Arohan Financial Services Limited | Annual Report 2022-23

129 | Annual Report | 2022-2023 Arohan Financial Services Limited Summary of significant accounting policies and other explanatory information for the year ended 31 March 2023 (Contd.) k) Impairment of financial assets 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 or LTECL), 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 (12mECL). The Company’s policies for determining if there has been a significant increase in credit risk. Loan assets The Company follows a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarised below: • Stage 1 (0-30 days) includes loan assets that have not had a significant increase in credit risk since initial recognition or that have low credit risk at the reporting date. • Stage 2 (31-90 days) includes loan assets that have had a significant increase in credit risk since initial recognition but that do not have objective evidence of impairment. • Stage 3 (more than 90 days) includes loan assets that have objective evidence of impairment at the reporting date. The ECL is measured at 12-month ECL for Stage 1 loan assets and at lifetime ECL for Stage 2 and Stage 3 loan assets. ECL is the product of the Probability of Default, Exposure at Default and Loss Given Default, defined as follows: Probability of Default (PD) The PD represents the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months (12 months PD), or over the remaining lifetime (Lifetime PD) of the obligation. Loss Given Default (LGD) LGD represents the Company’s expectation of the extent of loss on a defaulted exposure. LGD varies by type of counterparty, type and preference of claim and availability of collateral or other credit support. Exposure at Default (EAD) EAD is based on the amounts the Company expects to be owed at the time of default. Management overlay is included in determining the 12-month and lifetime ECL. The assumptions underlying the expected credit loss aremonitored and reviewed on an ongoing basis. Trade receivables In respect of trade receivables, the Company applies the simplified approach of Ind AS 109, which requires measurement of loss allowance at an amount equal to lifetime expected credit losses. Lifetime expected credit losses are the expected credit losses that result from all possible default events over the expected life of trade receivables. Other financial assets In respect of its other financial assets, the Company assesses if the credit risk on those financial assets has increased significantly since initial recognition. If the credit risk has not increased significantly since initial recognition, the Company measures the loss allowance at an amount equal to 12-month expected credit losses, else at an amount equal to the lifetime expected credit losses. When making this assessment, the Company uses the change in the risk of a default occurring over the expected life of the financial asset. To make that assessment, the Company compares the risk of a default occurring on the financial asset as at the balance sheet date with the risk of a default occurring on the financial asset as at the date of initial recognition and considers reasonable and supportable information, that is available without undue cost or effort, that is indicative of significant