Page 86 - Annual Report 2022

Banka Kombëtare Tregtare Annual Report 2022 24

Banka Kombëtare Tregtare Sh.a.
Notes to the Consolidated Financial Statements for the year ended
31 December 2022 (Amounts in USD, unless otherwise stated)

4. Use of estimates and judgements (continued)
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.
The weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 2.38%. The
incremental borrowing rate is determined as the base rate yield curve plus the credit spread.
a. Base rate yield curve

Input data in the model are money market rates (inter-bank rates in maturity bucket ON-1Y). These data are published on daily
basis in “Reuters” (inter-bank trading platform). For higher maturities, the rate is calculated by extrapolating starting from the
money market rates of December 2019.