Page 113 - Capricorn IAR 2020

INDEPENDENT AUDITOR’S REPORT (continued)
to the members of Capricorn Group Ltd
Key audit matter
Expected credit losses (“ECL”) on loans and advances and financial assets at amortised cost
Refer to note 3.2 (Credit risk), note 4(a) (Critical accounting estimates and judgements in applying accounting policies), note 14 (Financial assets) and note 17 (Loans and advances to customers) to the consolidated and separate financial statements.
This key audit matter is applicable to the consolidated and separate financial statements.
At 30 June 2020, gross loans and advances amounted to N$41.5 billion against which ECL of N$1.5 billion was recognised for the Group.
Gross financial assets at amortised cost amounted to N$723.6 million, against which ECL of N$10.8 million was recognised for the Group. Gross financial assets at amortised cost for the company amount to N$462.3 million, against which ECL of N$167.4 million was recognised.
The measurement of ECL requires the use of complex models and significant assumptions about future economic conditions and credit behaviour.
Where customers are granted payment holidays, the Group compares the risk of default on these loans against the risk under the original terms, and determines whether there has been a change in credit risk through the use of specific models for modified assets.
Key areas of significant management judgement and estimation applied in the determination of ECL on loans and advances and financial assets at amortised cost are disclosed in notes 3.2 and note 4(a) to the consolidated and separate financial statements, and relate to the:
• Evaluation of significant increase in credit risk (“SICR”);
• Determination of the write-off point
• Inclusion of forward-looking information and macro-
economic variables in the ECL calculation
• Calibration of ECL statistical model components, i.e.:
probabilities of default (“PDs”), losses given default
(“LGDs”) and Exposure at Default (“EAD”)
• Impacts of the COVID-19 pandemic on the
determination of ECL on loans and advances and financial assets at amortised cost
We determined the measurement of ECLs on loans and advances and financial assets at amortised cost to be a matter of most significance to our current year audit due to the degree of judgement and estimation applied by management in determining the ECLs.
How our audit addressed the key audit matter
Our audit procedures addressed the key areas of significant judgement and estimation in forward-looking information and uncertainties in relation to the COVID-19 pandemic, as it relates to management’s determination of the ECL on loans and advances as follows:
Evaluation of SICR
We performed the following procedures, in respect of which we noted no material exceptions:
• We recalculated the impact of SICR, applying the assumptions and data
included in management’s model.
• We tested the performance of SICR thresholds applied and the resultant
transfer ratio into stage 2 for SICR. This included benchmarking of the volume of up to date accounts transferred to stage 2 against historical data.
• We tested, through inspection of relevant underlying documentation, a sample of loans and advances that were restructured using payment holidays as a result of the COVID-19 pandemic to assess whether the payment holidays were granted to qualifying clients only. We evaluated the SICR from the date of restructuring to the end of the reporting period.
Determination of write-off point
• We evaluated management’s assessment of historical post-write-off recoveries, to assess the point at which there was no reasonable expectation of further recovery. This was done by comparing management’s policy on write-offs to the actual historical write-offs. We found the policy to be in line with the historical trend.
• Through recalculation, we tested the application of the write-off policy, including the exclusion of post-write-off recoveries from the Loss Given Default (“LGD”).
• We tested write-offs and recoveries that took place during the current year on a sample basis, by agreeing the amount written off to management’s policy. We also agreed the amount as received per bank statements for recoveries to the amounts recorded. We noted no exceptions.
• We assessed write-offs on loans and advances which have been restructured by means of payment holidays granted, by evaluating such against the write-off policy. We noted no instances of non-compliance with the write-off policy.
• We tested, on a sample basis, whether SICR has been appropriately evaluated for on an account level by assessing the impact of COVID-19 on these accounts through evaluating payments made and reconciling this to instalments required.
• We evaluated whether there are indicators of SICR by comparing the staging of a sample of loans to an independent staging based on the assumptions and data included in management’s model, as well as on our own independent assumptions, in particular around the outlook on the economy due to the COVID-19 pandemic.
2020 INTEGRATED ANNUAL REPORT
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