Contents Foreword Management report 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 Rabobank for 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.
245 Independent auditor's report