PASHA BANK ANNUAL REPOT 2024

Key audit matter As of 31 December 2024, loans measured at amortized cost comprise 45% of the Bank’s total assets. The Bank recognizes its loans in accordance with the Regulation on the Procedures and Principles for Classification of Loans by Banks and Provisions to be set aside (the “Regulation”) published on the Official Gazette No. 29750 dated 22 June 2016 and TFRS 9 Financial Instruments standard (“Standard”) become effective from 1 January 2018. The Bank applies the “expected credit loss model” in determining the impairment of financial assets in accordance with the Regulation and Standard. The model which contains significant assumptions and estimates is reviewed by the Bank management annually. The significant assumptions and estimates of the Bank’s management are as follows: - significant increase in credit risk - incorporating the forward-looking macroeconomic information in calculation of credit risk - design and implementation of expected credit loss model The determination of the impairment of loans measured at amortized cost depends on the credit default status, the model based on the change in the credit risk at the first recognition date and the classification of the loans measured at amortized cost according to the model. Establishing an accurate classification is a significant process as the calculation of expected credit loss varies to the staging of the financial assets. The Bank calculates expected credit losses on both an individual and a collective basis. Individual provisions consider the estimated future performance of the business and the market value of the collateral provided for credit transactions. The collective basis expected credit loss calculation is based on complex processes which are modelled by using current and past data sets and expectations. The completeness and accuracy of data sets in the model are also considered and the forward-looking expectations are reflected by macroeconomic models. The impairment calculation for loans has been identified as a key audit matter, as it has a complex structure and includes significant estimations and assumptions made by the management. How the matter is addressed in our audit Our procedures for auditing the expected credit losses on loans include below: - We tested the design and operating effectiveness of the controls on lending, collateralization, collection, follow- up, classification and impairment procedures are tested with the involvement of information risk management specialists. - We evaluated the adequacy of the subjective and objective criteria that is defined in the Bank’s impairment accounting policy compared with the Regulation and Standard. - We evaluated the Banks’s business model and methodology and the evaluation of the calculations carried out with the control testing and detail analysis by the involvement of specialist. - We performed loan reviews for selected loan samples which include a detailed examination of loan files and related information and evaluation of their classification. - For the expected credit loss calculations for individually assessed loans, we evaluated the accuracy of the loss allowances by including prospective cash flow information and collateral values. - We tested the accuracy and completeness of the data in the calculation models for the loans which are assessed on collective basis. The expected credit loss calculation was tested through recalculation. The models used for the calculation of the risk parameters were examined and the risk parameters for the selected sample portfolios were recalculated. - We assessed the macroeconomic models and tested the effect of the risk parameters by recalculation method. - We evaluated the qualitative and quantitative assessments, which are used in determining the significant increase in credit risk. - We evaluated the adequacy of the disclosures in the unconsolidated financial statements related to impairment provisions. 122 PASHA Bank 2024 Annual Report Independent Auditor’s Report