Integrated Annual Report 2024-25 348 Impairment of loans and advances to customers in financial services business See Note 2(e)(v) to consolidated financial statements The key audit matter How the matter was addressed in our audit As at March 31, 2025, the carrying value of loan assets in financial service business aggregating Rs 127,587 crores, against which an impairment loss of Rs 4,075 crores has been recorded. This mainly includes the loan given by Mahindra & Mahindra Financial Services Limited, a subsidiary of the Holding Company (‘MMFSL’ or ‘Component’). The Component recognized impairment provision for loan assets based on the Expected Credit Loss (“ECL”) approach laid down under ‘Ind AS 109 - Financial Instruments’. The estimation of ECL on financial instruments involves significant management judgement and estimates and the use of different modelling techniques and assumptions which could have a material impact on reported profits. Significant management judgement and assumptions involved in measuring ECL is required with respect to: • ensuring completeness and accuracy of the data used to create assumptions in the model. • determining the criteria for a significant increase in credit risk. • factoring in future economic assumptions techniques used to determine probability of default, loss given default and exposure at default. These parameters are derived from the Component’s internally developed statistical models and other historical data. The disclosure regarding Component’s application of Ind AS 109 are key to explaining the key judgements and material inputs to the ECL results. Considering the significance of the above matter to the overall financial statements and extent of management’s estimates and judgements involved, it required significant auditor attention. Accordingly, the financial services business have identified this as a key audit matter. The audit procedures applied by the component joint auditors included assessing appropriateness of component management’s judgement and estimates used in the impairment analysis through procedures that included, but were not limited to, the following: • O btained an understanding of the modelling techniques adopted by the Component including the key inputs and assumptions; • C onsidered the accounting policies for estimation of Expected Credit Loss on loans and assessing compliance with the policies in terms of Ind AS 109; • Obtained an understanding of the management’s updated processes, systems and controls implemented in relation to impairment allowance process. • Accuracy of the computation of the ECL estimate including reasonableness of the methodology and assumption used to determine macro- economic overlays; • Tested the design and operating effectiveness of key controls over completeness and accuracy of the key inputs and assumptions considered for calculation, recording, monitoring of the impairment loss recognized and staging of assets; • Assessed the critical assumptions and input data used in the estimation of Expected Credit Loss models for specific key credit risk parameters, such as the movement logic between stages, Exposure at default (EAD), probability of default (PD) or loss given default (LGD); • Evaluated the reports and working for the methodology used in the computation of Through The Cycle PD, Point In Time PD and LGD, among others; • Performed test of details over calculation of ECL, in relation to the completeness and accuracy of the data; • Obtained written representations from management and those charged with governance on whether they believe significant assumptions used in calculation of expected credit losses are reasonable; and • Assessed the appropriateness and adequacy of the related presentation and disclosures of “Financial Risk Management” disclosed in financial statements in accordance with the applicable accounting standards. Information Technology and General Controls in the financial services business The key audit matter How the matter was addressed in our audit The component relating to the financial services business (‘the Component’) is highly dependent upon its Information Technology (IT) systems for carrying out its operations and owing to the significant volume of transactions that are processed daily basis as part of the operations, which impacts key financial accounting and reporting. The Component has put in place the IT General Controls and application controls to ensure that the information produced by the Component is complete, accurate and reliable. Among other things, the Management also uses the information produced by the entity’s IT systems for accounting and preparation and the presentation of the financial statements. Since our audit strategy included focus on entity’s key IT systems relevant to our audit due to their potential pervasive impact on the financial statements of financial services business, we have determined the use of IT systems and related control environment for accounting and financial reporting as a key audit matter. The audit procedures of the component joint auditors of the Component for assessment of the IT systems and controls over financial reporting, which includes carrying out the key audit procedures, but were not limited to the following: • Obtained an understanding of the Component’s key IT systems, IT General Controls which covered access controls, program / system changes, program development and computer operations i.e., job processing, data / system backup and incident management and application controls relevant to the audit; • T ested the design, implementation and operating effectiveness of the general IT controls over the key IT systems that are critical to financial reporting. This included evaluation of entity’s controls to ensure segregation of duties and access rights being provisioned / modified based on duly approved requests, access for exit cases being revoked in a timely manner and access of all users being recertified during the period of audit; • T ested application controls (automated controls), related interfaces and report logic for system generated reports relevant to the audit of loans, expenses, payroll, borrowings and investment among others, for evaluating completeness and accuracy;
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