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2. Key audit matters: our assessment of risks of material misstatement 2. Key audit matters: our assessment of risks of material misstatement (cont.) Contents

The risk Our response The risk Our response
Contents
Impairment of loans and Subjective estimate: Our procedures included: Revenue recognition – EIR Subjective estimate: Our procedures included:
advances to customers accounting – Real Estate
The estimation of expected credit losses — Our financial risk modelling expertise: Using a spreadsheet based model, fees — Historical comparison: We critically
Allowance for impairment losses: (‘ECL’) on financial instruments, involves We involved our own financial risk modelling Finance earned and incurred on loans and assessed the expected paydown profile
(£14.8 million; 2020: £12.5m) significant judgments and estimates. specialists in evaluating the IFRS 9 models. EIR liability (£4.1 million; 2020: advances to customers are recognised assumptions against the Company’s recent
The key area where we identified We used our knowledge of the Company £3.1m) using the effective interest rate method historical experience of customer behaviour. Strategic Report
Refer to pages 97 to 99 and greater levels of management and our experience of the industry that the that spreads directly attributable
pages 108 to 118 (accounting judgement and therefore increased Company operates in to independently Refer to page 78 (accounting expected cashflows over the expected — Expectation vs outcome: We applied
policy and financial disclosures). levels of audit focus in the Company’s assess the appropriateness of the policy and financial disclosures). lives of the loans. alternative statistics based forecasting
estimation of ECL’s are: Company’s IFRS 9 models and key methodologies, based on actual
components. The directors apply judgement in redemptions experience, to create an
Model estimations – Inherently assessing the expected repayment independent expectation of the expected
judgmental modelling is used to — Our economic scenario expertise: We profiles used to determine the EIR repayment profiles and hence the calculated
estimate ECLs, including for accounts in involved our own economic specialists to period. The most critical element of EIR adjustment. We compared our result to
stage 3 which are individually assessed. assist us in assessing the appropriateness judgement being the expected paydown the Company’s EIR adjustment and
This involves determining Probabilities of the Company’s methodology for profile of the loans. The directors have assessed whether the expected repayment
of Default (‘PD’), Loss Given Default determining the economic scenarios used determined this estimate with reference profile assumptions were appropriate.
(‘LGD’), and Exposures at Default and the probability weightings applied to to product mix, historical customer — Methodology implementation: We
(‘EAD’). The LGD, including collateral them. We assessed the four key economic behaviour since the origination of the assessed the methodology applied by Corporate Governance Statement
valuations, and PD model are the key variables which included agreeing the Company in 2012, and management management against IFRS 9 requirements
drivers of the Company’s ECL results economic variables to external sources. We judgement over future redemption and performed recalculations. This included
also assessed the overall reasonableness of
and are therefore the most significant the economic forecasts by comparing the profiles of the loans. considering the ongoing appropriateness of
judgmental aspect of the Company’s Company’s forecasts to our own modelled The effect of these matters is that, as fees and costs included or excluded from
ECL modelling approach. part of our risk assessment, we the EIR calculation.
forecasts. As part of this work we assessed
the reasonableness of the Company’s determined that cash flows recognised
Economic scenarios – IFRS 9 requires considerations of the current on an effective interest rate basis have a — Assessing transparency: We assessed the
the Company to measure ECLs on an macroeconomic uncertainty. high degree of estimation uncertainty for adequacy of the Company’s disclosures
unbiased forward-looking basis the Real Estate Finance loan book, with regarding the degree of estimation involved
reflecting a range of future economic — Tests of details: We sample tested key a potential range of reasonable in arriving at the interest income recognised
conditions. Significant management inputs and assumptions impacting ECL outcomes greater than our materiality and its sensitivity to key assumptions.
judgement is applied to determine the calculations, specifically those used in the for the financial statements as a whole. Our results
economic scenarios used, and the determination of probability of default and The financial statements disclose the
probability weightings assigned to each loss given default. This included performing sensitivities estimated by the Company. We found the resulting estimate of EIR to be
economic scenario. sensitivity analysis to understand the acceptable (2020: acceptable).
significance of certain assumptions; Independent Auditor’s Report
Significant Increase in Credit Risk benchmarking procedures to compare the
(‘SICR’) – The criteria selected to Company’s key assumptions to comparable
identify a significant increase in credit peer group organisations; and assessing the
risk is a key area of judgement within key assumptions against the Company’s We continue to perform procedures over privileged user access management. However, following the implementation of
the Company’s ECL calculation as these historical experience. Additionally, we satisfactory mitigating actions by management during the financial year, we have not assessed this as one of the most significant
criteria determine whether a 12 month performed detailed credit file reviews of the risks in our current year audit and, therefore, it is not separately identified in our report this year.
or lifetime provision is recorded. stage 3 individually assessed impaired loans
to determine they were appropriately
The effect of these matters is that, as assessed and reserved.
part of our risk assessment, we
determined that the ECL on loans and — SICR: We assessed the ongoing
advances has a high degree of effectiveness of the SICR criteria and
estimation uncertainty, with a potential independently calculated the loans’ stage for
range of reasonable outcomes greater the Company’s loans and receivables. Financial Statements
than our materiality for the financial — Assessing transparency: We evaluated
statements as a whole. The financial whether the disclosures appropriately reflect
statements disclose the sensitivities and address the uncertainty which exists
estimated by the Company when determining the Company’s overall
ECL. As a part of this, we assessed the
Disclosure quality: sensitivity analysis that is disclosed. In
The disclosures regarding the addition, we challenged whether the
Company’s application of IFRS 9 are key disclosure of the key judgments and
to explaining the key judgements and assumptions was sufficiently clear.
material inputs to the IFRS 9 ECL Our results
results.
— We found the resulting estimate of the ECL
impairment provision to be acceptable
(2020: acceptable). Notes to the Financial Statements

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