to the members of idfc first bank limited (formerly idfc bank limited)
Report on the Audit of the Standalone Financial Statements
We have audited the accompanying standalone financial statements of IDFC FIRST BankLimited (formerly IDFC Bank Limited) (the Bank) which comprise the BalanceSheet as at 31 March 2019 the Profit and Loss Account the Cash Flow Statement for theyear then ended and a summary of significant accounting policies and other explanatoryinformation.
In our opinion and to the best of our information and according to the explanationsgiven to us the aforesaid standalone financial statements give the information requiredby the Banking Regulation Act 1949 Companies Act 2013 (the Act) in themanner so required and give a true and fair view in conformity with the AccountingStandards prescribed under section 133 of the Act read with the Companies (AccountingStandards) Rules 2006 as amended (Accounting Standards) and other accountingprinciples generally accepted in India of the state of affairs of the Bank as at 31 March2019 and its loss and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit of the standalone financial statements in accordance with theStandards on Auditing specified under section 143(10) of the Act (SAs). Ourresponsibilities under those Standards are further described in the Auditor'sResponsibility for the Audit of the Standalone Financial Statements section of our report.We are independent of the Bank in accordance with the Code of Ethics issued by theInstitute of Chartered Accountants of India (ICAI) together with the ethical requirementsthat are relevant to our audit of the standalone financial statements under the provisionsof the Act and the Rules made thereunder and we have fulfilled our other ethicalresponsibilities in accordance with these requirements and the ICAI's Code of Ethics. Webelieve that the audit evidence obtained by us is sufficient and appropriate to provide abasis for our audit opinion on the standalone financial statements.
Key Audit Matters
Key audit matters are those matters that in our professional judgment were of mostsignificance in our audit of the standalone financial statements of the current period.These matters were addressed in the context of our audit of the standalone financialstatements as a whole and in forming our opinion thereon and we do not provide aseparate opinion on these matters. We have determined the matters described below to bethe key audit matters to be communicated in our report.
|Sr. No. ||Key Audit Matter ||Auditor's Response |
|1 ||Identification of and provisioning for non-performing advances in accordance with the Reserve Bank of India (RBI) guidelines and Bank's Board approved policy. (Refer Schedule 9 read with Note 17.2) || |
| || ||Our audit approach included testing the design operating effectiveness of internal controls and substantive audit procedures in respect of income recognition asset classification and provisioning pertaining to advances. In particular: |
| ||The Bank has net advances amounting to द 863022859 thousands as at 31 March 2019. Identification of and provisioning for non-performing advances in accordance with relevant prudential norms issued by the RBI in respect of income recognition asset classification and provisioning pertaining to advances (herein after referred as Relevant RBI guidelines) and as per the Bank's Board approved policy is a key audit matter due to materiality of balances involved which requires management estimates judgement manual interventions and level of regulatory and other stakeholders focus. Accordingly our audit was focused on income recognition asset classification and provisioning pertaining to advances. || we have evaluated the Bank's internal control system in adhering to the Relevant RBI guidelines and regulations; |
| || || we have evaluated key IT systems/ applications used and tested the design and implementation as well as operational effectiveness of relevant controls including manual controls in relation to income recognition asset classification and provisioning pertaining to advances; |
| || || we tested a selection of advances to examine the validity of the recorded amounts loan documentation examined the statement of accounts indicators of impairment provision for non-performing advances and compliance with Relevant RBI guidelines; and |
| || || we evaluated the governance process and review controls over calculations of provision of non-performing advances basis of provisioning approved in accordance with the Board approved policy by the Chief Risk Officer and Chief Finance Officer. |
| || ||We discussed the provisions made with senior management including the Chief Executive Officer Chief Finance Officer Chief Risk Officer and with those charged with governance. |
|2 ||Accounting for Amalgamation || |
| ||As set out in note 17A and 18.01 the Bank completed its Amalgamation with Capital First Limited Capital ||Our audit approach for testing of accounting of amalgamation included in particular : |
| ||First Home Finance Limited and Capital First Securities Limited (together referred to as the CFL Group) with appointed date as October 1 2018 and effective date as December 18 2018. || we evaluated the Scheme of Amalgamation approved by the National Company Law Tribunal (NCLT); |
| ||The Bank has accounted for the amalgamation by Purchase method as per AS 14 - Accounting for Amalgamations. || we evaluated appropriateness of the Bank's selection of amalgamation accounting by Purchase method against the compliance with each of the conditions stipulated in AS 14 - Accounting for Amalgamation; |
| ||The amalgamation resulted in recognition of Intangible assets - (Brand and Goodwill) aggregating to द 2599.35 crore which have been subjected to accelerated amortisation through Profit and Loss Account during the year ended 31 March 2019. || we tested internal controls over financial reporting of the merged entity; |
