Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information 4. Significant Accounting Judgements and Estimates continued Assets considered in the ECL calculations IFRS 9 requires cash flows expected from collateral and other credit enhancements to be reflected in the ECL calculation. The treatment and reflection of collateral for IFRS 9 purposes is in line with general risk management principles, policies and processes of the Group. The Group’s accounting policy for collateral assigned to it through its lending arrangements under IFRS 9 is the same is it was under IAS 39. Collateral, unless repossessed, is not recorded on the Group’s statement of financial position. The fair value of collateral affects the calculation of ECLs. It is generally assessed, at a minimum, at inception and re-assessed on an annual basis for all material exposures. Forward-looking Information Under IFRS 9, the allowance for credit losses is based on reasonable and supportable forward-looking information obtainable without undue cost or effort, which takes into consideration past events, current conditions and forecasts of future economic conditions. To incorporate forward-looking information into the Group’s allowance for credit losses, the Group uses the macroeconomic forecasts provided by National Bank of Georgia for Group companies operating in Georgia, while data used by Belarusky Narodny Bank (“BNB”) is provided by a non-governmental research centre operating in Belarus. Macroeconomic variables covered by these forecasts and which the Group incorporated in its ECL assessment model include GDP growth, foreign exchange rate and inflation rate. These forward-looking macroeconomic variables are updated on a semi-annual basis for Georgian companies and on a quarterly basis for BNB. The determination of the probability weighted ECL requires evaluating a range of diverse and relevant future economic conditions. To accommodate this requirement, the Group uses three different economic scenarios in the ECL calculation: an upside (weight 0.25), a baseline (weight 0.50) and a downside (weight 0.25) scenario relevant for each respective portfolio. A weight is computed for each scenario by using a probabilistic economic model that considers recent information as well as historical data provided by National Bank of Georgia. The Group considers these forecasts to represent its best estimate of the possible outcomes based on reliable available information. Forward-looking variable assumptions The most significant period-end assumptions used for ECL estimate as at 31 December 2018 per geographical segments are set out below. The scenarios “base”, “upside” and “downside” were used for all portfolios. Georgia Assigned As at 31 December 2018 As at 1 January 2018 Key drivers ECL scenario weight 2019 2020 2021 2018 2019 2020 GDP growth in % Upside 25% 6.00% 5.50% 5.00% 5.50% 6.00% 5.70% Base case 50% 5.00% 5.00% 5.00% 4.50% 4.80% 5.00% Downside 25% 2.00% 2.50% 3.50% 3.00% 2.00% 3.00% GEL/US$ exchange rate % Upside 25% 10.00% 5.00% -5.00% 5.00% 7.00% 0.00% Base case 50% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Downside 25% -15.00% -10.00% 5.00% -10.00% -15.00% -10.00% CPI inflation rate in % Upside 25% 3.40% 3.20% 3.00% 2.50% 2.50% 2.70% Base case 50% 2.90% 3.00% 3.00% 3.50% 3.00% 3.00% Downside 25% 4.50% 4.00% 3.00% 4.50% 4.30% 3.80% Annual Report 2018Bank of Georgia Group PLC 209