Page 84 - Annual Report 2023

15 BANKA KOMBËTARE TREGTARE
Notes to the Consolidated Financial Statements for the year ended 31 December 2023
(amounts in USD, unless otherwise stated)

transactions on an arm’s length basis.

If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. Valuation techniques
include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value
of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation
technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Bank, incorporates all factors
that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial
instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent
in the financial instrument.
The Bank calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the
same instrument or based on other available observable market data.
When an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the transaction price is the price
paid to acquire the asset or received to assume the liability (an entry price). In contrast, the fair value of the asset or liability is the price
that would be received to sell the asset or paid to transfer the liability (an exit price). In many cases the transaction price equals the
fair value (that might be the case when on the transaction date the transaction to buy an asset takes place in the market in which the
asset would be sold). When determining whether fair value at initial recognition equals the transaction price, the Bank takes in account
factors specific to the transaction and to the asset or liability.
When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at
the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently
recognised in profit or loss depending on the individual facts and circumstances of the transaction but not later than when the valuation
is supported wholly by observable market data or the transaction is closed out.

(ix) Impairment of financial assets
IFRS 9’s impairment requirements use more forward-looking information to recognise expected credit losses – the ‘expected credit
loss (ECL) model’.
Instruments within the scope of the new requirements included loans and other debt-type financial assets measured at amortised cost
and FVOCI, trade receivables, contract assets recognised and measured under IFRS 15 and loan commitments and some financial
guarantee contracts (for the issuer) that are not measured at fair value through profit or loss.
Recognition of credit losses is no longer dependent on the Group first identifying a credit loss event. Instead the Group considers a
broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions,
reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument.
In applying this forward-looking approach, a distinction is made between:
• financial instruments that have not deteriorated significantly in credit quality since initial
recognition or that have low credit risk (‘Stage 1’) and
• financial instruments that have deteriorated significantly in credit quality since initial recognition
and whose credit risk is not low (‘Stage 2’).
‘Stage 3’ would cover financial assets that have objective evidence of impairment at the reporting date.
‘12-month expected credit losses’ are recognised for the first category while ‘lifetime expected credit losses’ are recognised for the
second category.
Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of
the financial instrument.

(x) Classification and measurement of financial liabilities
As the accounting for financial liabilities remains largely the same under IFRS 9 compared to IAS 39, the Group’s financial liabilities were
not impacted by the adoption of IFRS 9. The Group’s financial liabilities include Customer deposits borrowings from banks and other
financial institutions, subordinated debt and other payables. Financial liabilities are initially measured at fair value, and, where applicable,