)

(b) Basis of presentation and measurement – (continued)

The Company presents its statement of financial position broadly in order of liquidity. As required by Saudi Arabian Insurance Regulations “SAMA Implementing Regulations” the Company maintains separate books of accounts for “Insurance operations” and “Shareholders’ operations”. Accordingly, assets, liabilities, revenues and expenses clearly attributable to either activity are recorded in the respective accounts. The basis of allocation of expenses from joint operations is determined and approved by the management and the Board of Directors. The physical custody of all assets related to the insurance operations and shareholders’ operations are held by the Company. The statement of financial position, statement of income, statement of comprehensive income and statement of cash flows of the insurance operations and shareholders’ operations which are presented in note 33 have been provided as supplementary financial information and to comply with the requirements of the guidelines issued by SAMA Implementing Regulations and is not required by IFRS as endorsed in KSA. SAMA Implementing Regulations requires the clear segregation of the assets, liabilities, income and expenses of the insurance operations and the shareholders’ operations. In preparing the Company-level financial statements in compliance with IFRS as endorsed in KSA, the balances and transactions of the insurance operations are amalgamated and combined with those of the shareholders’ operations. Inter-operation balances, transactions and unrealized gains or losses, if any, are eliminated in full during amalgamation. The accounting policies adopted for the insurance operations and shareholders’ operations are uniform for like transactions and events in similar circumstances.

These financial statements have been presented in Saudi Arabian Riyals (“SAR”), which is also the functional currency of the Company. All financial information presented in SAR have been rounded off to the nearest thousands, except where otherwise indicated.

The Company incurred a net loss of SR 42.86 million (31 December 2021: SR 73.67 million) during the year ended 31 December 2022 and, as of that date, the Company’s accumulated losses amounted to SR 192.61 million (31 December 2021: SR 149.75 million) which represents 48% of the share capital. Since the accumulated losses of the Company amounted to 48% of the share capital, the requirements of Article 4, Part 2 of ‘CMA’s Procedures and Instructions Related to Listed Companies with Accumulated Losses Reaching 20% or More of Their Share Capital’ were also triggered and have been complied. Moreover, the solvency margin of the Company is below the minimum solvency margin prescribed by Article 66 of the Implementing Regulations of the Cooperative Insurance Companies Control Law and the requirements of implementing the measures prescribed by Article 68(2) of the Implementing Regulations of the Cooperative Insurance Companies Control Law have also not been followed. These events and conditions, indicate that a material uncertainty exists that may cast a significant doubt on the Company’s ability to continue as a going concern and therefore, it may be unable to realize its assets and discharge its liabilities in the normal course of business.

The management of the Company has prepared a detailed business plan for future prospects of the Company which is approved by the Board of Directors and has undertaken strategic initiatives that ensure healthy market penetration and retention levels while remaining in compliance with applicable regulatory requirements. The measure includes business growth, better pricing strategies, altering of business mix and retention of profitmaking portfolio which has resulted in an increase in gross premium written during the year ended 31 December 2022 due to new business underwritten in motor and engineering segments.

The Company on 6 December 2022 announced the signing of a non-binding Memorandum of Understanding (the “MOU”) with the Saudi Enaya Cooperative Insurance Company to evaluate a potential merger between the two companies. The Company is in the process of conducting due diligence to assess the financial viability of the merger. Based on the above measures taken by the management, along with existing cash and cash equivalents and other liquid assets, the management and those charged with governance remain confident that going concern assumption is valid. Furthermore, the management does not have any intention to liquidate the Company or to cease the operations in the near future. Based on the above these financial statements have been prepared on going concern basis.

The accounting policies, estimates and assumptions used in the preparation of these financial statements are consistent with those used in the preparation of the annual financial statements for the year ended December 31, 2021 except as explained below:

1. 1. New IFRS, International Financial Reporting and Interpretations Committee’s interpretations (IFRIC) and amendments thereof, adopted by the Company

A number of new standards and amendments became applicable for the current reporting period i.e. for reporting periods beginning on or after 01 January 2022. The Company did not have to change its accounting policies or make retrospective adjustments as a result of adopting amended standards which are described below:

The adoption of the amended standards and interpretations applicable to the Company did not have any significant impact on these financial statements.

