01 02 03 Financial Statements 04 3. Summary of significant accounting policies continued New and Amended Standards and Interpretations continued IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instrumentsthat replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Group adopted the new standard on the required effective date and has not restated comparative information. (a) Classification and measurement Classification and measurement requirements of IFRS 9 have no significant impact on GHG’s Statement of Financial Position or equity on applying the classification. The Group continues measuring at amortised cost all financial assets and liabilities except for derivative financial instruments and payables for share acquisitions that are measured at fair value. These items include: cash and cash equivalents, amounts due from credit institutions, pharmacy and distribution and healthcare receivables, loans issued, borrowings, debt securities issued and accounts payable. Loans as well as healthcare and pharma receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Group analysed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortised cost measurement under IFRS 9. Therefore, reclassification for these instruments is not required. (b) Impairment IFRS 9 requires the Group to record expected credit losses on all of its debt securities, loans and receivables, either on a 12-month or lifetime basis. The Group applies the simplified approach and records lifetime expected losses on all receivables, loans and contract assets. The primary impact of adoption of the new impairment methodology was on the following two accounts: allowance on receivables from healthcare services and allowance on receivables from sales of pharmaceuticals. Cash and cash equivalents and amounts due from credit institutions Due to the short-term and highly-liquid nature of these financial assets, the Group has assessed corresponding credit losses to be immaterial. Therefore, no impairment was recognised for cash and cash equivalents and amounts due from credit institutions under IFRS 9. Healthcare and Pharma receivables In applying the simplified impairment approach under IFRS 9, the Group implemented four different assessment methods based on type of receivables: • individual assessment for receivables from Government; • individual assessment for all other material receivables (with a balance above GEL 250 thousand); • individual assessment for barter receivables in the pharmacy and distribution business; and • collective assessment for all other receivables. Receivables with shared credit risk characteristics are combined in different portfolios for collective assessment. The Group has identified the following main types of portfolios (with a balance less than GEL 250 thousand): receivables from healthcare services (mainly receivables from individuals), receivables from sale of pharmaceuticals, rent receivables and other receivables. Receivables from Government JSC Medical Corporation EVEX (“EVEX”) participates in the Georgian state insurance programme, UHC. As a result, a significant part of receivables from healthcare services (approximately 70%) is due from the Georgian Government and municipal authorities. On the other hand, JSC GEPHA (“GEPHA”) participates in UHC’s tenders, supplying medicaments to different clinics. In addition, Georgian Government co-pays the price of certain medicines to individuals covered by the UHC. Therefore, a considerable part of receivables from sales of pharmaceuticals (approximately 15%) are also due from the Georgian Government. Receivables from Government have unique credit characteristics, which are different from those of any other financial instrument currently owned by the Group. Considering this fact and materiality of corresponding balance, the Group has concluded that receivables from Government should be considered for impairment on an individual basis, separately from all other financial instruments. The Group uses credit ratings published by international agencies, such as Standard & Poor’s (“S&P”) or Moody’s, in order to assess credit quality of state receivables. Similarly, the probabilities of default to the respective category of credit rating assigned to Georgia based on reports by the same international agencies are used as a reasonable appoxiation of probability of default (“PD”) for receivables from Government. PD for receivables from Government was based on the country’s risk-rating. The Group will reconsider the PD rate used in the impairment calculations at each reporting date. Individually assessed debtors For debtors a with receivable balance above GEL 250 thousand, the Group considers each case individually and takes into account various factors and individual circumstances. This process consists of two main stages: • Counterparty’s financial position is assessed based on: a) financial results and ratios (when available); b) average receivable overdue days to the Group; and c) any other non-financial information available to the Group, such as any news relevant to market sector in which particular debtor operates, management inquiries, etc. • Based on this analysis, counterparty is then categorised by the Group’s management for credit risk assessment and moved to collective assessment. Each credit category is assigned with corresponding expected credit loss rate, determined based on experience, management’s professional judgement and expectations for the future. Assessments are performed on a quarterly basis. Macro-adjustments are incorporated based on regression results and dependency factor on GDP growth. Financial ratios in this model are updated on an annual basis, after/if audited financial statements of the counterparty are published, while average overdue days, non-financial information and expectations for the future are updated monthly. 137