97 BARBADOS PUBLIC WORKERS’ CO-OPERATIVE CREDIT UNION LIMITED | CONSOLIDATED ANNUAL REPORT 2021 BARBADOS PUBLIC WORKERS’ CO-OPERATIVE CREDIT UNION LIMITED Notes to the Consolidated Financial Statements For the year ended March 31, 2021 (Expressed in Barbados dollars) 71 25. Financial Risk Management, continued 25.2 Credit risk, continued Assessment of corporate investments (term deposits), continued Each investment was assessed based on the companies’ ability to meet its short-term obligations together with its historical relationship with the Group relative to meeting these same obligations. This back testing approach is allowed under IFRS 9 in relation to the ranking of investments based on the purpose for which the investment is held. The investments mentioned herein are best described as callable upon demand, with the exception of the Barbados Light & Power Limited which is held as a security deposit. The other investment contracts carry a fixed term. They can be called prior to maturity with the penalty of forgone interest. Loss Given Default (LGD) This methodology is based on four key states from stable, marginal, moderate and significant. These recovery rates were internally generated based on historical experience and the availability of market data. Stable – A recovery rate of 90% was used which was lowest in the range of 90% to 95%. An internal due diligence rating of L-Low was assigned. Marginal – A recovery rate of 85% was used from a range of 80% to 90% to indicate a marginal decrease in credit quality from origination, based on the financial health, stability of the company, its share price and the AML/CFT and risk assessments. An internal due diligence rating of L-M Low to Medium was assigned. Moderate – A recovery rate of 75% within a range of 65% to 80% was a reflection of a moderate change from origination of the investment and historical relationship between the Credit Union and the investee. This was also based on the financial health and stability of the company and its share price and the AML and risk assessment. An internal due diligence rating of M-Medium was assigned. Significant – A recovery rate of 50% was used within a range of 35% to 65% if there were market indicators or events that demonstrated that the company was likely to default over the medium to long-term. An internal due diligence rating of H-High was assigned. Default - A recovery rate of 35% which was the highest within the range of 0% to 35% was used if there was a strong indicator of likely default in the short-term or there was a default in principal and/or accrued interest. For example, a going concern note has been disclosed in the recent financial statements, the company's credit rating has been withdrawn or there is a significant decrease in the company’s financial health. An internal due diligence rating of H/D High or Default was assigned. The expected credit loss allowance computed was - $146,135 (2020 - $68,383) as at March 31, 2021.
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