Cash and cash equivalents comprise of balances with banks.

Premium receivable are stated at gross written premiums receivable from insurance contracts, less an allowance for any uncollectible amounts. Premiums and reinsurance balances receivable are recognised when due and measured on initial recognition at the fair value of the consideration received or receivable. The carrying value of receivable is reviewed for impairment and whenever events or circumstances indicate that the carrying amount may not be recoverable, the impairment loss is recorded in “Provision for doubtful receivables” in the statement of income. Receivable balances are derecognised when the Company no longer controls the contractual rights that comprise the receivable balance, which is normally the case when the receivable balance is sold, or all the cash flows attributable to the balance are passed through to an independent third party. Receivables disclosed in note 5 fall under the scope of IFRS 4 “Insurance contracts”.

The Company has an ongoing software development project for which it has incurred a cost of SAR 2.9 million in current year (2021: SAR 9.8 million) in terms of development cost.

The calculation of value-in-use is most sensitive to the assumptions on discount rate applied to cash flow projections and projected EBITDA margins.

Sensitivity to changes in key assumptions:

With regard to the assessment of the value-in-use, management believes that no reasonably possible change in any of the key assumptions above would cause the carrying value of the CGU including goodwill to materially exceed its recoverable amount. The implications of changes to the key assumptions are described below.

i) Projected EBITDA margin:

The projected EBITDA margin in the forecasted period has been estimated to be at an average of 5%. If all other assumptions kept the same; a reduction of margin by 4% would give a value-in-use equal to the current carrying amount.

ii) Discount rate:

The projected discount rate in the forecasted period has been estimated to be at an average of 18% (2021: 15%). If all other assumptions kept the same; an increase in discount rate by 9% (2021: 50%) would give a value-in-use equal to the current carrying amount.

iii) Terminal value growth rate:

If all other assumptions remain constant; a decrease in projected terminal value growth rate in the forecasted period to 0% would give a value-in-use which exceeds the carrying value by SAR 69.7 million (2021: SAR 376 million).

Based on the assumptions made, the value in use calculated above exceeded the carrying amount of goodwill and hence no impairment was recognized. Based on the management experts’ assessment of value in use, the management believes that no reasonable possible change in any of the above assumptions would cause the carrying value to materially exceed its recoverable amount at the reporting date. The most significant assumptions used in determination of value in use calculations are weighted average cost of capital and long-term growth rate.

All regular way purchases and sales of financial assets are recognized / derecognized on the trade date (i.e. the date that the Company commits to purchase or sell the assets). Regular way purchases or sales are purchases or sales of financial assets that require settlement of assets within the time frame generally established by regulation or convention in the market place.

Provisions are recognised when the Company has an obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Defined benefit obligations

The Company operates an end of service benefit plan for its employees based on the prevailing Saudi Labor Laws. Accruals are made at the present value of expected future payments in respect of services provided by the employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period of high-quality corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. The benefit payments obligation is discharged as and when it falls due. Re-measurements (actuarial gains/ losses) as a result of experience adjustments and changes in actuarial assumptions are recognised in statement of comprehensive income.

Short term employee benefits

Short term employee benefits obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short term cash bonus or any other benefits if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

Zakat

The Company is subject to zakat in accordance with the regulations of the Zakat, Tax and Custom Authority (“ZATCA”). Zakat is computed on the Saudi shareholders’ share of equity or net income using the basis defined under the Zakat regulations. Income taxes are computed on the foreign shareholders' share of net adjusted income for the year. Zakat and income tax is accrued on a quarterly basis. Additional amounts payable, if any, at the finalization of final assessments are accounted for when such amounts are determined.

Zakat expense is charged to the profit or loss. Zakat is not accounted for as income tax and as such no deferred tax is calculated relating to zakat.

Income tax

The income tax expense or credit for the period is the tax payable on the current period’s taxable income, based on the applicable income tax rate, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities. Adjustments arising from the final income tax assessments are recorded in the period in which such assessments are made.

Withholding tax

The Company withholds taxes on certain transactions with non-resident parties in the Kingdom of Saudi Arabia as required under Saudi Arabian Income Tax Law.