| ||The aforesaid intangible assets have been considered to be eligible for tax depreciation consequently deferred tax asset has been recognised on timing difference. || we obtained management's workings for the accounting of the amalgamation and evaluated management's determination of the fair value of the net assets acquired focusing on the valuation of intangible asset which is based on independent valuer's report engaged by the Management; |
| ||The Bank was also required to integrate internal controls over financial reporting of the merged entity. || |
| ||Due to the complexity of the transaction and the associated significant risk of misstatement involved in || we evaluated the fair value of the acquired assets focusing on the valuation methodologies and key assumptions applied; |
| || integration of internal controls over financial reporting of the merged entity; || we evaluated the competence of independent valuer engaged by management and involved our valuation |
| || assumptions and estimates required to be made by the Management to determine the value of Intangible ||specialists to assist in our assessment of the fair value of the acquired assets; |
| ||Assets which is based on independent valuer's report engaged by the management; || we evaluated the reasonableness of key assumptions based on our knowledge of the business and industry; |
| || subsequent accelerated amortisation of these Intangible assets; and || we evaluated the basis determined by the Management for accelerated amortisation of Intangible Assets through Profit and Loss Account during the year ended 31 March 2019; |
| || significant management judgements involved regarding the future profit forecasts and application of tax laws for the recognition and measurement of deferred tax asset on amortised intangible assets || |
| ||The Accounting for Amalgamation is considered as key audit matter. || with the support of our taxation specialists we performed evaluation of tax laws applicable to the Bank and verification of the management's assessment with respect to eligibility of intangible assets for tax depreciation; |
| || || we evaluated management's assessment of future revenues and operating margins by comparing actual results and with the help our internal valuation specialists we assessed the reasonableness of the revenue forecast by performing sensitivity analysis of the growth rates compared to peer banks. |
|3 ||Evaluation of General Information Technology (IT) Controls for Key IT systems used in financial reporting process along with the integration of IT systems acquired on Amalgamation ||We involved our IT specialists to obtain an understanding of the Bank's IT related control environment including the systems acquired during the course of amalgamation. |
| ||The Bank's operational and financial processes are highly dependent on IT systems due to large volume of transactions that are processed daily. ||Furthermore we conducted an assessment and identified key IT applications databases and operating systems applications used in accounting for and recording of Advances Treasury transactions and the |
| ||The Bank has also acquired IT systems of CFL Group on amalgamation which were integrated with the financial reporting application of the Bank. ||systems used in financial reporting process that are relevant to our audit. |
| ||The Bank has constituted an IT Strategy Committee at the Board level to oversee implementation of IT strategy. ||For the key IT systems applications and databases that are relevant to our audit and used in preparation of accounting and financial information our areas of audit focus included Access Security (including controls over privileged access) Program Change controls database management and Network Operations. In particular: |
| ||Accordingly our audit was focussed on key IT systems and controls along with the integration of IT systems acquired on amalgamation due to the pervasive nature and complexity of the IT environment. || we obtained an understanding of the Bank's IT control environment and key changes if any during the audit period that may be relevant to the audit and reviewed the minutes of IT strategy committee meetings; |
| || || we tested the design implementation and operating effectiveness of the Bank's General IT controls over the key IT systems. This included evaluation of bank's controls to evaluate segregation of duties and access rights being provisioned / modified based on duly approved requests access for exit cases being revoked in a timely manner and access of all users being re-certified during the period of audit; |
| || || we also tested key automated and manual business cycle controls integration of IT systems of the CFL Group with the financial reporting application of the Bank and report logic for system generated reports relevant to the audit; including testing of alternate procedures to assess whether there were any unaddressed IT risks that would materially impact the financial statements. |
INFORMATION OTHER THAN THE FINANCIAL STATEMENTS AND AUDITOR'S REPORT THEREON
The Bank's Board of Directors is responsible for preparation of the other information.The other information comprises the information included in the Management Discussion andAnalysis Board's Report Corporate Governance Report Chairperson's Statement andManaging Director & Chief Executive Officer's Statement but does not include thestandalone financial statements the Pillar III Disclosure under the New Capital AdequacyFramework (Basel III disclosures) and our auditor's report thereon which is expected tobe made available to us after that date.
