Affin Bank Berhad | Annual Report 2020

421 AFFIN BANK BERHAD 197501003274 (25046-T) | ANNUAL REPORT 2020 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF AFFIN BANK BERHAD (Incorporated in Malaysia) Company No: 197501003274 (25046-T) REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED) Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the Group and of the Bank for the current financial year. These matters were addressed in the context of our audit of the financial statements of the Group and of the Bank as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matters Impairment of loans, advances and financing assets - RM779,777,000 (expected credit losses) (Refer to Summary of Significant Accounting Policies Note H (d), Note AF and Note 9 to the financial statement). MFRS 9 requires an expected credit losses (‘ECL’) impairment model for financial assets measured at amortised cost and fair value through other comprehensive income. The measurement of ECL requires the use of complex models and significant assumptions about future economic conditions and credit behaviour. We focused on the ECL for loans, advances and financing due to the significance of impairment allowance on loans, advances and financing assets balance. The Directors also exercised significant judgement on the following areas: Timing of identification of Stage 2 and Stage 3 loans, advances and financing • Assessment of objective evidence of impairment of loans, advances and financing based on mandatory and judgemental triggers • Identification of loans, advances and financing that have experienced a significant increase in credit risk Individual assessment • Estimates on the amount and timing of futures cash flows based on realisation of collateral or borrowers’ business cash flows How our audit addressed the key audit matters We tested the design and operating effectiveness of the controls over impairment of loans, advances and financing. These controls covered: • Identification of loans displayed indicators of impairment or loans that have experienced significant increase in credit risk • Governance over the impairment processes, including model development, model approval and model validation • Data used to determine the allowances for credit losses including the completeness and accuracy of the key inputs and assumptions into the ECL models • Calculation, review and approval of the ECL calculation Our detailed testing over the loans, advances and financing were as below: Individual assessment We performed individual credit assessment on a sample of loans, advances and financing on those identified as Early Control, rescheduled and restructured, Stages 2 and 3 loans accounts, particular focus on the impact of Covid-19 on high risk industries and borrowers that applied for moratorium and formed our own judgement on whether the occurrence of loss event or significant increase in credit risk had been identified. Where individual impairment had been identified for loans, advances and financing, we assessed the reasonableness of the underlying assumptions of the cash flows forecasts prepared by management. For cash flows forecasts based on realisation of collateral, we agreed the collateral valuation to the current valuation report prepared by independent valuers. If current valuation report is not available, we compared the value used by management against the independent third party publicly available report on property market based on similar property type, location and size. For cash flow forecasts based on borrower’s business cash flows, we assessed the reasonableness of the underlying key assumptions used by management and performed sensitivity analysis.