CLP Holdings Limited – Annual report – 31 December 2018
Financial Risk Management (extract)
1. Financial Risk Factors (extract)
The Group’s approach to managing credit risk for trade receivables is discussed in Note 16.
On the treasury side, all finance-related hedging transactions and deposits of the Group entities are made with counterparties with good credit quality in conformance to the Group treasury policies to minimise credit exposure. Good credit ratings from reputable credit rating agencies and scrutiny of the financial position of non-rated counterparties are two important criteria in the selection of counterparties. The credit quality of counterparties will be closely monitored over the life of the transaction. The Group further assigns mark-to-market limits to its financial counterparties to reduce credit risk concentrations relative to the underlying size and credit strength of each counterparty. In an attempt to forestall adverse market movement, the Group also monitors potential exposures to each financial institution counterparty, using VaR methodology. All derivatives transactions are entered into at the sole credit of the respective subsidiaries, joint ventures and associates without recourse to the Company.
16. Trade and Other Receivables
Trade and other receivables are recognised initially at transaction price and are subsequently stated at amortised cost using the effective interest method, less allowances for expected credit losses. The Group measures the loss allowance for its trade receivables at an amount equal to the lifetime expected credit losses. The amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to its recognised amount is recognised in profit or loss, as an impairment loss or a reversal of an impairment loss. Trade and other receivables are written off (either partially or in full) when there is no reasonable expectation of recovery.
Expected credit losses are a probability-weighted estimate of credit losses (i.e. the present value of all cash shortfalls) over the expected life of the trade receivables. Expected credit losses on trade receivables are calculated by using the provision matrix approach. Trade receivables are categorised by common risk characteristics that are representative of the customers’ abilities to pay all amounts due in accordance with the contractual terms. The provision matrix is determined based on historical observed default rates over the expected life of the trade receivables and is adjusted for forward-looking estimates. At every reporting date the historical observed default rates are updated and changes in the forward-looking estimates are analysed.
Impairment on other receivables is measured as either 12-month expected credit losses or lifetime expected credit losses, depending on whether there has been a significant increase in credit risk since initial recognition. If a significant increase in credit risk of a receivable has occurred since initial recognition, then impairment is measured as lifetime expected credit losses.
Critical Accounting Estimates and Judgments: Recoverability of Trade Receivables
Provision for expected credit losses is made when the Group will not collect all amounts due. The provision is determined by grouping together trade debtors with similar risk characteristics and collectively or individually assessing them for likelihood of recovery. The provision reflects lifetime expected credit losses i.e. possible default events over the expected life of the trade receivables, weighted by the probability of that default occurring. Judgment has been applied in determining the level of provision for expected credit losses, taking into account the credit risk characteristics of customers and the likelihood of recovery assessed on a combination of collective and individual basis as relevant. While the provision is considered appropriate, changes in estimation basis or in economic conditions could lead to a change in the level of provision recorded and consequently on the charge or credit to profit or loss.
(a) Trade receivables
The ageing analysis of the trade receivables at 31 December based on invoice date is as follows:
- Including unbilled revenue
Credit risk management
The Group has no significant concentrations of credit risk with respect to the trade receivables in Hong Kong and Australia as their customer bases are widely dispersed in different sectors and industries. The Group has established credit policies for customers in each of its retail businesses.
In Hong Kong, customers are allowed to settle their electricity bills within two weeks after issue. To limit the credit risk exposure, customers’ receivable balances are generally secured by cash deposits or bank guarantees from customers for an amount not exceeding the highest expected charge for 60 days of consumption. At 31 December 2018, such cash deposits amounted to HK$5,474 million (2017: HK$5,218 million) and the bank guarantees stood at HK$796 million (2017: HK$798 million). For all the deposits held, customers are paid a floating market interest rate equivalent to the HSBC bank savings rate. The customers’ deposits are treated on the statement of financial position as current liabilities on the basis that they are repayable on demand.
In Australia, customers are allowed to settle their electricity bills in no more than 45 days after issue. EnergyAustralia has policies in place to ensure that sales of products and services are made to most retail customers (including residential and commercial customers) of an appropriate credit quality and collectability is reviewed on an ongoing basis.
Trade receivables arising from sales of electricity to the offtakers in Mainland China and India are due for settlement within 30 to 90 days and 15 to 60 days after bills issue respectively. The offtakers of these regions are mainly state-owned enterprises. Management has closely monitored the credit qualities and the collectability of these trade receivables and consider that the expected credit risks of them are close to zero.
Expected credit losses
For trade receivables relating to accounts which are long overdue with significant amounts or known insolvencies or non-response to collection activities, they are assessed individually for impairment allowance. CLP Power Hong Kong and EnergyAustralia determine the provision for expected credit losses by grouping together trade receivables with similar credit risk characteristics and collectively assessing them for likelihood of recovery, taking into account prevailing economic conditions.
CLP Power Hong Kong
CLP Power Hong Kong classifies its trade receivables by nature of customer accounts. These include active accounts and terminated accounts.
- Expected credit loss is close to zero as these trade receivables are mostly secured by cash deposits or bank guarantees from customers and have no recent history of default.
EnergyAustralia categorises its trade receivables based on the ageing. EnergyAustralia recognises lifetime expected credit losses for receivables by assessing future cash flows for each group of trade receivables including a probability weighted amount determined by evaluating a range of possible outcomes based on twelve month rolling historical credit loss experience by customer segment, geographical region, tenure and type of customer and applying to the receivables held at year end. The determining factor impacting collectability is customer attributes. The impact of economic factors, both current and future, is considered in assessing the likelihood of recovery from customers.
The Group’s Mainland China renewable projects are experiencing delays in receipt of the Renewable National Subsidy. As at 31 December 2018, the Group had total receivables of HK$972 million (2017: HK$611 million) relating to unpaid Renewable National Subsidies. These amounts were not considered impaired because the subsidy settlement and renewable project accreditation are regulated by the Central Government. Furthermore, there have been continuous payments with no history of default.
At 31 December 2018, CLP India’s renewable projects have trade receivables of HK$487 million (2017: HK$510 million) of which HK$437 million (2017: HK$466 million) were past due. These amounts were not considered impaired as there are no recent history of default and continuous payments received. Trade receivables in dispute are assessed individually for impairment allowance in order to determine whether specific provisions are required. Disputed trade receivables of Paguthan and Jhajjar totalling HK$850 million (2017: HK$420 million) were provided in full as there is no reasonable expectation of recovery. Further information about disputes with offtakers is disclosed in Note 30.
Movements in Provision for Impairment
(b) At 31 December 2018, other receivables included the remaining 50% consideration of Rs13.2 billion (HK$1,452 million) receivable from the sale of 40% interest in CLP India (Note 26(B)).
(c) The current accounts with joint ventures and associates are unsecured, interest free and have no fixed repayment terms.