To the Members of
HDFC LIFE INSURANCE COMPANY LIMITED
Report on the audit of the Standalone Financial Statements
1. We have audited the standalone financial statements of HDFC Life Insurance CompanyLimited ("the Company") which comprise the balance sheet as at March 31 2021and the related Revenue Account (also called the "Policyholders' Account" or the"Technical Account") the Profit and Loss Account (also called the"Shareholders' Account" or "Non-Technical Account") and the Receiptsand Payments Account for the year then ended and notes to the financial statementsincluding a summary of significant accounting policies and other explanatory information.
In our opinion and to the best of our information and according to the explanationsgiven to us the aforesaid standalone financial statements are prepared in accordance withthe requirements of the Insurance Act 1938 (the "Insurance Act") InsuranceRegulatory and Development Act 1999 (the "IRDA Act") Insurance Regulatory andDevelopment Authority (Preparation of Financial Statements and Auditor's Report ofInsurance Companies) Regulations 2002 (the "Regulations") includingorders/directions/ circulars issued by the Insurance Regulatory and Development Authorityof India ("IRDAI") and the Companies Act 2013 ("the Act") to theextent applicable and in the manner so required and give a true and fair view inconformity with the accounting principles generally accepted in India as applicable toinsurance companies:
(a) in the case of the Balance Sheet of the state of affairs of the Company as atMarch 31 2021;
(b) in the case of the Revenue Account of the net surplus for the year ended on thatdate;
(c) in the case of the Profit and Loss Account of the profit for the year ended onthat date; and
(d) in the case of the Receipts and Payments Account of the receipts and payments forthe year ended on that date.
Basis for opinion
2. We conducted our audit in accordance with the Standards on Auditing (the"SAs") specified under section 143(10) of the Act. Our responsibilities underthose Standards are further described in the Auditor's Responsibilities for the Audit ofthe Financial Statements section of our report. We are independent of the Company inaccordance with the Code of Ethics issued by the Institute of Chartered Accountants ofIndia together with the ethical requirements that are relevant to our audit of thefinancial statements under the Insurance Act the IRDA Act the Regulations the Act andthe Rules thereunder and we have fulfilled our other ethical responsibilities inaccordance with these requirements and the Code of Ethics. We believe that the auditevidence we have obtained is sufficient and appropriate to provide a basis for ouropinion.
Emphasis of Matter
3. We draw your attention to Note 16C (20) to the standalone financial statements whichexplains the uncertainties and the management's assessment of the financial impact due tothe lockdown and other restrictions imposed by the Government and conditions related tothe COVID-19 pandemic situation for which a definitive assessment of the impact is highlydependent upon circumstances as they evolve in the subsequent period. Our opinion is notmodified in respect of this matter.
Key audit matters
4. Key audit matters are those matters that in our professional judgment were of mostsignificance in our audit of the financial statements of the current period. These matterswere addressed in the context of our audit of the financial statements as a whole and informing our opinion thereon and we do not provide a separate opinion on these matters.
