4.3.8 Net Impairment Gains/(Losses) on Financial and Contract Assets

In the context of the COVID-19 pandemic and low oil prices, during the year 2020 companies were experiencing conditions often associated with a general economic downturn. In a very short period of time, the credit ratings of various oil companies deteriorated and they announced significant cost reductions and other measures to preserve their liquidity. In response to this situation, the Company (i) reassessed whether there is a significant increase in credit risk related to its financial assets as of December 31, 2020, and (ii) updated estimates in terms of ’probability of default’ and ’oss given default’ in order to determine the expected credit losses.

Finance Lease Receivables

There was no payment default on any finance lease contracts over the period. In addition, despite the overall economic downturn, the Company concluded that the counterparties of the finance lease receivables still have a strong capacity to meet their contractual cash flow obligations based on existing contractual arrangements, which include parent company guarantees. Based on the available forward-looking information related to the oil price, it is also assumed that none of the assets leased under the Company’s finance lease contracts would become un-economic to operate for its clients.

Therefore, the Company concludes that (i) the credit risk has not increased significantly since the initial recognition of the finance lease receivable, and (ii) the finance lease receivables still have a low credit risk as of December 31, 2020.

Construction Work-in-Progress and Trade Receivables

As for the finance leases, there was no payment default (including overdue of more than 90 days) on any material trade receivables over the period. The Company performed as usual a detailed analysis of the credit risks associated with material trade receivables balances as at the reporting date. This did not result in any significant impairment losses over the period.

Other Financial Assets

Overall, the reassessment of the expected credit losses of other financial assets resulted in a limited impact, except for the impairment of one long-term receivable amounting to US$11 million. This was the result of a significant downgrade in the credit rating of the main producer of one of the units, resulting in a full impairment of the main producer’s contribution to the long-term receivable.

Impairments of financial assets and contract assets which relate to credit risk as per IFRS 9 requirements are recognized in a dedicated line of the income statement: ’Net impairment losses on financial and contract assets’. Impairments resulting from commercial disputes and other business decisions are not included in this dedicated line of the income statement.

During the year, the following gains/(losses) related to credit risks were recognized:

During the year 2020, the Company recognized US$(24) million net impairment loss on financial and contract assets.

The limited amount of loss allowance recognized by the Company over 2020 reflects the creditworthiness of the Company’s client portfolio.