Value Added Tax (VAT)

Output VAT related to revenue is payable to tax authorities on the earlier of:

(a) collection of receivables from customers; or

(b) delivery of services to customers.

Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales/services and purchases is recognised in the statement of financial position on a gross basis and disclosed separately as an asset and a liability.

VAT that is not recoverable is charged to the statement of income as expense.

Dividend distribution to the Company’s shareholders is recognised as a liability in the Company’s financial statements in the period in which the dividends are approved by the Company’s shareholders.

Transactions in foreign currencies are recorded in Saudi Arabian Riyals at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated to Saudi Arabian Riyals at the rate of exchange prevailing at the statement of financial position date. All differences are taken to the statements of income and comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction and are not subsequently restated. Foreign exchange gains or losses on available-for-sale investments are recognized in “Other income, net” in the statement of income. As the Company’s foreign currency transactions are primarily in US dollars, foreign exchange gains and losses are not significant.

IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. However, the Company has met the relevant criteria and has applied the temporary exemption from IFRS 9 for annual periods before 1 January 2023. Consequently, the Company will apply IFRS 9 for the first time on 1 January 2023.

The Company conducted a preliminary IFRS 9 Classification and Measurement assessment (“C&M”) for the financial assets held as at December 31, 2021. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost (“AC”), fair value through other comprehensive income (“FVOCI”) and fair value through statement of income (“FVSI”). This classification is generally based, except equity instruments and derivatives, on the business model in which a financial asset is managed and its contractual cash flows. Except for financial assets that are designated at initial recognition as at FVSI, and for investment in equity instruments, a financial asset is classified on the basis of both:

1. 1. 1. 1. 1. the entity’s business model for managing the financial asset; and

            2. the contractual cash flow characteristics of the financial asset.

1. Financial assets – Classification (continued)

The classification and measurement review exercise in the Company consists of two parts:

• A business model assessment based on fact patterns discussed in the classification and measurement workshop and agreed with management; and

• A contractual cash flows characteristics assessment based on a thorough desk-based review of a sample of specifically selected contracts to provide a provisional conclusion on whether or not the contractual terms of the asset give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (the “SPPI assessment”).

The new classification requirements are expected to have an impact on the Company’s total equity at 1 January 2022.

1. Financial assets – Impairment

Under IFRS 9, the Expected credit loss (“ECL”) allowance is based on the credit losses expected to arise over the life of the asset (the lifetime expected credit loss); unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months’ expected credit loss.

Lifetime expected credit losses represent ECL that would result from all possible default events over the expected life of the financial asset, whereas 12-month expected credit losses are those life expected credit losses expected to occur within 12 months of balance sheet date. Both lifetime ECLs and 12-month ECLs will be calculated on an individual basis depending on the nature of the underlying portfolio of financial instruments.

ECL is computed based on the parameters, namely Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD) values. ECL is discounted to present value.

Probability of Default (‘PD’): The probability of default is an estimate of the likelihood of default over a given time horizon.

Loss Given Default (‘LGD’): Loss given default inputs are determined by class of financial instrument based on the historical experience of loss and recovery rates for similar financial instruments and other relevant industry data.

Exposure at Default (‘EAD’): The exposure at default is an estimate of the exposure at a future default date.Forward looking estimate: While estimating the ECL, the Group will review macro-economic developments occurring in the economy and market it operates in. On a periodic basis, the Company will analyze the relationship between key economic trends with the estimate of PD.

IFRS 9 impairment applies to financial instruments that are not measured at Fair Value through Statement of Income (FVSI). Equity instruments measured at FVOCI are also excluded from the purview of impairment.

Financial assets that are subject to impairment consist of the following:

- Cash and cash equivalent;

- Investment in debt Instruments;

- Statutory deposits; and

- Prepayments and other assets.

The Company’s total equity is impacted by the IFRS 9 impairment requirements only to the extent of any loss allowances on financial assets measured at amortised cost.

IFRS 9 largely retains the requirements in IAS 39 for the classification and measurement of financial liabilities. However, under IAS 39 all fair value changes of financial liabilities designated as at FVTPL are recognised in the statement of income, whereas under IFRS 9 these fair value changes will generally be presented as follows:

1. 1. The amount of the change in the fair value that is attributable to changes in the credit risk of the liability will be presented in OCI; and

   2. The remaining amount of the change in the fair value will be presented in the statement of income.

There is no impact expected on financial liabilities as a result of the transition to IFRS 9.

