Inhoudsopgave Voorwoord Bestuursverslag Corporate governance Consolidated Financial Statements Company Financial Statements Pillar 3 Key audit matter Valuation of financial instruments Refer to note 2 'Accounting policies' and note 4.9 'Fair value of financial assets and liabilities'. The financial instruments that are measured at fair value and are significant for the financial statements are: Trading positions Derivatives Liabilities at fair value. For financial instruments that are actively traded and for which quoted market prices or market parameters are available, there is less judgement involved in the determination of fair values (level 1 instruments). However, when observable market prices or market parameters are not available the fair value is subject to significant judgement. This is relevant for derivatives and liabilities at fair value. The fair value of these financial instruments is determined through the application of valuation techniques and estimates which involve management judgement (level 2 and level 3 instruments). In particular we focused on the significant estimation uncertainties in: The valuation of derivatives that include bilateral credit valuation adjustments (BCVA); and The valuation of liabilities at fair value that include own credit adjustments (OCA). BCVA is sensitive to the value of uncollateralised derivative financial instruments and their expected future market volatility. The liabilities at fair include own debt securities in issue, debt securities in issue structured and subordinated liabilities. For OCA Rabobank values its own liabilities using valuation models. Since the market for own funding of Rabobank is not highly active, management utilizes other observable market data points. In 2016 Rabobank decided to early adopt and retrospectively apply the IFRS 9 accounting provision for the OCA. Hedge accounting Refer to note 2.3 'Derivatives and hedging' and note 10 'Derivatives'. The Bank manages its structural interest rate risk as well as exchange rate risk through hedges. If the hedge relationship meets the requirements of IAS 39, hedge accounting is applied. Hedge accounting is a technique that modifies the normal basis for recognising gains and losses (or revenues and expenses) on associated hedging instruments and hedged items, so that both are recognised in the statement of income (or OCI) in the same accounting period. The application of hedge accounting is judgemental and requires detailed calculations and documentation and that is why we determined this to be a key audit matter. Valuation of equity investments Refer to note 2.2.2 'Investments in associates and joint ventures' and note 13.1 'Investments in associates'. Rabobank has a 29.21% ownership in the equity of Achmea B.V. ('Achmea'), a Dutch non-public insurance company. In the fall of 2016 Rabobank identified a number of triggers to perform impairment assessments on its equity investment in Achmea. These triggers included the increasing uncertainties in the Dutch health insurance market, the deteriorating business environment for Dutch insurers, market transactions and press releases issued by Achmea. Management determined the value in use and fair value less cost to sell ('fair value'). The value in use calculation is sensitive to assumptions as the future cash flow projection, the cost of equity and access capital distributions. The fair value method utilizes market multiples as price to book or price to earnings. Management compared the highest of value in use and fair value to the carrying value of the investment resulted in an aggregated impairment of EUR 700 million. How our audit addressed the matter Internal controls We understood, evaluated and tested the operating effectiveness of key controls and focused on: The governance over models, including the support and approval process of the models and any subsequent changes to these models; Controls over the completeness and accuracy of data inputs; The Bank's independent price verification process that reviews the reasonableness of models and outputs; and The governance, review and approval process that management has in place for BCVA, and OCA. We determined that we could place reliance on these controls for the purpose of our audit. Substantive audit procedures We evaluated the assumptions, methodologies and models used by Rabobankfor derivatives and financial liabilities at fair value. We have performed sensitivity testing on key assumptions, and reconciled model inputs to actual market transactions as far as possible. For key data inputs for which no market data were available we challenged management's judgement. These key data inputs relate mostly to: Value of uncollateralised derivative financial instruments; Expected future market volatility; and Creditworthiness of the Bank's counterparties. We challenged management on the (right) use of comparable market transactions to demonstrate their appropriateness of these key data inputs. Based upon our work performed on these inputs we view the outcome of management's estimates and judgement as reasonable. Next to the procedures outlined above we performed an independent valuation of a sample of derivative positions. In some cases our independent valuation resulted in different values as compared to those calculated by management. We have assessed that those differences fell within the range of reasonable outcomes, in the context of the inherent uncertainties and use of models and assumptions. Disclosures We assessed the Bank's application of OCA under the early adopted IFRS 9 standard and noted that the impact amounts to EUR 365 million for 2016 and is appropriately presented in other comprehensive income instead of the statement of income. In our procedures we focused on the accurate presentation of financial instruments at fair value into level 1-3 and noted no material exceptions. Internal controls We understood, evaluated and tested the operating effectiveness of key controls and focused on: The operating effectiveness of controls over the designation and ongoing management of hedge accounting relationships, including the periodic testing of hedge effectiveness; Management's model validation controls that calculates the fair value of hedging relationships; Checks and balances on the reasonableness of these fair values through independent source calculations of the fair values; and Validation of controls around the appropriate monitoring and elimination of inter group hedging instruments. We determined that we could place reliance on these controls for the purpose of our audit. Substantive audit procedures Testing has been performed over all key year-end reconciliations between source systems and the hedge accounting systems that maintain the hedging models to calculate the hedge effectiveness. Substantive procedures were focused on the application of hedge accounting which included, examining hedge accounting documentation to assess whether the documentation complied with the EU-IFRS requirements. The hedge accounting documentation appropriately supports the use of hedge accounting by the Bank. Substantive audit procedures We independently assessed the value in use and fair value of Achmea. We challenged and assessed: Cost of capital Future cash flow projections Access capital distributions in combination with target solvency levels We based our assessment of these elements on the historical performance of Achmea, market practice data, and experience of valuation techniques. We used price to book and price to earnings multiples for most comparable peers in the Netherlands and Europe for the fair value calculation. We benchmarked the outcome with market prices in the Netherlands. We performed sensitivity testing on management's key assumptions and the output of the value in use and fair value calculation for Achmea. Overall we believe the key assumptions are reasonable and that the outcome falls within our range of possible outcomes. 249 Independent auditor's report

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Jaarverslagen Rabobank | 2016 | | pagina 250