|Key Audit Matter ||How our audit addressed the key audit matter |
|Appropriateness of the Timing of Revenue Recognition in the proper period ||Our procedures included the following: |
|Refer Schedule 1 and Schedule 16A(2) of the standalone financial statement. ||Understood and evaluated the design and operating effectiveness of process and controls relating to recognition of revenue |
|During the year the Company has recognised premium revenue of ` 20107 crore towards new business (first year premium and single premium). Out of the total revenue recognised ` 6560 crore was recognised during the last quarter. ||Testing of key controls for ensuring that the revenue has been accrued in the correct accounting period. |
| ||Tested on a sample basis the policies at the year end to confirm if related procedural compliances with regard to acceptability of the terms of policy were completed before or after the year end to ensure appropriate accounting of revenue. |
|We have focused on this area because of the significant concentration of revenue during the last quarter of financial year (including cut-off at the Balance sheet date). Due to the nature of the industry revenue is skewed towards the balance sheet date. Hence there is possibility that policy sales of the next financial year are accounted in the current period. ||Tested on a sample basis unallocated premium to ensure that there were no policies where risk commenced prior to balance sheet but revenue was not recognised. |
| ||Tested the manual accounting journals relating to revenue on a sample basis so as to identify unusual or irregular items. We agreed the journals tested to corroborative evidence. |
| ||Tested on a sample basis cheques receipt with the time stamp in case of products like Unit Linked Insurance Plan to confirm the recognition of the revenue in correct accounting period. |
| ||Based on the work carried out we did not come across any significant matter which suggests that the revenue recognition is not accounted in the correct period. |
|Appropriateness of the classification and valuation of Investments ||Our procedures included the following: |
|Refer Schedule 8 8A and 8B of the Financial Statement. For accounting policy refer schedule 16A (6) to the financial statements ||Understood Management's process and controls to ensure proper classification and valuation/ impairment of Investment |
|The Company holds investments against policyholders' liabilities linked liabilities and shareholders' funds. A significant portion of the assets of the Company is in the form of investments (total investments as at March 31 2021 is ` 173839 crore). ||Testing of key controls over investment classification and valuation/ impairment |
| ||Tested on a sample basis correct recording of investments (including derivative instruments) classification and compliance with Investment Regulations and policies approved by Board of Directors |
|As prescribed by Insurance Regulatory and Development Authority of India (the "IRDAI") all investments including derivative instruments should be made and managed in accordance with the Insurance Regulatory and Development Authority of India (Investment Regulations 2016) (the "Investment Regulations") and policies approved by Board of Directors of the Company. ||Tested on a sample basis valuation of securities which have been valued in accordance with the Investment Regulations and Company's accounting policies. We assessed the calculations made by management to assess the value of derivative instruments by involving auditor's independent experts. |
|Further investments including derivative instruments (which involves complex calculations to value such instruments) should be valued as prescribed in the Investment Regulations which state the valuation methodology to be used for each class of investment. ||Tested on a sample basis impairment of securities (including reversal of impairment) which have been impaired / impairment recognised earlier has been (reversed) in accordance with the Investment Regulations and Company's impairment policies. |
|The valuation of unlisted or not frequently traded investment involves management judgement. Also due to events affecting the investee company's rating there could be a need to reclassify investment and assess its valuation / impairment per the requirements of the Investment Regulations and/ or Company's internal policies. ||For unlisted and not frequently traded investments we evaluated management's valuation model and assumptions and corroborated these with regulatory requirements and Company's internal policies including impairment. |
| ||For an event specific reclassification and valuation we corroborated management's assessment with the regulatory requirements and Company's internal policies. |
|Thus this is an area where we spend significant time ||Based on the work carried out we did not come across any significant matter which suggests that the investments were not properly classified or valued. |
|Contingencies relating to certain matters pertaining to service tax ||Our procedures included the following: |
|Refer note no. 16B(1) to the financial statements. ||Understood Management's process and control for determining tax litigations and its appropriate accounting and disclosure. |
|The Company has received various demands and show cause notices (mostly industry specific) from the tax authorities in respect of matters relating to service tax. ||Testing key controls surrounding tax litigations Where relevant reading external legal opinions obtained by the management |
|The matters were mainly towards applicability of service tax on Lapse charges recovery of agency processing fees backdating alteration charges recoveries on look in policy reinstatement fees policy fees etc. ||Discussed pending matters with the Company's legal counsel and independent management appointed tax experts |
|The management with the help of its expert as needed have made judgments relating to the likelihood of an obligation arising and whether there is a need to recognise a provision or disclose a contingent liability. We focused on this area as a result of uncertainty use of management's judgement for assessment and potential material impact on the financial statements. ||Assessed management's conclusions which included involvement of auditors' independent tax experts as applicable to gain an understanding of the current status of the tax cases and monitoring of changes in disputes to establish that the tax provisions reflects the latest external developments |
| ||Based on the work performed in view of the contingencies relating to certain matters pertaining to service tax we determined the extent of provisioning and disclosure of contingent liabilities as at March 31 2021 to be reasonable. |
5. The actuarial valuation of liabilities for life policies in-force and policies wherepremium is discontinued is the responsibility of the Company's Appointed Actuary (the"Appointed Actuary") which has been certified by the Appointed Actuary inaccordance with the regulations as mentioned in paragraph 9 below. Accordingly we haverelied upon the Appointed Actuary's certificate for forming our opinion on the standalonefinancial statements of the Company. Our opinion is not modified in respect of thismatter.
