INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF FINANCE HOUSE P.J.S.C

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.


Key audit matter How our audit addressed the Key audit matter
Valuation of unquoted investments (refer to Note 5)

Unquoted investments comprise a portfolio of equity investments. These instruments are measured at fair value with the corresponding fair value change recognised in other comprehensive income.  The fair value of these financial instruments is determined through the application of valuation techniques which often involve the exercise of judgment by the management and the use of assumptions and estimates and therefore we considered valuation of unquoted investments as a key audit matter.

 

Estimation uncertainty exists for those instruments not traded in an active market and where the internal modelling techniques use:

  • significant observable valuation inputs (i.e. level 2 investments) and
  • significant unobservable valuation inputs (i.e. level 3 instruments)

 

Estimation uncertainty is particularly high for level 3 instruments.

 

In the Group’s accounting policies, management has described the key sources of estimation involved in determining the valuation of level 2 and level 3 financial instruments and in particular when the fair value is established using valuation techniques due to the instruments complexity or due to the lack of availability of the market based data.

 

Refer to the significant accounting policies note 2.5 to the financial statements which explains the investment valuation methodology used by the Group and note 37 which explains critical judgments and estimates.

We performed an assessment of the methodology and the appropriateness of the valuation models and inputs used to value available for sale investments against industry practice and valuation guidelines.

 

We tested the valuation of a sample of level 3 available for sale investments.  As part of these audit procedures, we assessed key inputs and assumptions used in the valuation such as the expected cash flows, risk free rates and credit spreads by benchmarking them with external data and investigated significant differences.

 

In order to assess the frequency of the available prices for Level 2 available for sale investments, we tested a sample of investments valuations:

  • to establish how many institutions contributed to pricing inputs and how wide the ranges of observable quotes were; and
  • performed our own independent price checks using external quotes for liquid positions and, where available, for illiquid positions.

 

Key audit matter How our audit addressed the Key audit matter
Impairment of loans and advances and Islamic financing and investing assets (refer to note 6)

At 31 December 2017, the gross loans and advances and Islamic financing and investing assets were AED 2,491 billion against which impairment provisions of AED 247 million were maintained. These include impairment against specific loans and collective impairment recorded on a portfolio basis through modelling techniques.

We considered this as a key audit matter as the Group makes subjective judgements and assumptions to determine the impairment and the timing of recognition of such impairment provision.

In particular the determination of impairment against loans and advance includes:

  • The identification of impairment events and methods and judgments used to calculate impairment against specific corporate loans and advances;
  • The use of assumptions underlying the calculation of collective impairment for portfolios of loans and advances, and the use of the models to make those calculations;

Refer to the significant accounting policies note 2.5 to the financial statements, note (b-ii and b-iii) which contains the disclosure of significant accounting estimates relating to impairment against loans and advances and note 6 which contains the disclosure of impairment against loans and advances

We tested a sample of controls exercised by management with regard to the provision of impairment of loans and advances and Islamic financing and investing assets. These include the following:

  • the identification of impairment events;
  • manual controls over the timely identified of impaired loans and advances;
  • the transfer of data between underlying source systems and the impairment models that the Group operates;
  • the review and approval process that management have in place for the outputs of the Group’s impairment models.

In addition to the above, we have performed the following substantive procedures:

We assessed the criteria for determining whether an impairment event had occurred and therefore whether there was a requirement to calculate an impairment provision. For this purpose, we tested a sample of performing loans with characteristics that might imply an impairment event had occurred to challenge whether all impairment events had been identified by management. We also randomly selected a sample of performing loans to further challenge whether impairment events, if any had been identified by management.

Where impairment was individually calculated, we assessed the latest developments relating to the borrower and the basis of measuring the impairment provisions and considered whether key judgments were appropriate given the borrowers’ circumstances. We also re-performed management’s impairment calculation. In addition, we tested key inputs to the impairment calculation including the expected future cash flows, discount rates and valuation of collateral held.

For the collective impairment models used by the Group, we tested the completeness and accuracy of the underlying loan information used in the impairment models by agreeing details to the Group’s source systems.  For the key assumptions in the model, we challenged management to provide objective evidence that they were appropriate.