INDEPENDENT AUDITOR’S REPORT
What we have audited
The consolidated financial statements of CITIC Limited (the “Company”) and its subsidiaries (the “Group”) set out on pages Financial Statement and notes, which comprise:
- the consolidated balance sheet as at 31 December 2019;
- the consolidated income statement for the year then ended;
- the consolidated statement of comprehensive income for the year then ended;
- the consolidated statement of changes in equity for the year then ended;
- the consolidated cash flow statement for the year then ended; and
- the notes to the consolidated financial statements, which include a summary of significant accounting policies.
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2019, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have been properly prepared in compliance with the Hong Kong Companies Ordinance.
Basis for Opinion
We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (“the Code”), and we have fulfilled our other ethical responsibilities in accordance with the Code.
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matters identified in our audit are summarised as follows:
- Measurement of expected credit losses for loans and advances to customers and other parties and investments in financial assets of China CITIC Bank Corporation Limited (“CITIC Bank”)
- Consolidation of structured entities – non-principal guaranteed wealth management products of CITIC Bank
- De-recognition of financial assets of CITIC Bank
- Impairment of the Sino Iron Project
|Key Audit Matter
||How our audit addressed the Key Audit Matter
|Measurement of expected credit losses for loans and advances to customers and other parties and investments in financial assets of CITIC Bank
Refer to Note 2(k), Note 3, Note 26 and Note 27 to the consolidated financial statements.
As at 31 December 2019, loans and advances to customers and other parties of CITIC Bank amounted to RMB4,001.18 billion (approximately HK$ 4 , 466 . 70 billion), and the corresponding allowance for impairment losses was RMB115.96 billion (approximately HK$129.45 billion); investments in financial assets of CITIC Bank amounted to RMB1,559.79 billion (approximately HK$1,741.27 billion), and the corresponding allowance for impairment losses was RMB8.41 billion (approximately HK$9.39 billion).
The balances of loss allowances for the loans and advances to customers and other parties and investments in financial assets represent the management’s best estimates at the balance sheet date of expected credit losses (“ECL”) under HKFRS 9: Financial Instruments expected credit losses models.
The management assesses whether the credit risk of loans and advances to customers and other parties and investments in financial assets have increased significantly since their initial recognition, and apply a three-stage impairment model to calculate their ECL. For corporate loans and advances and investments in financial assets classified into stages 1 and 2, and all personal loans, the management assesses loss allowance using the risk parameter modelling approach that incorporates key parameters, including probability of default, loss given default, exposure at default and discount rates. For corporate loans and advances and investments in financial assets in stage 3, the management assesses loss allowance by estimating the cash flows from the loans.
The measurement models of ECL involves significant management judgments and assumptions, primarily including the following:
- Criteria for determining whether or not there was a significant increase in credit risk, or a default or impairment loss was incurred;
- Economic indicators for forward-looking measurement, and the application of economic scenarios and weightings;
- Management overlay adjustments due to significant uncertain factors not covered in the models;
- The estimated future cash flows for corporate loans and advances and investments in financial assets in stage 3.
CITIC Bank established governance processes and controls for the measurement of ECL.
For measuring ECL, the management adopted complex models, employed numerous parameters and data inputs, and applied significant management judgments and assumptions. In addition, the exposures of the loans and advances to customers and other parties and investments in financial assets, the loss allowance and provision accrued involve significant amounts. In view of these reasons, we identified this as a key audit matter.
We evaluated and tested the design and operational effectiveness of the internal controls relating to the measurement of ECL for loans and advances to customers and other parties, and investments in financial assets, primarily including:
- Governance over ECL models, including the selection, approval and application of modelling methodology; and the internal controls relating to the ongoing monitoring and optimization of the models;
- Internal controls relating to significant management judgments and assumptions, including the review and approval of model selections, parameters estimation, identification of significant increase in credit risk, defaults or credit-impaired loans, and forward-looking measurement;
- Internal controls over the accuracy and completeness of key inputs used by the models;
- Internal controls relating to estimated future cash flows and calculations of present values of such cash flows for corporate loans and advances and investments in financial assets in stage 3;
- Internal controls over the information systems for model-based measurement.