Our opinion on the standalone financial statements does not cover the otherinformation and the Basel III disclosure and accordingly we do not and will not expressany form of assurance conclusion thereon.
In connection with our audit of the standalone financial statements ourresponsibility is to read the other information and in doing so consider whether theother information is materially inconsistent with the standalone financial statements orour knowledge obtained during the course of our audit or otherwise appears to bematerially misstated.
When we read the Management Discussion and Analysis Board's Report CorporateGovernance Report Chairperson's Statement and Managing Director & Chief ExecutiveOfficer's Statement if we conclude that there is a material misstatement therein we arerequired to communicate the matter to those charged with governance as required under SA720 The Auditor's responsibilities Relating to Other Information'.
MANAGEMENT'S RESPONSIBILITY FOR THE STANDALONE FINANCIAL STATEMENTS
The Bank's Board of Directors is responsible for the matters stated in section 134(5)of the Act with respect to the preparation of these standalone financial statements thatgive a true and fair view of the financial position financial performance and cash flowsof the Bank in accordance with the Accounting Standards and other accounting principlesgenerally accepted in India. This responsibility also includes maintenance of adequateaccounting records in accordance with the provisions of the Act for safeguarding theassets of the Bank and for preventing and detecting frauds and other irregularities;selection and application of appropriate accounting policies; making judgments andestimates that are reasonable and prudent; and design implementation and maintenance ofadequate internal financial controls that were operating effectively for ensuring theaccuracy and completeness of the accounting records relevant to the preparation andpresentation of the standalone financial statement that give a true and fair view and arefree from material misstatement whether due to fraud or error.
In preparing the standalone financial statements management is responsible forassessing the Bank's ability to continue as a going concern disclosing as applicablematters related to going concern and using the going concern basis of accounting unlessmanagement either intends to liquidate the Bank or to cease operations or has norealistic alternative but to do so. Those Board of Directors are also responsible foroverseeing the Bank's financial reporting process.
AUDITOR'S RESPONSIBILITY FOR THE AUDIT OF THE STANDALONE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the standalonefinancial statements as a whole are free from material misstatement whether due to fraudor error and to issue an auditor's report that includes our opinion. Reasonable assuranceis a high level of assurance but is not a guarantee that an audit conducted in accordancewith SAs will always detect a material misstatement when it exists. Misstatements canarise from fraud or error and are considered material if individually or in theaggregate they could reasonably be expected to influence the economic decisions of userstaken on the basis of these standalone financial statements.
As part of an audit in accordance with SAs we exercise professional judgment andmaintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the standalonefinancial statements whether due to fraud or error design and perform audit proceduresresponsive to those risks and obtain audit evidence that is sufficient and appropriate toprovide a basis for our opinion. The risk of not detecting a material misstatementresulting from fraud is higher than for one resulting from error as fraud may involvecollusion forgery intentional omissions misrepresentations or the override of internalcontrol.
