| 112 Annual Report | 2023-2024 Arohan Financial Services Limited Independent Auditors’ Report of even date on the financial statements of Arohan Financial Services Limited for the year ended March 31, 2024 (cont’d) Sr. No Key Audit Matter How the Key Audit Matter was addressed in our audit 1 Impairment of Loans including Expected Credit Loss (“ECL”) Refer Note 3(k) for material accounting policies and Note 41A for credit risk disclosures. The Company has reported gross loan assets of INR 678,619.46 lacs against which an impairment loss of INR 17,045.67 lacs has been recorded. The Company recognised impairment provision for loan assets based on the Expected Credit Loss approach laid down under ‘Ind AS 109 – Financial Instruments’. The calculation of impairment losses on loans is complex and is based on the application of significant management judgement and the use of different modelling techniques and assumptions which are uncertain and could have a material impact on reported profits. The Company has applied a three-stage approach based on changes in credit quality to measure expected credit loss on loans which is as follows: • If the loan is not credit-impaired on initial recognition, then it is classified in ‘Stage 1’ and its credit risk is continuously monitored by the Company i.e. the default in repayment is within the range of 0 to 30 days. • If a significant increase in credit risk since initial recognition is identified, it is moved to ‘Stage 2’ but is not yet deemed to be credit-impaired i.e. the default in repayment is within the range of 31 to 90 days. • If the loan is credit-impaired, it is then moved to ‘Stage 3’ i.e. the default in repayment is more than 90 days. Assessed the appropriateness of management’s judgment and estimates used in the impairment analysis through procedures that included, but were not limited, to the following: • Obtained an understanding of the modelling techniques adopted by the Company including the key inputs and assumptions. Since modelling assumptions and parameters are based on historical data, we assessed whether historical experience was representative of current circumstances and was relevant in view of the recent impairment losses incurred within the portfolios. • Considered the Company’s accounting policies for estimation of expected credit loss on loans and assessed the compliance with the policies in terms of Ind AS 109. • Tested the design and operating effectiveness of key financial controls over the completeness and accuracy of the key inputs and assumptions considered for calculation, recording and monitoring of the impairment loss recognized. Also evaluated the controls over the modelling process, validation of data and related approvals. • Understood and challenged the aforesaid assumptions through our understanding of the risk profile of the customers of the Company. Independent Auditor's Report
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