Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information Risk Our response to the risk Key observations communicated to the Audit Committee Allowance for expected credit loss • We obtained an understanding, performed Although the loan loss walkthroughs and tested the design and allowance is by nature Expected credit loss allowance GEL 313.5m, operating effectiveness of key controls across highly judgmental, based (2017: GEL 279.3m) the processes relevant to the ECL. This on the results of our included the controls over, data accuracy and audit procedures, we The allowance for expected credit loss is highly completeness, credit monitoring, allocation concluded that the loan judgmental and changes in assumptions could of borrowers into their respective impairment loss allowance is within have a material impact on reported profits. stages, individual provisioning and production a reasonable range and of journal entries and disclosures. properly presented in On 1 January 2018, a new accounting standard • Using our internal IFRS9 specialists, we accordance with IFRS for financial instruments (IFRS9) became assessed and challenged the Company’s as at 31 December 2018. effective, which requires loan impairment based IFRS9 provisioning methodology to determine on expected credit losses, rather than the that the new accounting standard had been incurred loss model previously required by IAS39. interpreted appropriately. • Using our modelling specialists, we tested The allowance for expected credit loss is the assumptions, inputs and formulae used in calculated using a combination of a collective the ECL model to confirm that the model was provisioning model and specific loan provisions. consistent with the stated methodology. This included assessing the appropriateness of the Both collective and specific provisioning depend model design and formulae used, recalculating on a number of assumptions and judgments the PD, LGD and EAD on a sample basis. including: • We assessed the appropriateness of • accounting interpretations and modelling the macroeconomic scenarios used by assumptions used to build the models for management and tested that they had been calculating the expected credit loss (ECL); properly applied in the ECL calculations • allocation of loans to stage 1, 2 or 3 based on • We tested the completeness and accuracy credit risk using criteria set in accordance with of key data inputs used in ECL model by IFRS9; reconciling loans and advances between the • estimation of probability of default (PD), loss underlying source systems and the ECL model. given default (LGD) and exposure at default • We challenged the criteria used to allocate (EAD), including the valuation of collateral; assets to stage 1, 2 or 3 in accordance with • inputs and assumptions used to estimate the IFRS 9. For a sample of loans we independently impact of multiple economic scenarios; and assessed whether they had been allocated to • measurement of individually assessed the appropriate stage. provisions, including expected future cash • For a sample of stage 3 credit impaired loans flows and the valuation of collateral. we evaluated the basis on which the allowance was determined and the evidence supporting There are also risks over: the management analysis; independently the accuracy and completeness of underlying challenged whether the key assumptions • loan data used in the ECL model; and inputs used, such as recovery strategies, the accuracy and adequacy of financial collateral rights and valuations and ranges of • statement disclosures. potential outcomes, were appropriate in the borrower’s circumstances; and we re-calculated As a consequence of the judgment involved in the impairment allowance. establishing the allowance, there is a greater risk • We verified the appropriate restriction of the of misstatement in this balance, either by fraud property pledged as collateral to the Georgian or error, including through the potential override public real estate register and, for real estate of controls by management. collateral where the valuation changed by more than 10% compared to the prior year The risk has increased in the current year as and for new real estate collateral, we reviewed a result of the first time application of IFRS 9. the details of the valuation and validated the reasonableness of the new value by Refer to the Audit Committee Report (page benchmarking major inputs to publicly available 122); Accounting policies (pages 188-194, 201- market data. 203 and 207-210); and Note 10 to the financial • We assessed the adequacy and statements appropriateness of disclosures for compliance with the requirements of IFRS. Annual Report 2018Bank of Georgia Group PLC 157