Mega Bank Annual Report 2017

31 Annual Report 2017 -31- The credit services provided by the Bank and its subsidiaries, which are their main business activity, are primarily corporate credit facilitations. Impairment losses on bills discounted and loans are losses as a result of existing objective evidence of impairment that estimated future cash flows of loans may not be recovered. The Bank and its subsidiaries’ impairment assessment on bills discounted and loans is conducted in accordance with related regulations of IAS 39, ‘Financial Instruments: Recognition and Measurement’ and meet the related requirements of the competent authority. If there is existing objective evidence of impairment loss for significant credit facilitations which exceed a certain amount, then such facilitations are individually assessed. Impairment loss is primarily provisioned according to the future cash flows and collateral value of the borrower; if there is no existing objective evidence of impairment or if there is existing objective evidence of impairment but the credit facilitation does not exceed a certain amount, then assessment is conducted on a collective basis and impairment losses are estimated according to impairment parameters such as the impairment probability, recovery rate, and effective interest rate under each industry group. The aforementioned provision of impairment loss for bills discounted and loans includes the determination of future cash flows of individual assessment and impairment parameters for collective assessment. Because this involves subjective judgment and numerous assumptions and estimates, the method of determining assumptions and estimates will directly affect the related recognized amounts. Also, considering that loans account for approximately 56% of total assets, we have thus included the individual and collective impairment assessment of the Bank and its subsidiaries’ bills discounted and loans as one of the key audit matters in our audit. How our audit addressed the matter The procedures that we have conducted in response to specific aspects of the above-mentioned key audit matter are summarized as follows: 1. Understood and assessed the related policies, internal control system, and operation procedures of assumptions and estimates (including the impairment probability, recovery rate, future cash flows, and collateral value) used by the Bank and its subsidiaries in provisioning impairment losses for bills discounted and loans. 2. Sampled and tested internal controls related to the provision of impairment loss, including the identification of objective evidence for impairment loss, annual reviews, management of collateral and their value assessment, value assessment of collateral, controls for changing impairment parameters, and approval for provisioning of impairment loss. 3. Collective assessment (1) Evaluated the model parameter assumptions of the Bank and its subsidiaries’ collective assessments; un derstood the calculation logic of different group parameters (e.g. the impairment probability, recovery rate, and effective interest rate), as well as the status of periodic updates. (2) Sampled and tested the accuracy of impairment loss balances. (3) Filtered loan portfolio amounts of corporate facilitations under loans accounts using the system logic which incorporated the Bank’s policy to sample and test the accuracy of their respective impairment probability, recovery rate, and effective interest rates, as well as to examine their consistency with the financial statements. 4. Individual assessment (for credit facilitations with existing objective evidence of impairment loss that exceeded a certain amount) (1) Assessed the completeness of the watch list for credit facilitations for which objective evidence is existed. (2) Sampled and compared the consistency of the system’s judgment with samples which had been judged to have objective evidence of impairment. (3) Assessed the reasonableness of parameter assumptions (including the borrower’s time of past due, financial and operational status, and historical experience) for estimated future cash flows and the accuracy of calculation results for estimated future cash flows. 屯婈倗⎰㚫妰ⷓḳ⊁㇨ PricewaterhouseCoopers, Taiwan 11012 冢⊿ⶪᾉ佑⋨➢昮嶗ᶨ㭝 333 嘇 27 㦻 27F, No.333, Sec.1, Keelung Rd., Xinyi Dist., Taipei 11012, Taiwan T: +886 (2) 2729 6666 , F: +886 (2) 2729 6686 , www.pwc.tw