INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF FINANCE HOUSE P.J.S.C
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements, and in forming our opinion thereon, and we do not provide a consolidated opinion on these matters.
Measurement of Expected Credit Losses (“ECL”) on loans and advances and Islamic financing and investing assets
Refer to note 6, 20 and 21 of the financial statements.
As at 31 December 2022, the Group has significant balance of loans and advances and Islamic financing and investing assets representing 64% of total assets.
The Group recognized allowances for credit losses on its consolidated statement of financial position using an expected credit loss model (“ECL”).
The Group exercises significant judgements and makes a number of assumptions in developing its ECL models which is determined as a function of the assessment of the probability of default (“PD”), loss given default (“LGD”), adjusted for the forward looking information, and exposure at default (“EAD”) associated with the underlying financial assets. Qualitative adjustments or verlays may also be recorded by the Group using credit judgement where the inputs, assumptions and / or modelling techniques do not capture all relevant risk factors.
Furthermore COVID-19 pandemic has significantly impacted management’s determination of ECL. The assumptions regarding the economic outlook are more uncertain which, combined with the government’s response (as it pertains to deferral programs), increases the level of judgement required by the Group in calculating the ECL, and the associated audit risk.
Given the inherent and significant auditor judgement required due to the use of complex models and effort in evaluating audit evidence related to the identification and calculation of qualitative adjustments and overlay adjustments to the ECL due to the impacts of current conditions and forecasts of future economic conditions, this is considered a key audit matter.
