My first Publication ocbc_ar17_fullreport_english | Page 158

INDEPENDENT AUDITORS’ REPORT
To The Members Of Oversea-Chinese Banking Corporation Limited
Valuation of insurance contract liabilities
(Refer to Notes 4, 22, 39 and 41 to the financial statements.)
The key audit matter How the matter was addressed in our audit
The Group’s insurance operations are entirely conducted
through its subsidiary, Great Eastern Holdings Limited (GEH). We planned, scoped and issued group audit instructions to
GEH’s auditors to obtain an independent auditors’ report of
the significant component. The scope of reporting included
valuation of liabilities of the insurance business.
The Group’s insurance business comprises life and general
insurance contracts. There are several sources of uncertainty
that need to be considered in the estimation of the liabilities
that the Group will ultimately be required to pay as claims.
The valuation of life insurance contract liabilities is dependent
on the valuation method adopted and key assumptions such as
prevailing interest rates of government securities and estimates
of mortality, disability, dread disease, expenses, lapse and
surrenders based on GEH’s internal experience studies and
publicly available data.
The valuation of general insurance contract liabilities is
dependent on estimates including the ultimate settlement cost
of claims reported, and claims incurred but not yet reported.
We reviewed GEH’s auditors’ working papers and involved our
actuarial specialists in our discussions with GEH’s auditors.
We independently assessed, through a review of procedures
carried out by GEH’s auditors, that the valuation methodologies
and assumptions relating to the measurement and estimation
of insurance contract liabilities were reasonable.
Based on the reports from GEH’s auditors and our review of
GEH’s auditors’ working papers, we concluded that the valuation
methods and assumptions used by the Group were reasonable,
and the values of insurance contract liabilities were within an
acceptable range of outcomes.
Changes in the assumptions used in calculation of the valuation
could result in a material impact to the carrying amount of
insurance contract liabilities and the related movements in the
income statement.
Impairment of goodwill
(Refer to Note 37 to the financial statements.)
The key audit matter How the matter was addressed in our audit
At 31 December 2017, the Group’s balance sheet included
goodwill of $4.5 billion arising from a number of acquisitions.
Goodwill is impaired if its carrying amount is not supported
by the recoverable amount of the respective cash generating
units (CGUs). The recoverable amounts are determined based on
estimates that require significant judgement in application of
methodologies, and assumptions. We assessed the appropriateness of management’s
identification of the Group’s CGUs. We involved our valuation
specialists to assess the methodologies applied and
assumptions used for determining recoverable amounts.
In respect of goodwill of banking CGUs amounting to
$4.0 billion, the recoverable amounts were determined using
the value-in-use method, based on estimated future cash
flows for each CGU discounted at an appropriate discount rate.
Significant management judgement included the expected
future cash flows, the discount rate and terminal growth rate.
In respect of the insurance CGU, the recoverable amount was
estimated using the appraisal value method, based on the
adjusted shareholders’ funds and the expected future profits
generated by the portfolio of the business in force at the
valuation date and the capacity to generate future profitable
new business. Significant assumptions used in the assessment
of these values included the discount rate and the investment
return rates.
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OCBC ANNUAL REPORT 2017
For the banking CGUs, we assessed management’s future
cash flow projections for consistency with historical cash
flows and business plans and investigated reasons for
significant deviations. We challenged the key assumptions
including discount rate and growth rate by comparing with
external sources and economic metrics. We also reperformed
calculations using the models.
For the insurance CGU, we assessed management’s assumptions
on discount rates and investment returns through our review
of GEH’s auditors’ working papers on valuation of insurance
contracts. We also performed sensitivity analysis on the impact
of change in key assumptions to the appraisal value.
Based on the results of our test procedures, the carrying amount
of goodwill was supported by the recoverable amount of the
respective CGUs.