Georgia Healthcare Group PLC Annual Report 2018 Financial Statements Notes to Consolidated Financial Statements continued (Thousands of Georgian Lari unless otherwise stated) 3. Summary of significant accounting policies continued New and Amended Standards and Interpretations continued IFRS 9 Financial Instruments continued (b) Impairment continued Barter receivables in pharmacy and distribution business GEPHA participates in barter transactions by supplying goods and services in exchange for receiving other goods and services from the counterparty. Both receivables and payables arise as a result of these transactions, but settlement is made on a net basis as required by corresponding contracts. Therefore, in assessing barter receivables for impairment the Group takes into account only net exposure from any individual counterparty, i.e. part of receivables in excess of payables to the same counterparty. These exposures are then assessed for impairment under IFRS 9 in the same manner as described in the preceding section for individually assessed debtors. Collective assessment For the purposes of implementing collective impairment assessment of receivables from insurance companies and other large counterparty entities under IFRS 9, debtor portfolios are segregated into distinct risk buckets based on number of overdue days. In defining 180 days as a cut-off period for default definition, the Group considered actual payment history of insurance companies and other large counterparty entities. Overdue of three to six months was usual among creditworthy counterparties, while more than a six-month period marked the sign for financial trouble. The statistics were based on the Group’s internal data. Five separate risk buckets were implemented as presented below: Overdue days Category Description 0-30 AA Excellent 31-60 A Good 61-90 B Normal 91-180 C Bad 181+ D Default As for collective impairment assessment of receivables from individuals and other small counterparties, the Group has five separate risk buckets as presented below: Overdue days Category Description 0-29 A Good 30-59 B Normal 60-89 C Bad 90+ D Default IFRS 9 allows an entity to use a simplified “provision matrices” for calculating expected losses as a practical expedient (e.g., for receivables), consistent with the general principles for measuring expected losses. However, IFRS 9 also requires incorporating forward-looking information in the entity’s impairment framework. The Group has decided to use this option and utilise provision matrices in estimation of ECLs in case of collective assessment of impairment. As mentioned above, the Group adopted the simplified approach for receivables and directly considers life-time losses for the entire portfolio i.e. expected lifetime credit losses will be recognised for the entire portfolio regardless whether or not significant increase in credit risk occurred since initial recognition. A migration matrix was used as a base for determination of probability of defaults by categories. Exposure at default was defined as the outstanding balance of debtor exposure. Forward-looking component Additionally, the Group incorporated macroeconomic forward-looking information in the analysis to determine adjusted default probabilities by categories. Considering the fact that debtors in healthcare service and pharmacy and distribution businesses mainly consist of individuals or small entities from widely diverse regions from Georgia, the Group believes that country-wide economic performance measure is good fit for the purposes of expected performance evaluation of the individually small debtors from all over the country. As such, real GDP growth rate was assessed to be the best macro-economic indicator on two arguments: • GDP growth rate is the single most important economy performance indicator that is closely tied to actual well-being of the citizens and small entities; and • GDP growth rate is easily obtainable and has both, consistent historical records as well as state forecast for coming years enabling to incorporate in the expected credit loss modelling. The Group regressed GDP growth rates over the past two years on impairment rates (which is the same as Probability of Default (“PD”) assuming 100% Loss Given Default (“LGD”); and found a statistically significant dependency factor. (c) Hedge accounting The Group determined that all existing hedge relationships that are currently designated in effective hedging relationships continue to qualify for hedge accounting under IFRS 9. The Group has chosen not to retrospectively apply IFRS 9 on transition to the hedges where the Group excluded the forward points from the hedge designation under IAS 39. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 did not have a significant impact on Group’s Financial Statements. 138