VKF_FRAE_2018_uyg11

122 Part III: Financial Highlights and Assessment of Risk Management Key Audit Matters How Our Audit Addressed the Key Audit Matter The Bank has developed new and complex models, that requires data to be derived from multiple systems and has not been part of the financial reporting process before for determining significant increase in credit risk and calculation of TFRS 9 expected credit losses. Our audit was focused on this area due to existence of complex estimates and information used in the impairment assessment such as macro-economic expectations, current conditions, historical loss experiences; the significance of the loan balances; the classification of loans as per their credit risk (staging) and the importance of determination of the associated expected credit loss. Timely and correct identification of default event and significant increase in credit risk and level of judgements and estimations made by the management have significant impacts on the amount of impairment provisions for loans. Therefore, this area is considered as key audit matter. First time application of TFRS 9 The Bank has adopted TFRS 9 to replace “TAS 39 Financial Instruments: Recognition and measurement” as of 1 January 2018. Transition resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. The impact of the first application of TFRS 9 and relevant disclosures are presented in Section 3 Part 1 in the accompanying unconsolidated financial statements as at 31 December 2018. TFRS 9 Financial Instruments Standard consists of three phases: Phase 1 - Classification and measurement of financial assets and financial liabilities; Phase 2 - Expected credit losses and Phase 3 - Hedge accounting. Management assessed the business model to determine whether its financial assets are held to collect, held to collect and sell or other. For the financial assets in every business model, management has performed assessment for each type of product to conclude whether the cash flows from financial instruments fulfil the solely of payment of principal of interest criteria (‘SPPI’). • To assess appropriateness of the Bank’s determination of staging for credit risk, identification of impairment and timely and appropriate provisioning for impairment under TFRS 9, we have performed loan review procedures based on a selected sample. • We assessed accuracy and completeness of the disclosures in the financial statements the Bank presented in relation to expected credit losses. With respect to classification and measurement of financial assets and financial liabities, our audit procedures comprised the following; We have read the Bank’s TFRS 9 based classification and measurement policy for financial assets and financial liabilities, and compared it with the requirements of TFRS 9. We obtained and reviewed the Bank’s business model assessment. We assessed criterias used to determine contracts which give rise to cash flows that are solely payments of principal and interest, and tested contracts representing product groups based on a selected sample.