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Valuation of financial instruments held at fair value
(Refer to Notes 18, 22, 24, 25, 30 and 41 to the financial statements.)
The key audit matter How the matter was addressed in our audit
The fair value of financial instruments is determined through
the application of valuation models and the use of assumptions
and estimates. Due to the significance of financial instruments
to the Group and the related estimation uncertainty, this is
considered a key audit focus area. These financial instruments
include those held by Great Eastern Holdings Limited (GEH).
GEH is audited by another firm of public accountants. We assessed the controls over the measurement of financial
instruments at their fair values. These controls include
independent price verification, governance over valuation
models, model validation and management reporting of
valuation risk.
Of the financial instruments that were carried at fair value
in the Group’s balance sheet as at 31 December 2017, the
significant majority qualified as Level 1 or Level 2 financial
instruments. These instruments were valued using prices that
were observable in the market or through models with market
observable inputs, resulting in a lower valuation risk.
The remaining financial instruments were classified as
Level 3. These instruments comprised mainly unlisted debt
and equity investments and derivatives. The valuation of
these instruments involved the application of unobservable
inputs such as cash flow forecasts, discount rates and
volatility, amongst others. As such, there was greater
estimation uncertainty in the determination of the fair
value of these instruments.
For a sample of financial instruments, we used our valuation
specialists to assess that the valuation models were reasonable.
For a selection of pricing inputs, we checked that the inputs
used were appropriately sourced and accurately input into
pricing models. Additionally, we priced a selection of the Group’s
derivative positions independently and compared the values to
the Group’s valuations.
For a sample of Level 3 instruments, we assessed the
appropriateness of the valuation methodology, and the
reasonableness of key inputs and assumptions. We also
considered alternative valuation methods and assessed
sensitivities to key factors.
In respect of the valuation of financial instruments held by
GEH, we assessed, through a review of GEH’s auditors’ working
papers, whether the valuation methods used were reasonable.
Overall, in our view, the values of the Group’s financial
instruments were within an acceptable range of estimates.
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