Contents Introduction Management report Appendices Corporate governance Consolidated Financial Statements Company Financial Statements
frequent (de) esignations. Furthermore IFRS 9 replaces some
of the arbitrary rules (such as 80%-125% effectiveness testing)
with more principle based requirements. Additionally IAS 39
lacks a specific accounting solution for hedge accounting with
cross-currency swaps (currency basis) when used as hedging
instruments, while IFRS 9 has this. Under IFRS 9 the currency
basis spreads may be considered as costs of hedging and
fair value changes caused by currency basis spread may be
recognised in OCI.
Rabobank will implement IFRS 9 for non-portfolio hedge
accounting to benefit from the specific treatment of currency
basis in IFRS 9 per 1 January 2018. We expect to be able to
designate more effective non-portfolio hedge accounting
relationships with cross-currency swaps under IFRS 9 and reduce
the profit or loss volatility caused by currency basis, which will
then be recognised in OCI prospectively. IFRS 9 does not offer a
solution for fair value hedge accounting for a portfolio hedge of
interest rate risk portfolio so Rabobank will use the accounting
policy choice IFRS 9 provides to continue to apply the IAS 39 EU
carve-out for such portfolio hedge accounting.
Hedge accounting - Expected impact
Rabobank will implement the change prospectively and
therefor opening retained earnings will not be impacted.
Impairments - Requirements
The rules governing impairments apply to financial assets at
amortised cost and financial assets at fair value through OCI,
as well as to lease receivables, certain loan commitments
and financial guarantees. At initial recognition, an allowance
will be formed for the amount of the expected credit losses
from possible defaults in the coming 12 months ('12-months
expected credit loss'(ECL)). If credit risk increased significantly
since origination (but remains non-credit-impaired), an
allowance will be required for the amount that equals the
expected credit losses stemming from possible defaults
during the expected lifetime of the financial asset ('Lifetime
ECL'). If the financial instrument becomes credit-impaired the
allowance will remain at the Lifetime ECL. However, for these
instruments the interest income will be recognised by applying
the effective interest rate on the net carrying amount (including
the allowance). Financial instruments become credit-impaired
when one or more events have occurred that had a detrimental
impact on estimated future cash flows.
The ECLs on an instrument should be based on an unbiased
probability-weighted amount that is determined by evaluating
a range of possible and reasonable outcomes and should
reflect information available on current conditions and forecasts
of future economic conditions, such as e.g. gross domestic
product growth, unemployment rates, interest rates.
Impairments - Differences with current IAS 39 methodology
The IAS 39 impairment methodology is based on an 'incurred
loss' model, meaning that an allowance is determined when
an instrument is credit-impaired, that is, when a loss event
has occurred that had a detrimental impact on estimated
future cash flows. This will generally align with the Lifetime
ECL - Credit-Impaired category of IFRS 9. However, within the
expected credit loss framework of IFRS 9 the entire portfolio of
financial instruments will be assigned an allowance through the
additions of the 12-month ECL category and the Lifetime ECL
category - Non-Credit-Impaired categories, generally leading
to increases in overall allowances.
Impairments - Key concepts and their implementation
at Rabobank
Two fundamental drivers of the IFRS 9 impairments
requirements are a) the methodology for the measurement
of 12-Month and Lifetime Expected Credit Losses and b) the
criteria used to determine whether a 12-month ECL, Lifetime
ECL non-credit-impaired, or Lifetime ECL credit-impaired should
be applied (also referred to as stage determination criteria).
a) Methodology to determine expected credit losses
In order to determine ECLs Rabobank will utilise Probability
of Default (PD) x Loss Given Default (LGD) x Exposure at
Default (EAD) models for the majority of the portfolio in
scope.The credit risk models in place for regulatory purposes,
Advanced Internal Rating Based Approach (A-IRB) models,
function as a basis for these ECL. However, as these models
contain prudential elements, such as conservatism, downturn
elements and through the cycle estimates an IFRS 9-overlay is
constructed on top of these A-IRB model. Rabobank will utilise
five IFRS 9 models that are aligned with the major asset classes
and underlying A-IRB models such as Residential Mortgages,
Small and Medium Enterprises, and Corporate loans.The IFRS 9
models are multi-year forward looking.
b) Stage determination criteria
In order to allocate financial instruments in scope between the
categories 12-month ECL (stage 1), Lifetime ECL Non-Credit-
Impaired (stage 2) and Lifetime ECL Credit-Impaired (stage 3)
a framework of qualitative and quantitative factors has been
developed. In order to allocate financial instruments between
stages 1 and 2, we will use criteria that are currently applied
in the credit process, such as days past due status and special
asset management status. Also, the quantitative criteria that
will be used are related to the probability of default (PD),
where a financial instrument is allocated to stage 2 when an
increase in the weighted average PD since origination exceeds
a predefined threshold.
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