Non-Consolidated Annual Report 2020

BARBADOS PUBLIC WORKERS’ CO-OPERATIVE CREDIT UNION LIMITED | NON-CONSOLIDATED ANNUAL REPORT 2020 73 BARBADOS PUBLIC WORKERS' CO-OPERATIVE CREDIT UNION LIMITED Notes to the Non-consolidated Financial Statements For the year ended March 31, 2020 (Expressed in Barbados dollars) 56 23. Financial Risk Management, continued Credit risk, continued Financial investments, continued Assessment of Sovereign debt securities In June 19, 2018, the Barbados’ government formally entered into default when the grace period for payment of interest and principal on its foreign 2035 bonds expired. The Barbados government entered into the Barbados Economic Recovery and Transformation (BERT) program, with its local currency debtors. Under this program holders of treasury bills, treasury notes, debentures, loans and bonds owed by the Government of Barbados received an offer of exchange on September 7, 2018. The Credit Union’s acceptance of this offer resulted in the restructuring of principal and interest payments of $19,002,841 on its debt securities measured at amortised costs. The new securities are designated as Series B bonds in the amount of $17,994,321 together with Series D bonds in the amount of $1,008,847. The effective average yield on these securities for income year 2020 were 3.28% (2019 - 4.58%). In keeping with the requirements of the IFRS 9 standard, the previous investments which were carried at amortized cost were derecognized and replaced by that of the new securities at their fair market value. This resulted in a derecognition expense of $3,634,651 below their 2018 year end stated value. However, IFRS 9 requires that a further assessment of these securities be performed at each financial yearend until, time of maturity or sale of the investment. This analysis considered the fact that Standards and Poor’s raised its long term local currency sovereign credit rating on Barbados to “B - /B” from “SD” (Selective Default) on November 16, 2018. This taken together with the government’s decision to default on its foreign exchange commitments was considered by the Credit Union as significant increase in credit risk. As a consequence, a derecognition assessment was carried out as at October 1, 2018 on the principal and capitalized interest of the underlying investments. The Central Bank of Barbados yield curve for these securities was compared with that of the Institute of Chartered Accountants of Barbados (ICAB) to arrive at the risk free rate used in the performance of this calculation. The Net Present Value (NPV) was calculated on each strip and was deducted from the carrying value to arrive at the loss on derecognition. As at March 31, 2020, the Credit Union held sovereign debt securities with a carrying value of $18,509,103. $13,458,342 relates to the series B and D bonds and $5,050,761 relates to the Barbados Port Inc. bonds. The estimated ECL as at March 31, 2020 was $324,541 (2019: $564,263). This reduction in ECL was attributed to the upgraded sovereign credit rating effective July 2019 from Caa3 to Caa1 affirming Barbados’ stable outlook. There were also improved cumulative default rates and recovery rates.