Annual Report 2019

CIM FINANCIAL SERVICES LTD / ANNUAL REPORT 2019 61 REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED) Key Audit Matter How the matter was addressed in the audit Expected Credit Losses (ECL) – Impaired Facilities IFRS 9 was implemented by the Group on October 1, 2018. This new standard required the Group to recognise Expected Credit Losses (ECL) on net investment in leases and other credit agreements, and loans and advances (collectively referred to as “Facilities”) which involves significant judgement and estimates to be made by the Group. The carrying value of the facilities may be materiallymisstated if judgements or estimates made by the Group are inappropriate. The Group’s facilities stood at MUR 12,478 million at 30 September 2019 and these facilities are subject to allowance for credit losses of MUR 597 million for impaired facilities and MUR 73 million for non-impaired facilities respectively. In accordance with IFRS 9, a financial asset is considered credit impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Identification of credit impaired facilities and determination of the expected credit losses thereon involves significant judgement, estimates and assumptions regarding (i) the determination of whether a facility is credit impaired and (ii) in estimating the expected recoverability of the Group from the obligors. This also includes an estimate of what the Group can realise from the collaterals it holds as security on the impaired facilities. We performed audit procedures on the balances at October 1, 2018 to gain assurance on the transition from IAS 39. This included evaluating the accounting interpretations for compliance with IFRS 9 and testing the adjustments and disclosures made on transition. We reviewed and assessed the design of the controls over the identification of facilities that are credit-impaired and the related calculations of expected credit losses, including the quality of underlying data and systems. This included the criteria definition of performing and non-performing credit facilities, model governance, data accuracy and completeness, credit monitoring, individual provisions and production of journal entries and disclosures. We evaluated whether facilities that are credit-impaired have been properly identified by management through: • Reviewing the minutes of the Debtors Monitoring Committee; • Obtaining facilities` arrears reports and testing that arrears exceeding 90 days are included in the stage 3 impairment assessment of the ECL models; and • Identifying facilities meeting certain criteria such as financial difficulties of the borrower, restructured loans, insufficient collaterals and exposures to sectors in decline. Where exposures were determined to be credit-impaired our procedures involved assessing the reasonability of the estimate of the expected future cash flows used in measuring the ECL which include the following: • We independently assessed the provisioning methodologies and policies and formed an independent view on the levels of provisions booked based on the detailed loan and counterparty information contained in the credit files; • Where exposures are collateralised, we evaluated the Group’s legal right to the collateral, as well as the appropriateness of the valuations in relation to ECL determination; and • 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 assessed the independence and the qualifications of the appraisers.