Contents Introduction Management report Appendices Corporate governance Consolidated Financial Statements Company 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 Audit Committee and Supervisory Board.
The key audit matters are not a comprehensive reflection
of all matters that were identified by our audit and that
we discussed. In this section we described the key audit
matters and included a summary of the audit procedures we
performed on those matters.
With regards to the comparison of key audit matters in our
auditor's report 2017 with 2016, we determined the disclosure
on the impact of IFRS 9 on the opening balance as of 1 January
2018 to be an additional key audit matter in 2017 given the
combination of the complexity of (new) models, estimates,
assumptions, potential impact of the new standard on the 2018
opening balance and future years and the focus by financial
statement stakeholders on the effects of the new standard.
After our first year as auditor in 2016 we determined that
the application of hedge accounting was more refined and
simplified during the year, making this not a key audit matter
anymore in 2017. We did not identify triggers for the valuation
of equity instruments and we concluded that the direct
financial statement impact of the strategy execution is less
significant in 2017, making those matters not a key audit matter
anymore for our 2017 audit.
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 separate opinions 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'.
The Bank's portfolio of loans and advances to customers amounts
to EUR 433 billion as at 31 December 2017. These loans and
advances are measured at amortised cost, less a loans impairment
allowance of EUR 5.4 billion. There are significant management
judgements involved and complex models and assumptions are
utilized in the process of estimating the impairment allowance on
loans and advances to customers. Combined with the magnitude
of the loans and advances to customer balances, these elements
drive us to believe that this is a key audit matter. Within Rabobank
the impairment allowance consists out of three different
components being:
Impairments for specifically identifiable individually impaired
loans or advances ('specific loan impairment allowance');
Model based impairments for Incurred But Not Reported losses
(referred to by the Bank as 'general loan impairment allowance');
and
Model based impairments to cover impairment risks in impaired
loans with individually low exposures and characteristics similar
to those in the group ('collective loan impairment allowance').
The judgements and estimation uncertainty is primarily linked to
the following:
The identification of impaired loans and allowances;
Regarding the specific loan impairment allowance the valuation
of the future expected cash flows based on the appropriate
use of key parameters and the assessment of the recoverable
amount;
Regarding the model based impairment allowances, the
assumptions regarding possibility of default, loan given default
and exposure at default underlying the general and collective
loan impairment allowance; and
Management adjustments that management applies because of
inherent model limitations.
How our audit addressed the matter
We evaluated the design effectiveness and tested the operating effectiveness of key controls
around:
Credit management process to assess the loan quality classification to identify impaired loans;
The valuation of future expected cash flows and existence and valuation of collateral, based
on the appropriate use of key parameters for the specific impairment allowance;
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 the 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.
Most of these controls operated effectively. For certain controls, specifically around the loan
quality classification process in the small and medium size business loans domain remedial
control activities and impact assessments were performed 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.
Considering the risk we selected appropriate samples of individually impaired loans, we took
note of the latest developments at the borrowers'and considered whether the 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". In some cases our
independent assessment 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, judgements and use of assumptions
within the impairment calculation.
We tested the impairment models for the general and collective loan impairment allowances.
We involved internal model experts, evaluated the reasonableness of model methodology and
performed backtesting procedures on a sample of key model parameters. Also we tested input
variables and challenged management that they provided us with reasonable explanations
and evidence supporting the key model parameters. We assessed these inputs to be in line with
market and industry practice.
We challenged management on the post model adjustments to provide evidence that these
adjustments were necessary to balance the Bank's sector, industry or macro economical
exposure, and we found the provided supporting evidence to be reasonable.
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