The substantive procedures we preformed primarily included:We reviewed the modelling methodologies for ECL measurement, and assessed the reasonableness of the models selection, key parameters estimation, significant judgements and assumptions in relation to the models. We tested whether or not the measurement models reflect the modelling methodologies documented by the management on a sample basis.
We selected samples, in consideration of the financial information and non-financial information of the borrowers, relevant external evidence and other factors, to assess the appropriateness of the management’s identification of significant increase in credit risk, defaults and credit-impaired loans.
For forward-looking measurement, we reviewed the management’s model analysis of their selection of economic indicators; economic scenarios and weightings employed, assessed the reasonableness of the prediction of economic indicators and performed sensitivity analysis of economic indicators, economic scenarios and weightings.
In addition, we assessed the reasonableness of the selection of significant uncertain factors, its application and measurement in the management overlay adjustments, and examined the accuracy of the relevant mathematical calculations.
We examined major data inputs to the ECL models on selected samples, including historical data and data at the measurement date, to assess their accuracy and completeness. We also performed walk-through testing and reconciliation of the transmission of major data inputs between the models’ measurement engines and the information systems, to verify their accuracy and completeness.
For corporate loans and advances and investments in financial assets in stage 3, we examined, on a sample basis, forecasted future cash flows prepared by CITIC Bank based on financial information of borrowers and guarantors, latest collateral valuations and other available information together with discount rates in supporting the computation of loss allowance.
Based on our procedures performed, in the context of the inherent uncertainties associated with measurement of ECL for loans and advances to customers and other parties and investments in financial assets, the models, key parameters, significant judgements and assumptions adopted by management and the measurement results were considered acceptable.
|Key Audit Matter
||How our audit addressed the Key Audit Matter
|Consolidation of structured entities – non-principal guaranteed wealth management products of CITIC Bank
Refer to Note 2(g), Note 3, Note 27 and Note 50 to the consolidated financial statements.
As at 31 December 2019 , consolidated and unconsolidated structured entities, including non- principal guaranteed wealth management products (“WMPs”) issued and managed by CITIC Bank, are disclosed in Note 27(a) and Note 50(b) to the consolidated financial statements.
Management’s decision on whether or not to consolidate structured entities was based on an assessment of the power of CITIC Bank, its variable returns and the ability to exercise its power to influence the variable returns from these structured entities.
We focused on the consolidation assessment and judgement made by management involving the structured entities for non-principal guaranteed WMPs during our audit as whether or not to consolidate these entities involved significant judgement.
We evaluated and tested the design and operating effectiveness of management’s relevant controls over the consolidation of structured entities for non- principal guaranteed WMPs. These controls primarily included the review and approval of the contractual terms, the results in variable return calculations, and the consolidation assessment conclusions for these structured entities.
We selected samples of structured entities for non- principal guaranteed WMPs and performed the following tests:
- assessed the contractual rights and obligations of CITIC Bank in light of the transaction structures, and evaluated the power of CITIC Bank over the structured entities;
- performed independent analysis and tests on the variable returns from the structured entities, including but not limited to commission income and asset management fees earned, retention of residual income, and, if any, liquidity and other support provided to the structured entities;
- assessed whether CITIC Bank acted as a principal or an agent through analysis of the scope of the decision-making authority of CITIC Bank, its remuneration entitlement, other interests CITIC Bank held, and the rights held by other parties;
- evaluated and examined on the appropriateness of disclosures relating to structured entities in the consolidated financial statements.
Based on the audit procedures performed above, we considered that management’s assessment and disclosure on the consolidation of structured entities with non-principal guaranteed wealth management products were appropriate in all material respects.
|Key Audit Matter
||How our audit addressed the Key Audit Matter
|De-recognition of financial assets of CITIC Bank
Refer to Note 2(k), Note 3 and Note 50(d) to the consolidated financial statements.