The statutory deposit shall be 15% percent of the paid-up capital. The Company has placed the statutory deposit amount in a bank designated by SAMA. SAMA shall be entitled to the earnings on statutory deposit which is payable by the Company to SAMA and appearing as ‘Accrued commission income on statutory deposit’.

Investments having fixed or determinable payments and fixed maturity that the Company has the positive intention and ability to hold to maturity are classified as held to maturity. Held to maturity investments are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at amortised cost, less provision for impairment in value. Amortised cost is calculated by taking into account any discount or premium on acquisition using an effective yield basis. Any gain or loss on such investments is recognised in the statement of income when the investment is derecognised or impaired.

Available-for-sale investments (AFS) include equity and debt securities. Equity investments classified as available-for-sale investments are those which are neither classified as held for trading nor designated at fair value through income statement. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. Such investments are initially recorded at cost, being the fair value of the consideration given including transaction costs directly attributable to the acquisition of the investment and subsequently measured at fair value. Any unrealised gains or losses arising from changes in fair value are recognised through the statement of comprehensive income until the investments are derecognised or impaired whereupon any cumulative gains or losses previously recognised in equity are reclassified to statement of income for the period and are disclosed as gains/(losses) on non-trading investments.

Dividend, commission income and foreign currency gain/loss on available-for-sale investments are recognized in the related statements of income or statement of comprehensive income - shareholder’s operations, as part of the net investment income / loss.

1. SIGNIFICANT ACCOUNTING POLICIES – (continued)

i) Investments – (continued)

i. Available-for-sale investments (continued)

Any significant or prolonged decline in fair value of available-for-sale investments is adjusted for and reported in the related statement of comprehensive income, as impairment charges. Fair values of available-for-sale investments are based on quoted prices for marketable securities or estimated fair values. The fair value of commission-bearing items is estimated based on discounted cash flows using commission for items with similar terms and risk characteristics. For unquoted investments, fair value is determined by reference to the market value of a similar investment or where the fair values cannot be derived from active markets, they are determined using a variety of valuation techniques. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values.

Investments in this category are classified if they are held for trading or designated by management as FVSI on initial recognition. Investments classified as trading are acquired principally for the purpose of selling or repurchasing in short term and are recorded in the statement of financial position at fair value. Changes in fair value are recognized in net trading income/loss.

An investment may be designated at FVSI by the management, at initial recognition, if it satisfies the criteria laid down by IAS 39 except for the equity instruments that do not have a quoted price in an active market and whose fair values cannot be reliably measured. Investments at FVSI are recorded in the statement of financial position at fair value. Changes in the fair value are recognised in the statement of income for the year in which it arises. Transaction costs, if any, are not added to the fair value measurement at initial recognition of FVSI investments. Special commission income and dividend income on financial assets held as FVSI are reflected as either trading income or income from FVSI financial instruments in the statement of income.

Investments classified as held to maturity cannot ordinarily be sold or reclassified without impacting the Company’s ability to use this classification and cannot be designated as a hedged item with respect to commission rate or prepayment risk, reflecting the longer-term nature of these investments.

However, sales and reclassifications in any of the following circumstances would not impact the Company’s ability to use this classification:

• Sales or reclassifications that are so close to maturity that the changes in market rate of commission would not have a significant effect on the fair value

• Sales or reclassifications after the Company has collected substantially all the assets’ original principal

Sales or reclassifications attributable to non-recurring isolated events beyond the Company’s control that could not have been reasonably anticipated.

The fair value of financial assets is based on quoted prices for marketable securities or estimated fair values. The fair value of commission-bearing items is estimated based on discounted cash flow using commission for items with similar terms and risk characteristics.

For financial assets where there is no active market, fair value is determined by reference to the market value of a similar financial assets or where the fair values cannot be derived from active market, they are determined using a variety of valuation techniques. The inputs of this models is taken from observable market where possible, but where this is not feasible, a degree of judgment is required in establishing fair values.

Provisions are recognised when the Company has an obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.