Obtain an understanding of internal financial control relevant to the audit inorder to design audit procedures that are appropriate in the circumstances. Under section143(3)(i) of the Act we are also responsible for expressing our opinion on whether theBank has adequate internal financial controls system in place and the operatingeffectiveness of such controls.
Evaluate the appropriateness of accounting policies used and the reasonablenessof accounting estimates and related disclosures made by the 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 Bank'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 standalone financial statements or if such disclosures are inadequate to modify ouropinion. Our conclusions are based on the audit evidence obtained up to the date of ourauditor's report. However future events or conditions may cause the Bank to cease tocontinue as a going concern.
Evaluate the overall presentation structure and content of the standalonefinancial statements including the disclosures and whether the standalone financialstatements represent the underlying transactions and events in a manner that achieves fairpresentation.
Materiality is the magnitude of misstatements in the standalone financial statementsthat individually or in aggregate makes it probable that the economic decisions of areasonably knowledgeable user of the standalone financial statements may be influenced. Weconsider quantitative materiality and qualitative factors in (i) planning the scope of ouraudit work and in evaluating the results of our work; and (ii) to evaluate the effect ofany identified misstatements in the standalone financial statements.
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 standalone financial statementsof the current period and are therefore the key audit matters. We describe these mattersin our auditor's report unless law or regulation precludes public disclosure about thematter or when 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.
The audit of special purpose financial information of Capital First Limited and itssubsidiaries Capital First Home Finance Limited and Capital First Securities Limited(together referred to as the CFL Group) as at and for the period ended 30September 2018 as considered for the merger accounting as on the appointed date wascarried out by the statutory auditors of the CFL Group.
Our Opinion is not modified in respect of this matter.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
1. As required by Section 143(3) of the Act and section 30 of the Banking RegulationAct 1949 based on our audit 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 proper books of account as required by law have been kept by theBank.
c) In our opinion the transactions of the Bank which have come to our notice have beenwithin the powers of the Bank.
d) As explained in paragraph 2 below the financial accounting systems of the Bank arecentralised and therefore accounting returns are not required to be submitted by theBranches.
e) The Balance Sheet the Profit and Loss Account and the Cash Flow Statement dealtwith by this Report are in agreement with the books of account.
f) In our opinion the aforesaid standalone financial statements comply with theAccounting Standards specified under Section 133 of the Act.
g) On the basis of the written representations received from the directors as on 31March 2019 taken on record by the Board of Directors none of the directors isdisqualified as on 31 March 2019 from being appointed as a director in terms of Section164(2) of the Act.
h) With respect to the adequacy of the internal financial controls over financialreporting of the Bank and the operating effectiveness of such controls refer to ourseparate Report in Annexure A. Our report expresses an unmodified opinion onthe adequacy and operating effectiveness of the Bank's internal financial controls overfinancial reporting.
i) With respect to the other matters to be included in the Auditor's Report inaccordance with the requirements of section 197(16) of the Act as amended in our opinionand to the best of our information and according to the explanations given to us theentity being a banking company section 197 of the Act related to the managerialremuneration is not applicable by virtue of section 35B (2A) of the Banking RegulationAct 1949.
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 as amended inour opinion and to the best of our information and according to the explanations given tous:
i. The Bank has disclosed the impact of pending litigations on its financial positionin its standalone financial statements;
ii. The Bank has made provision as required under the applicable law or accountingstandards for material foreseeable losses if any on long-term contracts includingderivative contracts;
iii. there were no amounts which were required to be transferred to the InvestorEducation and Protection Fund by the Bank.
2. We report that during the course of our audit we have visited and performed selectrelevant procedures at 17 branches. Since the Bank considers its key operations to beautomated with the key applications largely integrated to the core banking systems itdoes not require its branches to submit any financial returns. Accordingly our audit iscarried out centrally at the Head Office and Central Processing Units based on thenecessary records and data required for the purposes of the audit being made available tous.
