Page 77 - BKT Annual Report 2024 EN

Notes to the Consolidated Financial Statements for the year ended 31 December 2024 Notes to the Consolidated Financial Statements for the year ended 31 December 2024
(amounts in USD, unless otherwise stated) (amounts in USD, unless otherwise stated)

Option 2 – an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that rates, and then estimates the unknown parameters. The cubic spline approach, brings more flexibility on the shape of a yield curve
lease. Although it is not stated explicitly in the new standard, the practical expedient on initial direct costs is not relevant under Option and is thus good for financial practitioners who are looking for small pricing anomalies.
2. The Bank does not adjust the Right of Use asset for historical amounts e.g. initial direct costs.
The Bank has opted to apply the modified retrospective method under Option 2.
To construct local currency, Albanian Lek (ALL), yield curve (YC) the Bank is using the Cubic spline interpolation, as described above.
Low-value assets Yields of government bonds (ON-1Y) are auction results published by Ministry of Finance and Bank of Albania at the end of each
Lessees can also make an election to apply a method similar to current operating lease accounting to leases for which the underlying respective auction. For auctions that are not so frequent, the rate is calculated by extrapolating between rate values of the last 2Y bond
asset is of low-value. IFRS 16 does not define the term low-value. and the rate derived from the last auction of the bond in question. The issue encountered by the bank’s forecasts on Treasury Yields
is of the Runge’s phenomenon type, which is a problem of oscillation at the edges of an interval that occurs when using polynomial
Banka Kombëtare Tregtare uses the EUR 10,000 as a threshold and simultaneously analyses the nature of the asset in order to assess interpolation with polynomials of high degree over a set of equispaced interpolation points.
whether a leased asset qualifies for the low-value asset exemption. The types of assets that qualify for the low-value asset exemption
might change over time if, due to market developments, the price of a particular type of asset changes. b. Credit spread
For the credit spread calculations, the Bank has approached the following logic:
Incremental Borrowing Rate 1) Identify the international long-term Issuer Default Rating of the financial institution (“Bank”). International long-term IDR is given by the
The rate used for calculation of the RoU asset and Lease liability has taken into consideration the term, FX denomination, risk associated External Credit Rating Agency such as Moody’s, Fitch or Standard & Poor. The Bank will use only the official, world-wide accepted,
with the bank, security, risk associated with the asset and economic environment. external credit rating agencies such as Fitch, Moody’s and S&P because only these 3 agencies do the analyses world-wide, make
and publish the studies on PDs, LGD’s (where credit spread will be determined as PD*LGD) etc. on the global level. These three
The closest values matching this definition are Funds Transfer Pricing (FTP) rates. The term and FX denomination are taken into agencies are also the only ones allowed to be used for the purpose of relying on the expert-data parameters for e.g. in EU (as per
consideration when constructing the EUR/USD/ALL yield curves. The Bank considered at the initial application date the rates published CRD/CRR regulation etc.).
by 31 December 2018. 2) If the financial institution (Bank) does not have such a rating and it is part of a Group, the lower rating of the country ceiling for the
country where Bank is located and the external agency’s international long-term Issuer Default Rating of the ultimate parent is used.
After consideration, the Bank determined that there are no differences in terms of security, due to the fact that the lessor effectively has The underlying reason for this approach is that when a bank is part of a group, support is more likely.
security of owning the asset. Therefore, no adjustments were required. Since the starting point is in the same jurisdiction and in the same 3) If neither of these steps results in a rating, country ceiling for the country in which Bank is located is identified and at least one notch
currency as leases, no adjustment is required for this segment as well. In addition, for assets such as an office building, considering is subtracted. The country ceiling is the best rating that an entity based in that country can receive, so this is used as a benchmark
that they are in a frequented area, are not highly illiquid or specialized assets, specific asset premium would be nil. Meanwhile, the risk as we tend to work with the biggest and most robust institutions. Additionally, the downward risk adjustment is made for the sake
associated with the economic environment is incorporated in the government bonds yield. of prudence.

The Bank has adjusted the rate for the credit spread, the cost that the bank would pay if it were required to borrow the respective That particular rating of the Bank is assigned proper probability of default rate (PD rate), which is externally calculated – expert data
funds to finance the acquisition of such an asset.
given by the external credit rating agency. However, PD is just a probability. In order to approximate full credit risk, LGD is needed. By
multiplying the PD rate and LGD rate, credit loss rate is obtained, and this is the approximation of credit risk.
The weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 2.88%. The incremental
borrowing rate is determined as the base rate yield curve plus the credit spread.
Determining fair values
The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of
a. Base rate yield curve
valuation techniques as described in accounting policy 3 (g) (viii). For financial instruments that trade infrequently and have little price
Input data in the model are money market rates (inter-bank rates in maturity bucket ON-10Y). These data are published on daily basis
transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of
in “Reuters” (inter-bank trading platform). For higher maturities, the rate is calculated by extrapolating starting from the money market
market factors, pricing assumptions and other risks affecting the specific instrument. See also “Valuation of financial instruments” below.
rates of initial application date.
Critical accounting judgments made in applying the Bank’s accounting policies include:
The Bank uses the Nelson-Siegel-Svensson model for extrapolation purposes for USD yield curve construction, which fits an exponential
Valuation of financial instruments
approximation of the discount rate function directly to market prices. The Bank introduced the application of the augmented NSS
The Bank’s accounting policy on fair value measurements is discussed under note 3 (g) (viii).
(Nelson-Siegel-Svensson) model as a version that has the ability to combine different forms of graphs, allowing in essence negative
The Bank measures fair values using the following hierarchy of methods:
rates as well as atypical interest rate distributions, which are not captured accurately by the classic Nelson-Siegel model.
• Level 1: Quoted market price in an active market for an identical instrument.
• Level 2: Valuation techniques based on observable inputs. This category includes instruments valued using: quoted market prices
The Bank uses the Cubic spline interpolation for EUR yield curve construction. Cubic spline interpolation is a special case of spline type in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or
interpolation that is used very often to avoid the problem of Runge’s phenomenon. This method gives an interpolating polynomial that other valuation techniques where all significant inputs are directly or indirectly observable from market data.
is smoother and has smaller error than some other interpolating polynomials such as Lagrange polynomial and Newton polynomial. • Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation
Cubic smoothing splines fitted to univariate time series data can be used to obtain local linear forecasts. The approach is based on a technique includes inputs not based on observable data and the unobservable inputs could have a significant effect on the
stochastic state space model which allows the use of a likelihood approach for estimating the smoothing parameter, and which enables instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where
easy construction of prediction intervals. In essence the same mathematical mechanic is followed by the NSS (Nelson-Siegel-Svensson) significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
model. Whereas an interpolation typically begins with specifying a functional form either to approximate discount function or forward

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