102 JUST GROUP PLC Annual Report and Accounts 2020
INDEPENDENT AUDITORS’ REPORT continued
Key audit matter
How our audit addressed the key audit matter
Valuation of investments classified as Level 3 under IFRS 13, including Lifetime Mortgages (Group) Refer to Audit Committee Report, Accounting policy 1.18 Financial investments and note 17 Fair value.
The valuation of investments classified as Level 3 is typically based on either inputs into a valuation model or observable prices for proxy positions. This is inherently complex and requires the use of significant management judgement. Furthermore, the balances are material to the financial statements. This comprises investments in certain illiquid debt instruments, commercial mortgages and Lifetime Mortgages.
We performed the following procedures to tests the valuation of the investments classified as level 3 (excluding Lifetime Mortgages): • Validated the design adequacy and operating effectiveness of management’s controls, including the dual pricing control; • Obtained independent confirmations from third party asset managers (where relevant); For a sample of positions, we performed the following procedures: • Engaged our valuation experts to assess the reasonableness and appropriateness of the internal or external valuation methodology applied; • Performed an independent revaluation and investigated any variances outside of our tolerable threshold; and • Tested inputs into the valuation to external sources, where possible. For Lifetime Mortgages, we performed the following procedures: • Validated the design and operating effectiveness of controls related to the accuracy and completeness of data used in the modelling of Lifetime Mortgages; • For a sample of mortgages, agreed data used in the modelling of Lifetime Mortgages to policyholder documentation; • Understood the process and tested controls in place over the determination of the valuation of loans secured by residential mortgages, including those relating to model inputs, model operation and extraction and consolidation of results from the valuation models; • Using our actuarial specialists, applied our industry knowledge and experience to assess the appropriateness of the methodology, models and assumptions used against recognised actuarial practices; • Performed detailed audit testing of the model calculations or ‘model baselining’ as part of our first year audit. We used our own modelling tools to replicate the asset cash flows for a sample of policies in order to validate that the models calculations are operating as intended; • Evaluated the appropriateness of significant economic assumptions, including the property price inflation assumption and property price volatility assumptions used within the valuation process, with reference to market data and industry benchmarks where available; • Assessed the appropriateness of current property prices by obtaining management’s recent external surveyor reports for a sample of properties and recomputing the application of the ONS indices to property data; • Tested the key judgements involved in the preparation of the manually calculated components of the asset balance, and the accuracy of the calculations; • Evaluated the Group’s historic redemptions data used to prepare the Group’s mortality, morbidity and voluntary redemptions experience analysis, together with industry data on expectations of future mortality improvements and assessed whether this supports the assumptions adopted; and • Used the results of an independent PwC benchmarking survey on the valuation of Lifetime Mortgages to further challenge the assumptions and modelling approach adopted, relative to the Group’s industry peers. We also considered the adequacy of the Group’s disclosures in relation to the valuation of those assets designated Level 3, in particular the sensitivity of the valuations adopted to alternative outcomes and details of the sale of a tranche of mortgages during the year. Based on the work performed and the evidence obtained, we consider the valuation of level 3 assets to be appropriate.
Powered by FlippingBook