CFSL - Annual report 2018

Report on the Audit of the Financial Statements (Continued) Key Audit Matter How the matter was addressed in the audit Impairment of loans and advances and investment in leases and other credit agreements The Group has hire purchase and other credit agreements, loans and advances and net finance lease receivables (collectively referred to as “Loans and Advances”) portfolio of MUR 10,503.3m as at 30 September 2018. As explained in the accounting policies, these assets are carried at amortised cost, less allowance for credit impairment (MUR 575.5m). This provision is accounted for if, at the reporting date, there is objective evidence, for example the existence of payment arrears, that not all the contractually agreed cash flows will be collected. Failure to promptly recognise objective evidence of the risk of uncollectability and/or errors in the provisioning can result in incorrect valuation of the loan and advances and investment in portfolio in the financial statements. Refer to Note 2 for accounting policies on loans and advances and allowance for credit impairment. Given the relative size of loans and advances (60% of total assets), we identified the valuation of loans and advances as a key audit matter. We assessed and tested the design and operating effectiveness of the controls over specific and collective impairment calculations including the quality of underlying data and systems. Collective impairment allowances are calculated based on the guidelines imposed by the Bank of Mauritius. Such guidelines require the Group to make portfolio provisions of not less than 1% on unimpaired loans and advances. As this basis represents a departure from IAS39, the Group also determines what the collective impairment would have been under the standard using the incurred loss model and evaluates the impact of the departure. We reviewed the portfolio provisioning under both bases and assessed the impact of the difference on the overall presentation of the financial statements. In respect of the provisioning according to the guidelines of the Bank of Mauritius, we assessed the correctness of the calculation made by management, through re-performance, and the identification of loans to be included within the calculation. For collective impairment under IAS39, we assessed the appropriateness of the model used including the inputs and assumptions and we re-performed calculation of the impairment. For specific impairments, judgement is required to determine when an impairment event has occurred and then to estimate the expected future cash flows discounted at the original effective interest rate of the loans and advances. Where cash flows for large credits include the realisable value of collateral securing the credit, the value of such collateral is based on the opinion of independent and qualified appraisers. We thus evaluated the appropriateness of these valuations in relation to the impairment assessment. We assessed that loans and advances with objective evidence of impairment have been properly identified by management by: • Reviewing the minutes of the Debtors Monitoring Committee; and • Obtaining loans and advances arrears reports and testing that arrears exceeding the internally predefined periods are included in the specific impairment analysis; Identifying loans and advances displaying certain characteristics such as financial difficulties of the borrower, restructured loans, insufficient collaterals and exposures to sectors in decline. For loans andadvances showingan indicationof impairment, we independently assessed the appropriateness of provisioning methodologies and policies and formed an independent view on the levels of provisions booked based on the detailed loan and counterparty information in the credit files. 51 CIM FINANCIAL SERVICES LTD ANNUAL REPORT 2018