PASHA_BANK ANNUAL REPORT 2021

137 Annual Report 2021 PASHA Bank (Convenience Translation of Publicly Announced Financial Statements Originally Issued in Turkish, See Note I of Section Three) (Amounts are expressed in thousands of Turkish Lira (“TL”) unless otherwise stated.) PASHA Yatırım Bank A.Ş. Notes to Unconsolidated Financial Statements At 31 December 2021 EXPLANATIONS ON ACCOUNTING POLICIES (Continued) The ratings of financial assets subject to PD calculations are reviewed and updated annually (unless there is a significant improvement in the credit risk of the counterparty). In the case of delay over 30 days, which is the main criteria for transition from Stage 1 to Stage 2, the rating of financial asset is revised. For transitions between stages, certain criteria have been defined by taking into account the relevant regulations/circulars of the BRSA and the notifications issued. In case of following criteria; if the principal or interest/commission collection delays exceed 30 days or the credit rating falls down to two grades relative to the country rating, or restructuring of loan due to debtor has difficulty on payment, the transition criteria from Stage 1 to Stage 2 is applied. The fact that the principal and interest/commission collection delays of 90 days or more is also applied for the transition to Stage 3. In addition, in case the Bank management considers that it is appropriate, the Bank will be able to transition between stages whether not to meet with criteria. The expected loss provision for the assets in Stage 1 are presented under the “12 Months Expected Credit Losses (Stage 1), expected loss provision for the assets in Stage 2 are presented under the “Significant Increase in Credit Risk” and expected loss provision for financial assets in Stage 3 are followed as “Credit-Impaired (Stage 3)”. Due to the deterioration in the credit risk between stages, there may be downgrade transitions as well as improvements between stages. As a mentioned in the important estimates and judgments note used in the preparation of the financial statements, the Bank reflected the possible effects of the COVID-19 outbreak as of report date with the best estimation method for the estimates and judgments used in calculating the expected loan losses. The Bank has revised its macroeconomic expectations for the second quarter of the year in June and reflected the calculations made as of report date in the light of these data, taking into account the values of default probabilities and the loss of default. While the default probabilities were calibrated, the long-term default rate estimates were updated and reflected to the financial statements. In thıs context, the Bank has measured the impact of the change in gross domestic product on frozen receivables within different scenarios and reflected the increase coefficient, which is considered to reflect the current situation in the NPL ratio, to loan parameters, by reflecting on the loan parameters. This approach, which is preferred in reserve calculations, will be revised by taking inti consideration the impact of the epidemic, loan portfolio and future expectations in the following reporting periods. Due to the disruptions in economic and commercial activities as a result of the COVID-19 pandemic, the decisions of the BDDK dated March 17, 2020 and numbered 8948 and March 27, 2020 and numbered 8970, To apply the 90-day delay period for the credit classification of loans as 180 days within the scope of Articles 4 and 5 of the Regulation on the Classification of Loans and the Procedures and Principles; the 30-day period for classification as Stage 2 was also allowed to be applied as 90 days. With the announcement made on September 16, 2021, it was decided to end flexibility by the end of September 30, 2021, excluding stage 1 loans with a delay period of more than 31 days and no more than 90 days as of October 1, 2021, and stage 2 loans with a late period exceeding 91 days and a delay period of no more than 180 days. VIII. EXPLANATIONS ON OFFSETTING FINANCIAL ASSETS Financial assets and liabilities are offset and the net amount is reported in the balance sheet when the Bank has a legally enforceable right to offset the recognised amounts and there is an intention to collect/pay related financial assets and liabilities on a net basis, or to realise the asset and settle the liability simultaneously. IX. EXPLANATIONS ON SALES AND REPURCHASE AGREEMENTS AND SECURITIES LENDING TRANSACTIONS Securities subject to repurchase agreements (“Repo”) are classified as “Financial assets at fair value through profit or loss”, “Financial assets at fair value through other comprehensive income” and “Financial assets measured at amortised cost ” according to the investment purposes of the Bank and measured according to the portfolio to which they belong. Funds obtained from repurchase agreements are accounted under “Funds Provided under Repurchase Agreements” in liabilities and the difference between the sale and repurchase price is accrued over the life of repurchase agreements using the effective interest method. Funds given against securities purchased under agreements (“Reverse repo”) to resell are accounted under “Receivables from Reverse Repurchase Agreements” on the balance sheet. The difference between the purchase and determined resell price is accrued over the life of repurchase agreements using the “effective interest method”.