6. The Company's Board of Directors is responsible for the other information. The otherinformation comprises the information included in the Chairman's Message Report onCorporate Governance Annual Report on Corporate Social Responsibility ManagementDiscussion and Analysis Directors' Report including Annexures to Directors' ReportBusiness Responsibility Report and Management Report but does not include the financialstatements and our auditor's report thereon.
Our opinion on the standalone financial statements does not cover the other informationand we do not express any form of assurance conclusion thereon.
In connection with our audit of the standalone financial statements our responsibilityis to read the other information and in doing so consider whether the other informationis materially inconsistent with the financial statements or our knowledge obtained in theaudit or otherwise appears to be materially misstated. If based on the work we haveperformed we conclude that there is a material misstatement of this other information weare required to report that fact.
We have nothing to report in this regard.
Responsibilities of Management for the Standalone Financial Statements
7. The Company's Board of Directors is responsible for the matters stated in section134(5) of the Act with respect to the preparation of these standalone financial statementsthat give a true and fair view of the financial position financial performance andreceipts and payments of the Company in accordance with the requirements of the InsuranceAct read with the IRDA Act the Regulations order/ directions issued by the IRDAI in thisregard and in accordance with the accounting principles generally accepted in Indiaincluding the Accounting Standards specified under section 133 of the Act to the extentapplicable and in the manner so required. This responsibility also includes maintenance ofadequate accounting records in accordance with the provisions of the Act for safeguardingof the assets of the Company and for preventing and detecting frauds and otherirregularities; selection and application of appropriate accounting policies; makingjudgments and estimates that are reasonable and prudent; and design implementation andmaintenance of adequate internal financial controls that were operating effectively forensuring the accuracy and completeness of the accounting records relevant to thepreparation and presentation of the financial statement that give a true and fair view andare free from material misstatement whether due to fraud or error.
In preparing the financial statements management is responsible for assessing theCompany's ability to continue as a going concern disclosing as applicable mattersrelated to going concern and using the going concern basis of accounting unless managementeither intends to liquidate the Company or to cease operations or has no realisticalternative but to do so. Those Board of Directors are also responsible for overseeing theCompany's financial reporting process.
Auditor's responsibilities for the audit of the Standalone Financial Statements
8. Our objectives are to obtain reasonable assurance about whether the financialstatements as a whole are free from material misstatement whether due to fraud or errorand to issue an auditor's report that includes our opinion. Reasonable assurance is a highlevel of assurance but is not a guarantee that an audit conducted in accordance with theSAs will always detect a material misstatement when it exists. Misstatements can arisefrom fraud or error and are considered material if individually or in the aggregate theycould reasonably be expected to influence the economic decisions of users taken on thebasis of these financial statements.
As part of an audit in accordance with the SAs we exercise professional judgment andmaintain professional scepticism throughout the audit. We also:
- Identify and assess the risks of material misstatement of the financialstatements whether due to fraud or error design and perform audit procedures responsiveto those risks and obtain audit evidence that is sufficient and appropriate to provide abasis for our opinion. The risk of not detecting a material misstatement resulting fromfraud is higher than for one resulting from error as fraud may involve collusionforgery intentional omissions misrepresentations or the override of internal control.
- Obtain an understanding of internal control relevant to the audit in order todesign audit procedures that are appropriate in the circumstances. Under Section 143(3)(i)of the Act we are also responsible for expressing our opinion on whether the company hasadequate internal financial controls with reference to financial statements in place andthe operating effectiveness of such controls.
- Evaluate the appropriateness of accounting policies used and thereasonableness of accounting estimates and related disclosures made by management.
