REPORT ON THE ANNUAL FINANCIAL STATEMENTS
We have audited the annual financial statements of DZ PRIVATBANK S.A. (the “Bank”), which comprise the balance sheet as of 31 December 2020, the statement of comprehensive income, the statement of changes in equity and cash flow statement for the financial year ending on this date as well as notes to the financial statements comprising a summary of significant accounting policies.
In our opinion, the accompanying annual financial statements give a true and fair view of the financial position of the Company of the Bank as of 31 December 2020 and of its financial performance and its cash flows for the financial year ending on this date in accordance with the International Financial Reporting Standards (“IFRS”) as adopted by the European Union.
BASIS OF THE AUDIT OPINION
We performed our audit in accordance with the EU Regulation No. 537/2014, the Audit Law (“Law of 23 July 2016”) and the International Standards on Auditing (“ISA”) which are accepted for Luxembourg by the Commission de Surveillance du Secteur Financier (“CSSF”). Our responsibility pursuant to the EU Regulation No. 537/2014, the Law of 23 July 2016 and the ISAs accepted for Luxembourg by the CSSF is described in more detail in the section “Responsibilty of the auditor for the audit”. We are also independent of the Company as required for conformity with the “International Code of Ethics for Professional Accountants, including International Independence Standards” issued by the “International Ethics Standards Board for Accountants” (the IESBA Code) which is accepted by the CSSF for Luxembourg, and in accordance with the professional rules of conduct which we have to adhere to in relation to the annual audit, and we have fulfilled all other professional duties in accordance with these rules of conduct. We believe that the audit evidence which we have obtained is sufficient and is appropriate to provide a basis for our audit opinion.
PARTICULARLY IMPORTANT AUDIT MATTERS
Particularly important audit matters are those matters that, in our professional judgement, were of most significance in the audit of the annual financial statements for the current reporting period. These matters were considered in the context of the audit of the annual financial statements as a whole and in forming our opinion about them, and we do not express a separate opinion on these matters. In the following, we present the audit matter that we consider to be of particular importance:
DESCRIPTION OF THE FACTS
The Company holds financial assets with a book value of EUR 3,388 million, which, with the exception of the investment book value of EUR 164.7 million measured at amortised cost, are generally allocated to the “measured at amortised cost” category due to their exclusive allocation to the “hold” business model (two securities with a book value of EUR 13 million are currently in the fair value option). This category represents approximately 20% of the Company's total assets. Information provided by the Bank on the recognition and measurement of these financial assets is included in the notes to the financial statements in the individual explanatory notes under chapter 5 “Financial instruments”, chapter 17 “Financial assets”, chapter 21 “Risk provisions”, chapter 48 “Risk provisions” and chapter 57 “Classes, categories and fair values of financial instruments”.
In this year's annual financial statements, these financial assets are recognised and measured for the first time in accordance with the provisions of IFRS 9. In this context, the Company has decided to acquire all financial instruments with the aim of collecting the cash flows they contain, so that only the “hold” business model is envisaged. The further classification of a financial instrument in the category “measured at amortised cost” first requires compliance with defined criteria (SPPI condition), which the Company must review on a transaction-by-transaction basis upon addition of the corresponding financial instrument.
The measurement of financial assets measured at amortised cost depends primarily on the derivation of amortised cost, the existence of a hedging relationship and the amount of the provision for credit risks.
The amortised cost of these financial assets is determined using the effective interest method and the parameters required for this including cash flows for individual transactions.
If a hedging relationship exists, its permissibility must be reviewed by assessing hedge effectiveness at the time of designation and monitored on a regular basis. The book values of hedged financial assets are adjusted for the change in fair value attributable to the hedged risk using appropriate methods.
The measurement of the provision for credit risks and credit losses on these assets is based on three main input factors. The probability of default (PD) is determined using internally and externally available ratings and taking into account macroeconomic expectations of DZ BANK Group. The loss given default (LGD) is determined internally within the Group for the various economic sectors of issuers and types of securities. The exposure at default (EAD) corresponds to the amortised cost of the relevant financial asset.
The level transfer within the impairment model used is based on the “low-credit-risk” exemption, which allows financial assets to be kept in Level 1 as long as their rating is in the investment grade range.
We consider the recognition and measurement of this significant balance sheet item “financial assets” to be a particularly important audit matter, as both this year's recognition and measurement are highly dependent on the proper classification within the category “at amortised cost” and the application of appropriate internal procedures and parameters to determine the hedge adjustment and credit risk provisions.
OUR AUDIT APROACH
Based on our risk assessment and evaluation of the risks of error, we have based our opinion on both control-based and expressive audit procedures.
We have therefore performed the following audit procedures:
We included the procedures and processes used in the acquisition of the financial assets, the assessment of the SPPI condition and the designation of hedging relationships and assessed the controls in place for adequacy and effectiveness.
We have also performed expressive substantive audit procedures on all financial assets within the “measured at amortised cost” category to assess the SPPI requirement.
With regard to the correct designation of hedging relationships, we have traced the allocation to the corresponding hedging instrument for all financial assets concerned. We performed a revaluation on a sample basis for the underlying and hedging transactions on the balance sheet date and assessed the appropriateness of the Bank's valuations on this basis.
