Annual Report 2022
Key audit matter
How our audit addressed the key audit
matter
Loan Impairment charges
We performed risk assessment procedures with the
purpose of achieving an understanding of it-systems,
business procedures and relevant controls regarding the
calculation of provisions for expected losses on loans.
Loans are measured at amortised cost less impairment
charges.
Loan impairment charges represent Management’s
best estimate of expected losses on loans at the
balance sheet date in accordance with the provisions
of IFRS 9 and as incorporated in the Executive Order
for the Faroe Islands on the Presentation of Financial
Statements of Credit Institutions and Investment
Companies, etc. Reference is made to the detailed
description of accounting policies in note 1.
In respect of controls, we assessed whether they were
designed and implemented effectively to address the risk
of material misstatement.
We reviewed and assessed the impairment charges
recognised in the income statement in 2022 and the
accumulated impairment charges recognised in the
balance sheet at 31 December 2022.
The Company makes provisions for expected losses
both on an individual basis in terms of individual
provisions and on a model-based basis.
We assessed the applied impairment model prepared by
the data centre SDC, including division of responsibilities
between the data centre and the Group
Due to the climate change, the Russian invasion of
Ukraine and macroeconomic uncertainty Management
has made a substantial provision to impairment
charges as an accounting estimate (management
judgement). The consequences of these matters for the
Group’s customers are uncertain, and therefore there
is an estimation uncertainty regarding this accounting
estimate. We focused on loan impairment charges, as
the accounting estimate is by nature complex and
influenced by subjectivity and thus to a large extent
associated with estimation uncertainty.
We assessed and tested the Group’s calculation of
impairment charges in stages 1 and 2, including
assessment of Management’s determination and
adaptation of model variables to the Group’s own
circumstances.
Our review and assessment included the Group’s
methods applied for the calculation of expected credit
losses as well as the procedures designed, including the
involvement of the credit department and Management,
and internal controls established to ensure that credit-
The following areas are central to the calculation of loan
impairment charges:
impaired loans in stage
3
and in stage 2,
underperforming, are identified and recorded on a timely
basis.
■
Determination of credit classification.
■
Model-based impairment charges in stages 1
and 2, including Management’s determination of model
variables adapted to the Group’s loan portfolio.
We assessed and tested the principles applied by the
Group for the determination of impairment scenarios and
for the measurement of collateral values of e.g. ships
and real estate included in the calculations of impairment
of credit-impaired loans in stage 3 and in stage 2,
underperforming.
■
The
Group’s
procedures
to
ensure
completeness of the registration of credit-impaired
loans (stage 3) or loans with significant increase in
credit risk (stage 2, underperforming).
■
Most significant assumptions and estimates
We tested a sample of credit-impaired loans in stage 3
and in stage 2, underperforming, by testing the
calculations of impairment charges and applied data to
underlying documentation.
applied by Management in the calculations of
impairment charges, including principles for the
assessment of various outcomes of the customer’s
financial position (scenarios) and for the assessment of
collateral values of e.g. ships and real estate included
in the calculations of impairment.
We tested a sample of other loans by making our own
assessment of stage and credit classification. This
included an increased sample of major loans, loans
within segments with generally increased risks including
segments particularly affected by the actual
macroeconomic situation.
■
Management’s assessment of expected credit
losses at the balance sheet date as a result of possible
changes in market conditions and which are not
included in the model-based calculation or individually
assessed impairment charges including in particular
the consequences for the Groups customers of the
current macroeconomic situation.
We reviewed and challenged Management’s estimates
of expected credit losses not included in the model-
based calculations or individually assessed impairment
charges based on our knowledge of the portfolio,
industry knowledge and knowledge of current market
conditions. Among other things, we had a special focus
on the rationale behind the management estimates to
Reference is made to note 1 of the Parent Company
Financial statements and the Consolidated Financial
Statements, ”Estimates and assumptions”, ”IFRS 9,
Financial Instruments” and “Impairment charges”, note
14, ”Credit risk management”, ”Changes to credit risks”
and ”Calculation of the expected credit loss” and
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