Contents Foreword Management report Corporate governance
Consolidated Financial Statements
Company Financial Statements
Pillar 3
In the current year the group engagement team visited
the Netherlands, USA, the UK, Australia and Brazil at least once.
During these visits the group engagement team met with the
component teams and with local management. Where the
work was performed by component auditors, we determined
the level of involvement we needed to have in their audit work
to be able to conclude whether sufficient appropriate audit
evidence had been obtained as a basis for our opinion on the
financial statements as a whole.
The group consolidation, financial statement disclosures
and a number of complex items are audited by the group
engagement team at the head office. By performing the
procedures above at components, combined with the
additional procedures at group level, we have obtained
sufficient and appropriate audit evidence regarding the
financial information of the group. These procedures in totality
provided a basis for our opinion on the consolidated financial
statements.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance to the audit of the
financial statements. We have communicated the key audit
matters to the Supervisory Board, however these should not be
regarded as a comprehensive reflection of all matters that were
identified by our audit and that we discussed. We described
the key audit matters and included a summary of the audit
procedures we performed on those matters.
The key audit matters were addressed in the context of our
audit of the financial statements as a whole, and in forming
our opinion thereon. We do not provide a separate opinion
on these matters or on specific elements of the financial
statements. Any comments we make on the results of our
procedures should be read in this context.
Key audit matter
Impairment of loans and advances to customers
Refer to note 2.15 'Loans and advances to customers and loans and
advances to banks' and note 11 'Loans and advances to customers'.
We focused on this area because management makes complex and
subjective judgements over both timing of recognition and the
estimation of the size of any such impairment. Within Rabobank the
impairment consists out of three different components being:
Impairments for specifically identifiable individually impaired
loans or advances ('specific allowance');
Model based impairments for Incurred But Not Reported losses
(referred to by the Bank as 'general allowance'); and
Model based impairments to cover impairment risks in impaired
loans with individually low exposures ('collective allowance').
The judgements and estimation uncertainty is primarily linked to
the following:
The identification and follow-up of impairment triggers and the
underlying calculation of the allowances;
Regarding the specific allowance the valuation of the future cash
flows based on the appropriate use of key parameters and the
assessment of the recoverable amount;
The models that support the general and collective allowance;
Post model adjustments that management applies because the
models do not take into account the groups consolidated market-,
sector- and industry risk as well as latest macro-economic trends
so that the provisions reflect conditions at the balance sheet date.
How our audit addressed the matter
Internal controls
We understood, evaluated and tested the operating effectiveness of key controls and focused on:
Credit management including the identification of impairment triggers;
The governance over impairment models, including the continuous reassessment of
management that the impairment models are still calibrated in a way that addresses the
impairment risk in accordance with the IFRS standards;
The completeness and accuracy of transfer of data from the underlying source systems to the
impairment models; and
The review and approval process that management has in place for the outputs of the
impairment models, and the adjustments that are applied to modelled outputs.
We found that these key controls where designed and implemented. Most of these controls
operated effectively. For certain controls remedial action was taken by management. Based on
the testing of controls and additional testing of remedial actions we determined that we could
place reliance on these controls for the purpose of our audit.
Substantive audit procedures
For a sample of individually impaired loans, we took note of the latest developments at
the borrowers' and considered whether key judgements were appropriate. We challenged
management's inputs including the future cash flows, the valuation of collateral and tested the
key parameters. In addition we selected a sample of individual loans from the 'performing book'
and the so called 'watch list'. Our procedures did not identify any material differences.
We tested the impairment models for the general and collective allowance. We performed
backtesting procedures on a sample of key model parameters and we challenged management
and they provided us with reasonable explanations and evidence supporting the key model
parameters, in line with market and industry practice.
We challenged management on the post model adjustments to provide objective evidence that
these adjustments were necessary to balance the Bank's sector, industry or macro economical
exposure, and we found the provided support reasonable
244 Rabobank Annual Report 2016