Page 91 - Annual Report 2023

ANNUAL REPORT 2023 22
Notes to the Consolidated Financial Statements for the year ended 31 December 2023
(amounts in USD, unless otherwise stated)

Establishing groups of assets with similar credit risk characteristics: When ECLs are measured on a collective basis, the financial
instruments are grouped on the basis of shared risk characteristics. Refer to note 3 (g) (ix) and 5 (b) (ii), for details of the characteristics
considered in this judgement. The Group monitors the appropriateness of the credit risk characteristics on an ongoing basis to assess
whether they continue to be similar. This is required in order to ensure that should credit risk characteristics change there is appropriate
re-segmentation of the assets. This may result in new portfolios being created or assets moving to an existing portfolio that better
reflects the similar credit risk characteristics of that group of assets. Re-segmentation of portfolios and movement between portfolios
is more common when there is a significant increase in credit risk (or when that significant increase reverses) and so assets move from
12-month to lifetime ECLs, or vice versa but it can also occur within portfolios that continue to be measured on the same basis of
12-month or lifetime ECLs but the amount of ECL changes because the credit risk of the portfolios differ.

Models and assumptions used: The Group uses various models and assumptions in measuring fair value of financial assets as well as
in estimating ECL. Judgement is applied in identifying the most appropriate model for each type of asset, as well as for determining
the assumptions used in these models, including assumptions that relate to key drivers of credit risk. See note 3 (g) (ix) and 5 (b) (ii),
for more details on ECL and note 3 (g) (viii) for more details on fair value measurement.

Input in data model of application of IFRS 16 requirements
Initial direct costs
An entity may exclude initial direct costs from the measurement of the Right of Use asset at the date of initial application. Based on
IFRS 16, if a lessee elects to apply the standard with the modified retrospective application, the lessee shall choose, on a lease-by-
lease basis, to measure the right-of-use asset at either:
Option 1 – its carrying amount as if IFRS 16 had been applied since the commencement date, but discounted using the lessee’s
incremental borrowing rate at the date of initial application. The practical expedient to exclude initial direct costs from the measurement
of the Right of Use asset at the date of initial application is applicable under Option 1 or;
Option 2 – an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that
lease. Although it is not stated explicitly in the new standard, the practical expedient on initial direct costs is not relevant under Option
2. The Bank does not adjust the Right of Use asset for historical amounts e.g. initial direct costs.
The Bank has opted to apply the modified retrospective method under Option 2.

Low-value assets
Lessees can also make an election to apply a method similar to current operating lease accounting to leases for which the underlying
asset is of low-value. IFRS 16 does not define the term low-value.
Banka Kombëtare Tregtare uses the EUR 10,000 as a threshold and simultaneously analyses the nature of the asset in order to assess
whether a leased asset qualifies for the low-value asset exemption. The types of assets that qualify for the low-value asset exemption
might change over time if, due to market developments, the price of a particular type of asset changes.

Incremental Borrowing Rate
The rate used for calculation of the RoU asset and Lease liability has taken into consideration the term, FX denomination, risk associated
with the bank, security, risk associated with the asset and economic environment.
The closest values matching this definition are Funds Transfer Pricing (FTP) rates. The term and FX denomination are taken into
consideration when constructing the EUR/USD/ALL yield curves. The Bank considered at the initial application date the rates published
by 31 December 2018.

After consideration, the Bank determined that there are no differences in terms of security, due to the fact that the lessor effectively has
security of owning the asset. Therefore, no adjustments were required. Since the starting point is in the same jurisdiction and in the same
currency as leases, no adjustment is required for this segment as well. In addition, for assets such as an office building, considering
that they are in a frequented area, are not highly illiquid or specialized assets, specific asset premium would be nil. Meanwhile, the risk
associated with the economic environment is incorporated in the government bonds yield.

The Bank has adjusted the rate for the credit spread, the cost that the bank would pay if it were required to borrow the respective
funds to finance the acquisition of such an asset.