Annual Report 2019

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF CIM FINANCIAL SERVICES LTD CIM FINANCIAL SERVICES LTD / ANNUAL REPORT 2019 62 REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED) Key Audit Matter How the matter was addressed in the audit Expected Credit Losses (ECL) – Facilities which are not Credit-Impaired The determination of ECL on the facilities which are not credit-impaired involves a very high level of management judgement, thus requiring greater audit attention. Specific areas of judgement and estimation uncertainty include: • Identification of a significant increase in credit risk (SICR) and in particular the selection of criteria to identify a SICR. These criteria are highly judgemental and can materially impact the ECL recognised for certain portfolios where the life of the facilities is greater than 12 months; • Complexity of the ECL model involving a number of critical assumptions in the determination of probabilities of default (PD), loss given default (LGD) and Exposure at default (EAD); • Use of forward-looking information to determine the likelihood of future losses being incurred; • Qualitative adjustments made to model driven ECL results raised to address model limitations, emerging risks and trends in underlying portfolios which are inherently judgemental; • Accuracy and adequacy of the financial statement disclosures. For stage 1 and stage 2 loans, we assessed the appropriateness of the model used including the inputs and assumptions by performing the following procedures: • With the support of our internal specialist, we carried out the following: reviewing the methodology adopted by the Group for calculation of ECL and in particular the segmentation of facilities in appropriate portfolios reflecting different risk factors. Our review also includes an assessment of the design of the models used for determination of Probability of default (EAD) for different types of facilities; • Checking the adequacy and quality of the data used for the calculation of PD, LGD and EAD; • Assessing the key assumption used in PD, LGD and EAD models and ensuring such assumptions reflect the actual behaviours of the credit facilities; • Reviewing the criteria for staging of credit exposures and ensuring these are in line with the requirement of IFRS 9 including any backstops used in the methodology; • Checking the accuracy of critical data elements input into the system used for credit grading and the approval of credit facilities; • Review of the PD and LGD calculations including the incorporations of forecast macro-economic information by our data modelling specialists; • Testing the accuracy and completeness of the ECL model through reperformance; and • Assessing the adequacy and appropriateness of disclosures for compliance with the financial reporting standards including disclosure of transition form IAS 39 to IFRS 9.