KENANGA ANNUAL REPORT 2019

114 Key audit matters (cont’d.) Risk area and rationale Our response Fair value measurement of financial instruments When fair values of financial assets and financial liabilities recorded on the statements of financial position cannot be derived from active markets, they are determined by the Group using a variety of valuation techniques that include the use of financial models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, judgment is required to establish fair values. Judgments include considerations of liquidity and model inputs such as volatility for longer-dated derivatives and discount rates, prepayment rates and default rate assumptions for asset-backed securities. Refer to summary of significant accounting policies in Note 3.4(j), significant accounting judgements, estimates and assumptions in Note 4(ii) and the disclosures of fair value of financial instruments in Note 51 to the financial statements. Our audit procedures included reviewing and evaluating management’s rationale for selecting and using the valuation models to assess if the use of such models was appropriate. Our audit procedures also included, among others, testing management’s controls related to the development and calibration of any model used, challenged and assessed assumptions used, including reasonableness of market observable inputs. We also reviewed the adequacy of the Group’s and Bank’s disclosures within the financial statements about those key assumptions to which the fair value is most sensitive. Impairment of goodwill As at 31 December 2019, the goodwill recognised in the financial statements of the Group and of the Bank are RM243.754 million and RM252.909 million, respectively. Goodwill impairment testing of cash generating units (“CGUs”) relies on estimates of value-in-use (“VIU”) based on estimated future cash flows. The Group and the Bank are required to annually test the amount of goodwill for impairment. These involve management judgement and are based on assumptions that are affected by expected future market and economic conditions. Refer to summary of significant accounting policies in Note 3.4(e)(i), significant accounting estimates and judgment in Note 4(i) and the disclosure of intangible assets in Note 17 to the financial statements. Our audit procedures included, among others, evaluating the assumptions and methodologies used by the Group and the Bank in performing the impairment assessment. We tested the basis of preparing the cash flow forecasts taking into account the back testing results on the accuracy of previous forecasts and the historical evidence supporting underlying assumptions. We assessed the appropriateness of the other key assumptions, such as the growth rates used to extrapolate the cash flows and the discount rates applied, by comparing against internal information, and external economic and market data. We assessed the sensitivity analysis performed by management on the key inputs to the impairment models, to understand the impact that reasonable alternative assumptions would have on the overall carrying amounts. We also reviewed the adequacy of the Group’s and the Bank’s disclosures within the financial statements about those key assumptions to which the VIU is most sensitive. INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF KENANGA INVESTMENT BANK BERHAD (INCORPORATED IN MALAYSIA)