MAHINDRA & MAHINDRA LTD. | Integrated Annual Report 2021-22

284 COMPANY OVERVIEW BOARD’S REPORT MANAGEMENT DISCUSSION AND ANALYSIS CORPORATE GOVERNANCE BUSINESS RESPONSIBILITY REPORT STANDALONE ACCOUNTS CONSOLIDATED ACCOUNTS 2. Impairment loss allowance in the financial service business The key audit matter How the matter was addressed in our audit As at 31 March 2022, the carrying value of loan assets measured at amortised cost, aggregated Rs 67,660 crore (net of allowance of expected credit loss Rs 5,081 crore) constituting approximately 81% of the financial services’ business total assets. Significant judgement is used in classifying these loan assets and applying appropriate measurement principles. ECL on such loan assets measured at amortised cost is a critical estimate involving greater level of management judgement. As part of the component auditor’s risk assessment, they determined that the ECL on such loan assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes. The elements of estimating ECL which involved increased level of audit focus are the following: • Qualitative and quantitative factors used in staging the loan assets measured at amortised cost; • Basis used for estimating Probabilities of Default (“PD”), Loss Given Default (“LGD”) and exposure at Default (“EAD”) at product level with past trends; • Judgements used in projecting economic scenarios and probability weights applied to reflect future economic conditions; and • Adjustments to model driven ECL results to address emerging trends The audit procedures applied by the auditor of the component included: Examined the policies approved by the Board of Directors of the financial services business that articulate the objectives of managing each portfolio and their business models. The component auditors have also verified the methodology adopted for computation of ECL (“ECL Model”) that addresses policies approved by the Board of Directors, procedures and controls for assessing and measuring credit risk on all lending exposures measured at amortised cost. Additionally, the component auditors have confirmed that adjustments to the output of the ECL Model is consistent with the documented rationale and basis for such adjustments and that the amount of adjustment has been approved by the Audit Committee of the Board of Directors of the component. The audit procedures related to the allowance for ECL included the following, among others: • Testing the design and operating effectiveness of the following: o completeness and accuracy of the EAD and the classification thereof into stages consistent with the definitions applied in accordance with the policy approved by the Board of Directors of the component including the appropriateness of the qualitative factors to be applied; o completeness, accuracy and appropriateness of information used in the estimation of the PD and LGD for the different stages depending on the nature of the portfolio; and o accuracy of the computation of the ECL estimate including reasonableness of the methodology used to determine macro-economic overlays and adjustments to the output of the ECL Model. • Testing of details on a sample in respect of the following by the component auditor: o accuracy and completeness of the input data such as period of default and other related information used in estimating the PD; o the mathematical accuracy of the ECL computation by using the same input data as used by the component; o completeness and accuracy of the staging of the loans and the underlying data based on which the ECL estimates have been computed; o evaluating the adequacy of the adjustment after stressing the inputs used in determining the output as per the ECL Model to ensure that the adjustment was in conformity with the overlay amount approved by the Audit Committee of the component.