annual-report-FY2020

293 MAHINDRA & MAHINDRA LTD. INTEGRATED ANNUAL REPORT 2019-20 4. Impairment Loss Allowance in financial services business The key audit matter How the matter was addressed in our audit Within the financial services business, the Group recognised impairment loss allowance of Rs. 3,652 crores as at 31 March 2020 and recognised an expense for Rs. 1,722 crores in its statement of profit and loss. The determination of impairment loss allowance is inherently judgmental and relies on the Group’s best estimate due to the following: • Increased level of data inputs for capturing the historical data for the Probability of Default (‘PDs’) and Loss Given Default (‘LGD’) and the completeness and accuracy of the data; • Use of the Group overlays for considering the probability weighted scenarios, the forward looking macro-economic factors, economic environment and the timing of cash flows; • Criteria selected to identify significant increase in credit risk, particularly in respect of moratorium benefit given to eligible borrowers, as per the approved policy, read with the RBI COVID-19 regulatory package; and • Judgements and assumptions including the extent and duration of COVID-19, impact of governments and other authority actions, and the responses of businesses and consumers in different industries and the associated impact on the economy. The underlying forecasts and assumptions used in the estimates of impairment loss allowance are subject to uncertainties which are often outside the control of the Group. The extent to which the COVID-19 will impact the Group’s current estimate of impairment loss allowances is dependent on future developments, which are highly uncertain at this point. Given the size of loan portfolio relative to the balance sheet and the impact of impairment allowance on the financial statements, this is considered as a key audit matter. Refer note 2(k) – significant accounting policy for impairment of financial assets. Our audit procedures include: • Performed process walkthroughs to identify the key systems, applications and controls used in the impairment allowance processes; • Assessed the design and implementation of controls of the impairment allowance process including timely recognition of impairment loss, completeness and accuracy of reports used and the related disclosures on credit risk; • Obtained understanding of the impairment allowance process, systems and controls implemented, due to staging freeze as on 29 February 2020 as per the policy adopted consequent to the RBI COVID-19 regulatory package; • Tested that the periods considered for capturing underlying data as base to PD and LGD workings are in line with Company’s recent experience of past observed periods. Further, tested the accuracy of the key inputs and assumptions used in the PD and LGD workings for reasonableness; • Challenged the Group overlays, particularly in response to COVID-19 with assistance of our financial risk modelling experts. Evaluated the completeness of the risks which have been addressed by the Group through overlays. Tested the Group’s underlying documentation for the overlay quantum; and • Assessed the adequacy of the disclosures in the financial statements on key judgements, assumptions and quantitative data with respect to impairment loss allowance.  Other Information The Holding Company’s management and Board of Directors are responsible for the other information. The other information comprises the information included in the holding Company’s annual report, but does not include the financial statements and our auditors’ report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed and based on the work done/ audit report of other auditors, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.  Management’s and Board of Directors’ Responsibilities for the Consolidated Financial Statements The Holding Company’s Management and Board of Directors are responsible for the preparation and presentation of these consolidated financial statements in term of the requirements of the Act that give a true and fair view of the consolidated state of affairs, consolidated profit/ loss and other comprehensive income, consolidated statement of changes in equity and consolidated cash flows of the Group including its associates and joint ventures in accordance with the accounting principles generally accepted in India, including the Indian Accounting Standards (Ind AS) specified under section 133 of the Act. The respective Management and Board of Directors of the companies included in the Group and of its associates and joint ventures are responsible for maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of each company and for preventing and detecting frauds and other irregularities; the selection and application of appropriate accounting policies;