79 BARBADOS PUBLIC WORKERS’ CO-OPERATIVE CREDIT UNION LIMITED | CONSOLIDATED ANNUAL REPORT 2020 BARBADOS PUBLIC WORKERS’ CO-OPERATIVE CREDIT UNION LIMITED Notes to the Consolidated Financial Statements For the year ended March 31, 2020 (Expressed in Barbados dollars) 62 26. Financial Risk Management, continued 26.2 Credit risk, continued Assessment of sovereign debt securities, continued 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 $4,037,931 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 Group 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 Group held sovereign debt securities with a carrying value of $22,024,523. (2019 - $22,59,971) inclusive of an ECL allowance of $387,859 (2019: $697,784).The 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. An ECL assessment was performed at March 31 2020 as required by IFRS 9. This assessment on the Group’s debt securities measured at amortized utilized the following methodology as outlined below: • Due to the lack of published statistical data and the lack of an active market for securities, Moody’s Investor’s Report dated May 13, 2019 on Sovereign default and recovery rates, 1983 to 2019 were used to provide the cumulative default rates (CDR) for categories of bonds similar to Barbados’. This gave the cumulative probability of defaults over a 10 year period. • An average expected recovery rate of 72.5% for the lower and upper ranges were used to approximate the government securities (Caa1) and corporate issuers (Caa2) to reflect a stable outlook, taking into consideration the level of uncertainty and economic stocks from COVID-19. Therefore, 1-recovery rate, 27.5%, was the loss given default (LGD). • The recovery rate of 85% for the Barbados Port Inc. bonds were used since these securities were not part of the debt exchange and had a higher likelihood of repayment due to the corporate independence, financial stability and profitability of the Barbados Port Inc. The loss given default (LGD) was therefore 15%. • The discount rate applied was the yield curve supplied by the Institute of Chartered Accountants of Barbados (ICAB). The above assumptions were the best case scenario for the Groups’s securities that are backed by the most reasonable and supportable data available at the time of the assessment.
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