Contents Management report Corporate governance Consolidated financial statements Financial statements Pillar 3
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.
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.
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.
Other provisions (see chapter 4.9 and note 18)
Other provisions are accrued for regarding restructurings, uncertainties associated
with legal, tax and compliance risks. IFRS provide specific criteria determining
the point in time other provisions must be accrued for. Assessments are made
both on likelihood of certain risks and the possibility to estimate the amounts
involved. Especially the outcome of legal procedures might be very difficult to
predict. Procedures have been developed to cope with the uncertainties, including
involvement of internal and external experts. Nevertheless, judgments regarding
other provisions inherently are (highly) uncertain and best estimates regarding
other provisions might change over time.
Given the uncertainty of provisions and the unpredictability of final outcomes, we
determined this to be a significant item for our audit.
Reliability and continuity of electronic data processing
Rabobank Group is dependent on the IT-infrastructureforthe continuity of
their business processes. Rabobank Group invested in the improvement of IT-
hardware, systems and processes, focused on the increased effectiveness of the
IT-infrastructure and the reliability and continuity of electronic data processing.
Risk
Provision for loan losses (see chapter 4.4 and note 4)
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.
Fair values of financial assets and liabilities (see chapter 2.4 and 2.5)
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.
Given the judgment applied in the estimation of the fair values, we determined this
to be a significant item for our audit.
We assessed and tested the design and operating effectiveness of the controls
related to the timely recognition and measurement of other provisions. We
included (tax) specialists in our team to assess risks and audit the proper
application of IFRS. Judgments were discussed with management and challenged
based on internal and/or external information available. We assessed the design
and operating effectiveness of the controls over related disclosures. Finally, we
assessed the completeness and accuracy of the disclosures relating to other
provisions to assess compliance with disclosure requirements included in EU-IFRS.
We tested IT- security, change management and application controls embedded in
Rabobank's key processes. We assessed the reliability and continuity of electronic
data processing only to the extent necessary within the scope of the audit of the
annual accounts. We included IT-auditors in our audit-team. Our work consisted of
assessing the developments in the IT-infrastructure and analysing the impact on
the IT-organisation. Additionally, we tested the design and operating effectiveness
of relevant internal controls related to IT- systems and processes.
294 Rabobank Annual Report 2015
