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FINANCIAL STATEMENTS
Key audit matter
How our audit addressed the key audit matter
Impact of uncertainties related to COVID-19 (Group and Company) Refer to Strategic Report, Going Concern and Viability Statement in the Directors’ Report, Audit Committee Report, note 17 Fair value and note 23 Insurance contracts and related reinsurance.
The impacts of the global pandemic due to the Coronavirus COVID-19 continue to cause significant social and economic disruption up to the date of reporting. In our audit we have identified the following key impacts of COVID-19: Ability of the entity to continue as a going concern There are a number of potential matters in relation to COVID-19 which could impact on the going concern status of the Group and Company. Using downside scenarios driven by the required Own Risk and Solvency Assessment (ORSA) process, the Directors have considered the ability of the Group and the Company to remain solvent with sufficient liquidity to meet future obligations. The Directors have also considered its requirements in respect of regulatory capital under Solvency II, including performing reverse stress testing on property exposure. The Directors have concluded that the Group and Company is a going concern. Impact on Estimation Uncertainty in the Financial Statements The pandemic has increased the level of estimation uncertainty in the financial statements. The Directors have therefore considered how COVID-19 has impacted the key estimates that determine the valuation of material balances, particularly insurance contract liabilities and financial investments. Qualitative Disclosures in the Annual Report and Financial Statements In addition, the Directors have considered the qualitative disclosures included in the Annual Report in respect of COVID-19 and the impact that the pandemic has had, and continues to have, on the Group and Company.
In assessing management’s consideration of the impact of COVID-19 on the Group and Company we have performed the following procedures: • Obtained management’s updated going concern assessment and challenged the rationale for the downside scenarios adopted and material assumptions made using our knowledge of performance, review of regulatory correspondence and obtaining further corroborating evidence; • Considered information obtained during the course of the audit and publicly available market information to identify any evidence that would contradict management’s assessment of the impact of COVID-19; • Inquired and understood the actions taken by management to mitigate the impacts of COVID-19, including attendance at all Audit Committee and Group Risk and Compliance Committee meetings; • Assessed the impact of COVID-19 on the design and operating effectiveness of the control environment; • Challenged management’s judgements in the valuation of the insurance contract liabilities, including annuitant mortality, credit default and expense assumptions, in light of the emerging COVID-19 experience and by comparing these relative to industry peers; and • Reviewed the appropriateness of disclosures within the Annual Report with respect to COVID-19 and, where relevant, considered the material consistency of this other information to the audited financial statements and the information obtained in the audit. Based on the work performed, we consider the impact of COVID-19 has been appropriately reflected in the Annual Report.
Recoverability of investment in subsidiaries (Company) Refer to Audit Committee Report, Company accounting policy 1.4 Investments in Group undertakings and note 2 to the Company’s financial statements – Investments in Group undertakings.
The carrying amount of the Company’s investments in subsidiaries are significant and in excess of the market capitalisation of the Group. This gives rise to an indicator of impairment. The estimated recoverable amount of these balances is subjective due to the inherent uncertainty in forecasting trading conditions and discounting future cash flows used in the budgets. The effect of these matters is that, as part of our risk assessment, we determined that the carrying value of the cost of investment in subsidiaries has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole.
We performed the following procedures related to the recoverability of the Company’s investment in subsidiaries: • Assessed the reasonableness and appropriateness of the assumptions used in the cash flows included in the budgets based on our knowledge of the Group and the markets in which the subsidiaries operate; • Assessed the reasonableness of the budgets by considering the historical accuracy of the previous forecasts; • Evaluated the current level of trading, including identifying any indications of a downturn in activity, by examining the post year end management accounts and considering our knowledge of the Group and the market; • Reviewed the methodology used in determining the discount rate applied, including engaging our valuation experts to assess the appropriateness of the inputs into the discount rate; and • Assessed the adequacy of the Company’s disclosures in respect of the associated impairment. Based on the work performed and the evidence obtained, we consider the carrying amount of the Company’s investment in subsidiaries to be appropriate.
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