ALAFCO Aviation Lease and Finance K S C P : Annual Report 2022

INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF ALAFCO AVIATION LEASE AND FINANCE COMPANY K.S.C.P. (continued)

Report on the Audit of the Consolidated Financial Statements (continued)

Key Audit Matters (continued)

We have fulfilled the responsibilities described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements.

In addition to the matter described in the "Material Uncertainty Related to Going Concern" section, we have determined the matters described below to be the key audit matters to be communicated in our report.

Impairment of aircraft and engines

As at 30 September 2022, aircraft and engines are carried at KD 1,067,282,690 as disclosed in Note

5. The impairment test of aircraft and engines performed by the management is significant to our audit due to the size of the assets' carrying value as well as the judgement involved in the assessment of recoverable amounts of aircraft and engines, which are based on value-in-use or fair value less costs to sell. Value-in-use basis is complex and requires considerable judgment on the part of management such as estimates of future cash flows and discount rate variables which includes risk free rate, equity risk premium, beta in the relevant industry sector and estimation of cost of debt based on the group's total debt/equity balances. Fair value less costs of sell is based on models adopted by the management using published reports of aircraft values. The published reports of aircraft values include the value of aircrafts in the current year considering the model and date of manufacturing of each aircraft. Therefore, we identified the impairment testing of aircraft and engines as a key audit matter.

Our audit procedures to assess the impairment testing of aircraft and engines included the following:

• Assessing the knowledge and expertise of the management of the group to perform such impairment assessment;
• Evaluating and challenging the key assumptions and methodologies used by the management;
• Assessing the appropriateness of the valuation technique used and evaluating the key assumptions used by the management in determining the fair value less costs to sell which includes benchmarking the fair value with the published reports of aircraft values;

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INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF ALAFCO AVIATION LEASE AND FINANCE COMPANY K.S.C.P. (continued)

Report on the Audit of the Consolidated Financial Statements (continued)

Key Audit Matters (continued)

Impairment of aircraft and engines (continued)

• For the aircrafts where the value in use is higher than the fair value less costs to sell, our audit procedures included the following:
• • Assessing the appropriateness of discount rates used by management to determine the value-in-use with the help of our internal specialist by reference to externally available data taking into account regional and industry specific risk premiums;
  • Assessing the reasonability of estimated future cash flows based on the recent lease agreement of each aircraft and the related lease income taking into consideration expected changes in future lease rental;
  • Comparing the assumptions adopted in the prior year's impairment assessments with actual results for the current year, and investigating significant variances identified and considering the impact on the current year's impairment assessments.

Expected Credit Losses ("ECL") on receivables

As at 30 September 2022, lease and maintenance receivables amounted to KD 18,644,850 net off expected credit loss of KD 25,376,798 as disclosed in Note 7.

The group applies a simplified approach in calculating ECL for receivables by establishing a provision matrix that is based on historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment in which each debtors operate. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns.

Due to the significance of receivables and the complexity involved in the ECL calculation, this was considered as a key audit matter.

Our audit procedures included, among others, the following:

• We assessed the reasonableness of the assumptions used in the ECL calculation by comparing them with historical data adjusted for current market conditions and forward-looking information;
• We performed substantive procedures to test, on a sample basis, the completeness and accuracy of the information included in the debtors' ageing report;
• Further, in order to evaluate the appropriateness of management judgements, we verified on a sample basis, the customer's historical payment patterns and whether any post year-end payments had been received up to the date of completing our audit procedures; and

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INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF ALAFCO AVIATION LEASE AND FINANCE COMPANY K.S.C.P. (continued)

Report on the Audit of the Consolidated Financial Statements (continued)

Key Audit Matters (continued)

Expected Credit Losses ("ECL") on receivables (continued)

• We also considered the adequacy of the group's disclosures relating to the ECL, management's assessment of the credit risk and their responses to such risks in Note 23.1 to the consolidated financial statements.

Other information included in the Group's 2022 Annual Report

Management is responsible for the other information. Other information consists of the information included in the Group's 2022 Annual Report, other than the consolidated financial statements and our auditor's report thereon. We obtained the report of the Parent Company's Board of Directors, prior to the date of our auditor's report, and we expect to obtain the remaining sections of the Group's 2022 Annual Report after the date of our auditor's report.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor's report, we conclude that there is a material misstatement of this other information; we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the group's financial reporting process.

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