- Conclude on the appropriateness of management's use of the going concern basisof accounting and based on the audit evidence obtained whether a material uncertaintyexists related to events or conditions that may cast significant doubt on the Company'sability to continue as a going concern. If we conclude that a material uncertainty existswe are required to draw attention in our auditor's report to the related disclosures inthe 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'sreport. However future events or conditions may cause the Company to cease to continue asa going concern.
- Evaluate the overall presentation structure and content of the financialstatements including the disclosures and whether the financial statements represent theunderlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding among other matters theplanned scope and timing of the audit and significant audit findings including anysignificant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have compliedwith relevant ethical requirements regarding independence and to communicate with themall relationships and other matters that may reasonably be thought to bear on ourindependence and where applicable related safeguards.
From the matters communicated with those charged with governance we determine thosematters that were of most significance in the audit of the financial statements of thecurrent period and are therefore the key audit matters. We describe these matters in ourauditor's report unless law or regulation precludes public disclosure about the matter orwhen in extremely rare circumstances we determine that a matter should not becommunicated in our report because the adverse consequences of doing so would reasonablybe expected to outweigh the public interest benefits of such communication.
Report on other legal and regulatory requirements
9. The actuarial valuation of liabilities for life policies in-force and for policieswhere premium has been discontinued but liability exists as at March 31 2021 has beenduly certified by the Appointed Actuary. The Appointed Actuary has also certified that inhis opinion the assumptions for such valuation are in accordance with the generallyaccepted actuarial principles and practices requirements of the Insurance Actregulations notified by the IRDAI and Actuarial Practice Standards issued by the Instituteof Actuaries of India in concurrence with the IRDAI;
10. As required by the Regulations we have issued a separate certificate dated April26 2021 certifying the matters specified in paragraphs 3 and 4 of Schedule C to theRegulations.
11. Further to our comments in the Certificate referred to in paragraph 10 above asrequired under the Regulations read with Section 143 (3) of the Act we report that:
a) We have sought and obtained all the information and explanations which to the bestof our knowledge and belief were necessary for the purposes of our audit.
b) In our opinion and to the best of our information and according to the explanationsgiven to us proper books of account as required by law have been kept by the Company sofar as it appears from our examination of those books.
c) As the Company's financial accounting system is centralised at Head Office noreturns for the purposes of our audit are prepared at the branches and other offices ofthe Company.
d) The Balance Sheet the Revenue Account the Profit and Loss Account and theReceipts and Payments Account dealt with by this Report are in agreement with the books ofaccounts.
e) In our opinion and to the best of our information and according to the explanationsgiven to us investments have been valued in accordance with the provisions of theInsurance Act and the Regulations and orders/directions issued by the IRDAI in thisbehalf.
f) In our opinion and to the best of our information and according to the explanationsgiven to us the accounting policies selected by the Company are appropriate and are incompliance with the Accounting Standards referred to in Section 133 of the Act to theextent they are not inconsistent with the accounting principles prescribed in theRegulations and orders/directions issued by the IRDAI in this behalf.
g) In our opinion and to the best of our information and according to the explanationsgiven to us the Balance Sheet the Revenue Account the Profit and Loss Account and theReceipts and Payments Account dealt with by this report comply with the AccountingStandards referred to in Section 133 of the Act to the extent they are not inconsistentwith the accounting principles prescribed in the Regulations and orders/directions issuedby IRDAI in this regard.
h) On the basis of the written representations received from the directors as on March31 2021 taken on record by the Board of Directors none of the directors is disqualifiedas on March 31 2021 from being appointed as a director in terms of Section 164 (2) ofthe Act.
i) With respect to the adequacy of the internal financial controls over financialreporting of the Company and the operating effectiveness of such controls refer to ourseparate report in "Annexure A".
j) With respect to the other matters to be included in the Auditor's Report inaccordance with Rule 11 of the Companies (Audit and Auditors) Rules 2014 in our opinionand to the best of our information and according to the explanations given to us:
i. The Company has disclosed the impact of pending litigations on its financialposition in its financial statements Refer Schedule 16B(1) and Schedule 16B(2) tothe standalone financial statements;
ii. The Company has made provision as at March 31 2021 as required under theapplicable law or accounting standards for material foreseeable losses if any onlong-term contracts including derivative contracts Refer Schedule 16C(18) and
Schedule 16B(15) to the standalone financial statements.
iii. There are no amounts which are required to be transferred to the InvestorEducation and Protection Fund by the Company for the year ended March 31 2021.
