CAPITA FINANCIAL SERVICES INC. (ST. LUCIA BRANCH) Notes to the Financial Statements March 31, 2024 (expressed in Eastern Caribbean dollars) 20 3 Critical Accounting Estimates and Judgments The Branch makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The most significant uses of judgment and estimates are as follows: a) Expected credit losses (ECL) The measurement of the expected credit loss allowance for financial assets measured at amortised cost is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour (e.g. the likelihood of customers defaulting and the resulting losses). Explanation of the inputs, assumptions and estimation techniques used in measuring ECL is detailed in note 2(b). A number of significant judgments are also required in applying the accounting requirements for measuring ECL, such as: • The Branch’s criteria for determining if there has been a significant increase in credit risk and hence whether impairment allowances for financial assets should be measured on a lifetime expected credit loss (ECL) basis. • Choosing appropriate models and assumptions for the measurement of expected credit losses, including post model adjustments. • Determination of associations between macroeconomic scenarios and, economic inputs, such as unemployment rates, inflation and GDP levels, and their effect on PDs, EADs and LGDs. • Establishing the number and relative weightings of forward-looking macroeconomic scenarios for each type of product or market and the associated ECL; and • Establishing groups of similar financial assets for the purposes of measuring ECL. In determining ECL, management’s judgment is applied, using objective, reasonable and supportable information about current and forecast economic conditions. Incorporation of forward-looking information When determining whether the risk of default has increased significantly since initial recognition, both quantitative and qualitative information is considered, including expert credit assessment, forward looking information and analysis based on the Branch’s historical loss experience.
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