Contents Management report Corporate governance Consolidated financial statements Financial statements Pillar 3
For the in-scope components the group audit team instructed
component auditors as to the significant areas to be covered,
including the significant risks identified for the consolidated
financial statements and the information to be reported back.
The group audit team allocated component materiality levels
depending on the mix of size and risk profile of the group
across the components.
By performing the procedures mentioned above at group
entities, together with additional procedures at group level,
we have been able to obtain sufficient and appropriate audit
evidence about the group's financial information to provide
an opinion about the consolidated financial statements.
Our key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the
financial statements. We have communicated the key audit
matters to the Supervisory Board. The key audit matters are not
a comprehensive reflection of all matters discussed.
These matters were addressed in the context of our audit
of the financial statements as a whole and in forming our
opinion thereon, and we do not provide a separate opinion on
these matters.
Risk
Provision for loan losses (see note 4.4 and 11)
The provision for loan losses amount to EUR 8,372 million as at 31 December
2015.
The appropriateness of loan loss provisions is a key area of judgment
for management. The identification of loans that are deteriorating, the
assessment of objective evidence for impairment, the value of collateral
and the determination of the recoverable amount are inherently uncertain
involving various assumptions and factors including the financial condition
of the counterparty, expected future cash flows, observable market prices
and expected net selling prices. The use of different modelling techniques
and assumptions could produce significantly different estimates of loan
loss provisions. The associated risk management disclosure is complex and
dependent on high quality data. Specific portfolios of focus included the retail
portfolio in the Netherlands, the shipping portfolio and the commercial real
estate portfolio.
Given the impact of inherent uncertainty of the loan loss provision and the
subjectivity involved in the judgments made, we considered this to be an
important item for our audit.
Our audit response
We assessed and tested the design and operating effectiveness of the controls related
to the timely recognition and measurement of impairments for loan losses, including
the quality of underlying data and systems. For loan loss provisions calculated on
an individual basis we examined a selection of individual loan exposure in detail,
and challenged management assessment of the recoverable amount. We tested the
assumptions underlying the impairment identification and quantification including
forecasts of future cash flows, valuation of underlying collateral and estimates of
recovery on default. This included taking into consideration the impact of forbearance.
We applied professional judgment in selecting the loan exposures for our detailed
inspection with an emphasis on exposures in sectors that pose an increased uncertainty
for recovery in the current market circumstances, for example commercial real estate
exposures, retail exposures and exposures in the shipping industry.
We tested, supported by our specialists, the sufficiency of the underlying models,
assumptions and data used by Rabobank to measure loan loss impairments for
portfolios of loans with similar credit characteristics. Likewise we have tested the
models, assumptions and data used for the collective impairment for incurred but not
identified loan losses, including the appropriateness of the respective loss identification
period that is used in these models.
Fair values of financial assets and liabilities (see note 4.9)
The financial instruments that are measured at fair value are significant for the
financial statements. At 31 December 2015, derivatives (both assets/liabilities),
trading positions, available for sale investments and other financial liabilities
at fair value through profit or loss amount to EUR 48,113/EUR 55,129 million,
EUR 3,472 million, EUR 37,773 million and EUR 16,991 million respectively.
For financial instruments that are actively traded and for which quoted
market prices are available, there is high objectivity in the determination of
fair values ('level 1 valuation'). Regarding 'level 3' assets, observable market
prices or market parameters are not available. As a result the fair value is
subject to estimation uncertainty as significant judgment is applied to
estimate fair value. Regarding 'level 2' assets, observable market prices or
market parameters are available as inputs for valuation models that are used
to determine the fair values.
Finally, we assessed the completeness and accuracy of the disclosures relating to loan
loss provisions to assess compliance with disclosure requirements included in EU-IFRS.
We have tested the level 1 fair valuations by comparing the fair values applied by
Rabobank with publicly available market data. For level 2 and level 3 valuations we
tested the appropriateness of the models used by Rabobank and the reliability of the
data that was used as input to these models.
We assessed the design and operating effectiveness of the internal controls over
valuation and performed independently price verification and model approval. We
performed additional procedures for areas of higher risk and estimation with the
assistance of our valuation specialists.
This included, where relevant, comparison of judgments made to current and emerging
market practice and reperformance of valuations on a sample basis.
We also assessed the impact of other sources of fair value information including gains
or losses on disposal. Besides we assessed the design and operating effectiveness of the
controls over related disclosures including the disclosure of valuation sensitivity and fair
value hierarchy.
Given the judgment applied in the estimation of the fair values, we
determined this to be a significant item for our audit.
Finally, we assessed the completeness and accuracy of the disclosures relating to
fair values of financial assets and liabilities to assess compliance with disclosure
requirements included in EU-IFRS.
247 Independent auditor's report