During the year ended 31 December 2019, CITIC Bank entered into transactions which involved transfers of financial assets including securitisation transactions, structured transfers on assets usufruct, and transfers of non-performing loans.
Management analysed the contractual rights and obligations of CITIC Bank in connection with such transfers, and assessed the extent to which the associated risks and rewards of ownership were transferred by using models to determine whether the de-recognition criteria were met. Where necessary, CITIC Bank assessed whether it had relinquished its control over the transferred financial assets to determine whether the de-recognition criteria were met.
The de-recognition assessment relating to the transfer of financial assets involved significant judgement from management, and as such, we focused our audit on the de-recognition of these financial assets.
We evaluated and tested the design and operating effectiveness of the relevant controls over transfers of financial assets, including the review and approval of the structure designs and contractual terms of the transactions, the approval of models for testing the transfer of risks and rewards of ownership and the key parameters and assumptions used in the models, as well as the review and approval of management’s assessment results.
We selected samples and read through transaction agreements to assess the contractual rights and obligations of CITIC Bank, and whether CITIC Bank transferred the rights to receive contractual cash flows from the financial assets, or the transfer qualified for the “pass through” of those cash flows, to independent third parties.
We also assessed the appropriateness of the models, the parameters and assumptions, the discount rates, and the variability factors. We also tested the mathematical accuracy of the calculations.
For financial assets where CITIC Bank neither retained nor transferred substantially all of the risks and rewards associated with their ownership, we analysed whether CITIC Bank had relinquished its control over these financial assets, and if CITIC Bank had a continuing involvement in these transferred financial assets.
Based on the procedures performed above, we found management’s assessment over de-recognition of transferred financial assets acceptable.
|Key Audit Matter
||How our audit addressed the Key Audit Matter
|Impairment of the Sino Iron Project
Refer to Note 3 and Note 9 to the consolidated financial statements.
An impairment assessment was undertaken on the Sino Iron Project (“the Project”) by management as at 30 June 2019, with an update assessment on 31 December 2019.
Management has assessed the recoverable amount of the Project using the Fair Value Less Cost of Disposal (“FVLCD”) method as consistent with the approach taken previously. As a result, management has determined that no further impairment charge is required.
In the impairment assessment, the most significant areas of judgement applied by management relate to:
- The production profile of the Project (including production rates as the Project ramps up, ore grades and operating and capital expenditures);
- Iron ore prices (inclusive of base price and premium on product grade);
- The discount rate adopted in the valuation;
- Foreign exchange rates, particularly between Australian and United States dollars.
As the impairment assessment involves significant assumptions and judgements, we regard this as a key audit matter.
In evaluating management’s valuation of the Project we undertook the following procedures:
- Evaluated the reasonableness of management’s judgement in relation to non-current asset impairment indicators, cash flow forecasts and the adoption of the FVLCD model;
- Assessed whether management had included all appropriate assets and liabilities in the cash generating unit with appropriate consideration of tax impact;
- Compared assumptions adopted in cash flow forecasts on production, future capital and operating expenditure with approved Life of Mine Plans, operating budgets and, where applicable, actual performance outcomes achieved to date;
- With the support of our valuation experts, benchmarked key market related assumptions included in the valuation model, being base price, foreign exchange rates and the discount rate, against external market data; assessed the forecast premium on product grade with actual premiums achieved to date; and validated the competence and objectivity of the third party experts utilised by management to develop these assumptions;
- Performed sensitivity analysis on the key assumptions.
Based on the above procedures, we found the assumptions and judgements applied by management to be reasonable and consistent with the audit evidence we obtained.
The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor’s report thereon.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of Directors and Audit and Risk Management Committee for the Consolidated Financial Statements
The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Audit and Risk Management Committee is responsible for overseeing the Group’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely to you, as a body, in accordance with Section 405 of the Hong Kong Companies Ordinance and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
- Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
- Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
- Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
- Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with Audit and Risk Management Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide Audit and Risk Management Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with Audit and Risk Management Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Chan Kwong Tak.
Certified Public Accountants
Hong Kong, 31 March 2020