For DELOITTE HASKINS & SELLS
Chartered Accountants (Firm's Registration No. 117365W)
Kalpesh J. Mehta
(Membership No. 48791)
Date: 10 May 2019
Annexure A to the independent Auditor's Report
(Referred to in paragraph 1(h) under Report on Other Legal and RegulatoryRequirements' section of our report of even date)
Report on The Internal Financial Controls Over Financial Reporting Under Clause (I) ofSubSection 3 of Section 143 of The Companies Act 2013 (The Act)
We have audited the internal financial controls over financial reporting of IDFC FIRSTBank Ltd. (the Bank) as of 31 March 2019 in conjunction with our audit of thestandalone financial statements of the Bank for the year ended on that date.
Management's Responsibility for Internal Financial Controls
The Bank's management is responsible for establishing and maintaining internalfinancial controls based on the internal control over financial reporting criteriaestablished by the Bank considering the essential components of internal control stated inthe Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issuedby the Institute of Chartered Accountants of India. These responsibilities include thedesign implementation and maintenance of adequate internal financial controls that wereoperating effectively for ensuring the orderly and efficient conduct of its businessincluding adherence to respective Bank'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 Companies Act 2013 the Banking Regulation Act 1949 and theguidelines issued by the Reserve Bank of India.
Our responsibility is to express an opinion on the Bank's internal financial controlsover financial reporting of the Bank based on our audit. We conducted our audit inaccordance with the Guidance Note on Audit of Internal Financial Controls Over FinancialReporting (the Guidance Note) issued by the Institute of Chartered Accountantsof India and the Standards on Auditing prescribed under Section 143(10) of the CompaniesAct 2013 to the extent applicable to an audit of internal financial controls. ThoseStandards and the Guidance Note require that we comply with ethical requirements and planand perform the audit to obtain reasonable assurance about whether adequate internalfinancial controls over financial reporting were established and maintained and if suchcontrols operated effectively in all material respects.
Our audit involves performing procedures to obtain audit evidence about the adequacy ofthe internal financial controls system over financial reporting and their operatingeffectiveness. Our audit of internal financial controls over financial reporting includedobtaining an understanding of internal financial controls over financial reportingassessing the risk that a material weakness exists and testing and evaluating the designand operating effectiveness of internal control based on the assessed risk. The proceduresselected depend on the auditor's judgement including the assessment of the risks ofmaterial misstatement of the financial statements whether due to fraud or error.
We believe that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our audit opinion on the Bank's internal financial controls systemover financial reporting.
Meaning of Internal Financial Controls Over Financial Reporting
A Bank's internal financial control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A Bank's internal financial control over financialreporting includes those policies and procedures that (1) pertain to the maintenance ofrecords that in reasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the Bank; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles and that receipts and expenditures of the Bankare being made only in accordance with authorisations of management and directors of theBank; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorised acquisition use or disposition of the Bank's assets that could have amaterial effect on the financial statements.
Inherent Limitations of internal Financial Controls Over Financial Reporting
Because of the inherent limitations of internal financial controls over financialreporting including the possibility of collusion or improper management override ofcontrols material misstatements due to error or fraud may occur and not be detected.Also projections of any evaluation of the internal financial controls over financialreporting to future periods are subject to the risk that the internal financial controlover financial reporting may become inadequate because of changes in conditions or thatthe degree of compliance with the policies or procedures may deteriorate.
In our opinion to the best of our information and according to the explanations givento us the Bank has in all material respects an adequate internal financial controlssystem over financial reporting and such internal financial controls over financialreporting were operating effectively as at 31 March 2019 based on the criteria forinternal financial control over financial reporting established by the Bank consideringthe essential components of internal control stated in the Guidance Note on Audit ofInternal Financial Controls Over Financial Reporting issued by the Institute of CharteredAccountants of India.
For DELOITTE HASKINS & SELLS
Chartered Accountants (Firm's Registration No. 117365W)
Kalpesh J. Mehta
(Membership No. 48791)
Place: Mumbai Date: 10 May 2019