Page 114 - Capricorn IAR 2020

GLOSSARY OF TERMS ANNUAL FINANCIAL GLOSSARY OF TERMS STATEMENTS
INDEPENDENT AUDITOR’S REPORT (continued)
to the members of Capricorn Group Ltd
Key audit matter
How our audit addressed the key audit matter
Inclusion of forward-looking information and macroeconomic variables in the ECL calculation
• We evaluated the assumptions used in the forward-looking economic
model, specifically around the forward-looking scenarios used, the macroeconomic variables considered, as well as the macroeconomic outlook. We compared these to our internal actuarial and economic statistics and independent market data, with specific consideration of the impact of the COVID-19 pandemic, and found it to be comparable.
• For a sample of stage 3 exposures, we independently recalculated the ECL based on our assessment of the expected cash flows and recoverability of collateral at an individual exposure level. No material exceptions were noted.
• On a sample basis, we assessed whether the loss event (that is the point at which exposures are classified as credit-impaired) had been identified in a timely manner by considering watch lists as well as credit committee meeting minutes.
• For collateral held, we inspected legal agreements and other underlying documentation to assess the existence and legal right to collateral on a sample basis. No material exceptions were noted.
• On a sample basis, we tested the reasonability of haircuts used in collateral valuations by comparing the market value to recent sales that occurred. We compared the force sales value haircut to current market conditions. We found haircuts applied to be in line with recent market valuations.
• We tested whether loans are included in the correct loan stage by recalculating the days in arrears for a sample of loans. We noted that loans are correctly grouped in stages.
Calibrating of ECL statistical model components (PD, EAD, LGD)
• We obtained an understanding of the methodologies and assumptions used by management in the various ECL model components and how these were calibrated to use historical information and forward-looking information to estimate future cash flows. We assessed whether the methodologies applied were in line with International Financial Reporting Standard 9 – Financial Instruments, and whether the assumptions applied were comparable to available historical and market data. We found the methodologies to be consistent with the requirements of the standard, and accepted the assumptions applied.
• We utilised our actuarial expertise to reperform the ECL calculation on loans and advances and noted no material exceptions.
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