12. The Company has paid/ provided for managerial remuneration in accordance with therequisite approvals mandated by the provisions of Section 197 of the Act and Section 34Aof the Insurance Act.
(Referred to in paragraph 10 of our Report on Other Legal and Regulatory Requirementsforming part of the Independent Auditors' Report dated April 26 2021)
TO THE MEMBERS OF HDFC LIFE INSURANCE COMPANY LIMITED
This certificate is issued to comply with the provisions of paragraphs 3 and 4 ofSchedule C of the Insurance Regulatory and Development Authority (Preparation of FinancialStatements and Auditor's Report of Insurance Companies) Regulations 2002 (the"Regulations") read with regulation 3 of the Regulations.
The Company's Board of Directors is responsible for complying with the provisions ofThe Insurance Act 1938 as amended from time to time including amendment brought byInsurance Laws (Amendment) Act 2015 (the "Insurance Act") read with theInsurance Regulatory and Development Authority Act 1999 (the "IRDA Act") theInsurance Regulatory and Development Authority (Preparation of Financial Statements andAuditor's Report of Insurance Companies) Regulations 2002 (the "Regulations")orders/directions issued by the Insurance Regulatory and Development Authority of India(the "IRDAI"). This includes collecting collating and validating data anddesigning implementing and monitoring of internal controls suitable for ensuringcompliance as aforesaid.
Our responsibility for the purpose of this certificate is limited to certifyingmatters contained in paragraphs 3 and 4 of Schedule C of the Regulations. We conducted ourexamination [on a test check basis] in accordance with the Guidance Note on Audit Reportsand Certificates for Special Purposes issued by the Institute of Chartered Accountants ofIndia (the ICAI').
We have complied with the relevant applicable requirements of the Standard on QualityControl (SQC) 1 Quality Control for Firms that Perform Audits and Reviews of HistoricalFinancial Information and Other Assurance and Related Services Engagements.
In accordance with the information and explanations given to us and to the best of ourknowledge and belief and based on our examination of the books of accounts and otherrecords maintained by HDFC LIFE INSURANCE COMPANY LIMITED (the "Company")for the year ended March 31 2021 we certify that:
1. We have reviewed the Management Report attached to the standalone financialstatements for the year ended March 31 2021 and have found no apparent mistake ormaterial inconsistency with the standalone financial statements;
2. Based on management representations and the compliance certificate submitted to theBoard of Directors by the officers of the Company charged with compliance and the samebeing noted by the Board nothing has come to our attention that causes us to believe thatthe Company has not complied with the terms and conditions of registration as per subsection 4 of section 3 of the Insurance Act 1938;
3. The Cash on hand balance as at March 31 2021 is ` Nil. We have verified thecheques on hand to the extent considered necessary and securities relating to Company'sloans and investments as at March 31 2021 on the basis of certificates/ confirmationsreceived from the Company's personnel Custodians and/Depository Participants appointed bythe Company as the case may be. As at March 31 2021 the Company does not havereversions and life interests;
4. The Company is not a trustee of any trust; and
5. No part of the assets of the Policyholders' Funds has been directly or indirectlyapplied in contravention of the provisions of the Insurance Act relating to theapplication and investments of the Policyholders' Funds.
Annexure A to Independent Auditors' Report
Referred to in paragraph 11 (i) of the Independent Auditors' Report of even date to themembers of HDFC Life Insurance Company Limited on the standalone _nancial statements forthe year ended March 31 2021.
