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 consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.


Key audit matter How our audit addressed the Key audit matter
                        Measurement of Expected Credit Losses and related disclosures

                 

IFRS 9 ‘Financial instruments’ became effective from 1 January 2018 and replaced most of the guidance in IAS 39 – ‘Financial instruments’. In particular, the incurred loss impairment model under IAS 39 has been replaced with the Expected Credit Losses model (“ECL”). The Group has in previous years adopted the first phase of the IFRS 9 with regards to classification and measurement of financial instruments. The Group adopted the final phase of IFRS 9 with respect to impairment of financial assets with effect from 1 January 2018. The adoption of the ECL model under IFRS 9 has resulted in an increase in the impairment provision of AED 66.3 million which, has been recognised as an adjustment to retained earnings at 1 January 2018. The impairment charge for the year was AED 79.5 million.

The Group applies ECL on all the financial instruments measured at amortised cost, and debt instruments measured at fair value through other comprehensive income, and financial guarantee contracts including financing commitments.

 

The Group exercises significant judgements and makes a number of assumptions in developing its ECL models, which includes probability of default computation separately for retail and corporate portfolios, determining Loss Given Default (“LGD”) and Exposure at Default (“EAD”) for both funded and unfunded exposures, forward looking adjustments and staging criteria.

 

Measurement of ECL is considered as a key audit matter as the Group applies significant judgments and makes a number of assumptions in the staging criteria applied to the financial instruments as well as in developing ECL models for calculating its impairment provisions and judgments are involved in determining the disclosures under IFRS 7 and IFRS 9.

 

The Group’s impairment policy as per IFRS 9 is presented in Note 2.4 (f) to the consolidated financial statements.

 

 

 

 

We performed the following audit procedures on the computation of the  ECL included in the Group’s consolidated financial statements for the year ended 31 December 2018:

 

Ø  We involved our internal impairment modelling specialists to assess and review the following areas:

  • Conceptual framework used for developing the Group’s impairment policy in the context of it’s consistency with the requirements of IFRS 9.
  • ECL modelling methodology and calculations used to compute the Probability of Default (“PD”), Loss Given Default (“LGD”), and Exposure at Default (“EAD”) for the Group’s classes of financial instruments.
  • Reasonableness of the assumptions made in developing the modelling framework including assumptions used for estimating forward looking scenarios and significant increase in credit risk.
  • For a sample of exposures, we checked the appropriateness of determining EAD, including the consideration of repayments and the resultant arithmetical calculations.

 

Ø  We tested the completeness and accuracy of the data used in calculation of ECL.

 

Ø  For a sample of exposures, we checked the appropriateness of the Group’s staging of financial instruments.

 

Ø In addition, for the Stage 3 corporate portfolio, the appropriateness of provisioning assumptions were independently assessed for a sample of exposures selected on the basis of risk and the significance of individual exposures. An independent view was formed on the levels of provisions recognised, based on the detailed loan and counterparty information available in the credit file. For the Stage 3 retail portfolio, assumptions were independently assessed for each product category and an independent view was formed on the levels of provisions recognised at each category level.

 

 

Ø  We assessed the consolidated financial statement disclosures to ensure compliance with IFRS 7 and IFRS 9.