With regard to the correct measurement of the provision for credit risks and credit losses, we have methodically traced the valuation model applied by the Company and examined its compliance with the requirements of IFRS 9. We have assessed the appropriateness of the input parameters used in the valuation model on the basis of both data available within the Company and data available externally.
We also inspected the individual ratings of the financial assets used by the Company within the framework of the “low-credit-risk” exemption and compared them to external ratings on a sample basis. In this context, we also assessed the impact of the coronavirus pandemic on the valuation models applied, particularly with regard to the appropriateness of future macroeconomic factors.
The Board of Management is responsible for the other information. Other information includes information which can be found in the annual report including the operations report, but does not include the annual financial statements or our auditor's report on those annual financial statements.
Our audit opinion in relation to the annual financial statements does not cover other information and we offer no guarantee for this information.
Our responsibility in relation to the audit of the annual financial statements is to read the other information and to assess whether there is a major inconsistency between this and the annual financial statements or the findings obtained from the audit or the other information appears to be otherwise presented in a fundamentally incorrect manner. If we come to the conclusion based on the scope of our work that other information includes fundamentally incorrect statements, we are obligated to report this fact.
We have nothing to report regarding this.
RESPONSIBILITY OF THE BOARD OF MANAGEMENT FOR THE ANNUAL FINANCIAL STATEMENTS
The Board of Management is responsible for the drafting and correct overall presentation of the annual financial statements in accordance with the IFRS as they are applicable in the European Union in relation to the preparation and presentation of the annual financial statements and for any internal checks which it deems necessary in order to enable the annual financial statements to be drawn up in such a way that they are free from significant intentional or unintentional misrepresentations.
In preparing the annual financial statements, the Board of Management is responsible for assessing the ability of the Bank to continue to operate and, where relevant, to provide information on matters relating to the continuation of operations, and to use the assumption of going concern as the basis for the accounting, unless the Board of Management intends to liquidate the Bank, cease operations or has no other realistic alternative than to do so.
RESPONSIBILITY OF THE AUDITOR FOR THE AUDIT OF THE ANNUAL FINANCIAL STATEMENTS
The aim of our audit is to obtain reasonable assurance as to whether the annual financial statements as a whole are free of significant intentional or unintentional misrepresentations, and to issue an auditor's report in this regard containing our audit opinion. Reasonable assurance equates to a high level of certainty, but it does not represent a guarantee that an audit conducted in accordance with EU Regulation No. 537/2014, the Law of 23 July 2016 and the ISAs that have been accepted for Luxembourg by the CSSF will always reveal any material misrepresentation. Incorrect information may result from errors or violations, and it is viewed as material if it can reasonably be assumed that it could, either individually or overall, influence any economic decisions made by relevant parties on the basis of these annual financial statements.
In accordance with EU Regulation No. 537/2014, the Law of 23 July 2016 and the ISAs accepted for Luxembourg by the CSSF, we apply due discretion and maintain a critical attitude during the performance of any audit. In addition,
- we identify and assess the risk of material inaccuracies in the annual financial statements resulting from errors or violations, we plan and execute audit operations in response to these risks, and we obtain audit evidence which is adequate and appropriate to serve as the basis for the audit assessment. The risk that material misinformation is not disclosed is greater in the case of violations than inaccuracies, since violations may involve fraudulent collaboration, falsifications, intentionally incomplete information, misleading information, and/or the disabling of internal controls,
- we gain an understanding of the internal control system that is relevant to the audit in order to plan audit operations which are appropriate in the given circumstances, but not with the aim of delivering an audit opinion regarding the efficacy of the Bank's internal control system,
- we assess the appropriateness of the accounting policies applied by the Board of Management, of the accounting estimates made, and of the corresponding information that is provided in the notes to the accounts,
- we draw conclusions on the appropriateness of the application of going-concern accounting policy by the Board of Management and, on the basis of the audit evidence obtained, whether there is material uncertainty in connection with events or situations which could reveal serious doubts in the ability of the Bank to continue in operation. Should we conclude that there is any material uncertainty, we are obliged to make reference within the audit report to the relevant details that are contained in the notes to the annual financial statements, or, if the information is inappropriate, to modify the audit opinion. These conclusions are set out on the basis of the audit evidence obtained up to the date of the audit report. Future events or circumstances may, however, mean that the Bank can no longer continue in business activities,
- we assess the overall presentation, the structure and content of the annual financial statements, including the notes to the accounts, and we assess whether this accurately describes the underlying business operations and events.
We communicate with those responsible for supervision in relation to such matters as the planned scope of the audit and the period covered by it, as well as any material audit conclusions, including significant weaknesses of the internal control system that we identify during the audit.
Of the matters discussed with those responsible for monitoring, we determine those matters that were of most significance in the audit of the annual financial statements of the current reporting period to be key audit matters. We describe these matters in our report unless law or regulation precludes public disclosure of the matter.
REPORT ON OTHER LEGAL AND REGULATORY OBLIGATIONS
We were appointed as approved statutory auditors by the Board of Management on 24 August 2020 and the continuous term of office, including previous extensions and reappointments, is ten years. The operations report is consistent with the annual financial statements and meets the applicable legal requirements.
We confirm that we have not provided any prohibited non-audit services to statutory auditors in accordance with EU Regulation No. 537/2014 and that we have remained independent of DZ PRIVATBANK S.A. in conducting our audit.
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