Report on the Internal Financial Controls with reference to financial statements underClause (i) of Sub-section 3 of Section 143 of the Act
1. We have audited the internal financial controls with reference to financialstatements of HDFC Life Insurance Company Limited ("the Company") as of March31 2021 in conjunction with our audit of the standalone financial statements of theCompany for the year ended on that date.
Management's Responsibility for Internal Financial Controls
2. The Company's management is responsible for establishing and maintaining internalfinancial controls based on the internal control over financial reporting criteriaestablished by the Company considering the essential components of internal control statedin the Guidance Note on Audit of Internal Financial Controls Over Financial Reportingissued by the Institute of Chartered Accountants of India (ICAI). These responsibilitiesinclude the design implementation and maintenance of adequate internal financial controlsthat were operating effectively for ensuring the orderly and efficient conduct of itsbusiness including adherence to company's policies the safeguarding of its assets theprevention and detection of frauds and errors the accuracy and completeness of theaccounting records and the timely preparation of reliable financial information asrequired under the Act.
3. Our responsibility is to express an opinion on the Company's internal financial withreference to financial statements based on our audit. We conducted our audit in accordancewith the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting(the "Guidance Note") and the Standards on Auditing deemed to be prescribedunder section 143(10) of the Act to the extent applicable to an audit of internalfinancial controls both applicable to an audit of internal financial controls and bothissued by the ICAI. Those Standards and the Guidance Note require that we comply withethical requirements and plan and perform the audit to obtain reasonable assurance aboutwhether adequate internal financial controls with reference to financial statements wasestablished and maintained and if such controls operated effectively in all materialrespects.
4. Our audit involves performing procedures to obtain audit evidence about the adequacyof the internal financial controls system with reference to financial statements and theiroperating effectiveness. Our audit of internal financial controls with reference tofinancial statements included obtaining an understanding of internal financial controlswith reference to financial statements assessing the risk that a material weaknessexists and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk. The procedures selected depend on the auditor'sjudgement including the assessment of the risks of material misstatement of thestandalone financial statements whether due to fraud or error.
5. We believe that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our audit opinion on the Company's internal financial controls systemwith reference to financial statements.
Meaning of Internal Financial Controls with reference to financial statements
6. A company's internal financial control with reference to financial statements is aprocess designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of standalone financial statements for external purposes inaccordance with generally accepted accounting principles. A company's internal financialcontrol with reference to financial statements includes those policies and procedures that
(1) pertain to the maintenance of records that in reasonable detail accurately andfairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of standalone financial statements in accordance with generally acceptedaccounting principles and that receipts and expenditures of the company are being madeonly in accordance with authorisations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection ofunauthorised acquisition use or disposition of the company's assets that could have amaterial effect on the standalone financial statements.
Inherent Limitations of Internal Financial Controls with reference to financialstatements
7. Because of the inherent limitations of internal financial controls with reference tofinancial statements including the possibility of collusion or improper managementoverride of controls material misstatements due to error or fraud may occur and not bedetected. Also projections of any evaluation of the internal financial controls withreference to financial statements to future periods are subject to the risk that theinternal financial control with reference to financial statements may become inadequatebecause of changes in conditions or that the degree of compliance with the policies orprocedures may deteriorate.
8. In our opinion the Company has in all material respects an adequate internalfinancial controls system with reference to financial statements and such internalfinancial controls with reference to financial statements were operating effectively as atMarch 31 2021 based on the internal control over financial reporting criteriaestablished by the Company considering the essential components of internal control statedin the Guidance Note on Audit of Internal Financial Controls Over Financial Reportingissued by the Institute of Chartered Accountants of India.
9. The actuarial valuation of liabilities for life policies in force and policies wherepremium is discontinued is required to be certified by the Appointed Actuary as per theregulations and has been relied upon by us as mentioned in para 5 and 9 of our auditreport on the standalone financial statements for the year ended March 31 2021.Accordingly our opinion on the internal financial controls over financial reporting doesnot include reporting on the operating effectiveness of the management's internal controlsover the valuation and accuracy of the aforesaid actuarial valuation.