About this Report Chairman's Foreword Corporate Management Report Appendices Governance Consolidated Financial Company Financial Statements Statements has increased significantly since origination of a financial asset (but remains non-credit-impaired), an allowance is required for the amount that equals the expected credit losses from possible defaults during the expected lifetime of the financial asset ('Lifetime ECL'). If the financial instrument becomes credit- impaired the allowance will remain atthe Lifetime ECL. However, for these instruments the interest income will be recognized by applying the effective interest rate on the net carrying amount (including the allowance) instead of the gross carrying amount. Financial instruments become credit-impaired when one or more events have occurred that had an adverse impact on estimated future cash flows. 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). In general, the methodology to determine expected credit losses is described below. Further details are included in section 2.16 Impairment allowances on financial assets and the section Judgements and estimates. a) Methodology to Determine Expected Credit Losses In order to determine ECLs Rabobank utilizes point in time Probability of Default (PD) x Loss Given Default (LGD) x Exposure at Default (EAD) models for the majority of the portfolio in scope. Three global macroeconomic scenarios (consisting of a baseline, a baseline minus and a baseline plus scenario) are incorporated into these models and probability weighted in order to determine the expected credit losses. For stage 3 financial assets that are assessed on an individual basis, a discounted cash flow calculation is performed which is based on the weighted average of the net present value of expected future cash flows in three different scenarios: a sustainable cure, an optimizing and a liquidation scenario. When unexpected external developments or data quality issues are not sufficiently covered by the outcome of the ECL models, an adjustment will be made. 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. The criteria for allocating a financial instrument to stage 3 are fully aligned with the criteria for assigning a defaulted status, for example 90 days past due status, or if a debtor is likely to become unable to pay its credit obligations without liquidation of collateral by the bank. In orderto allocate financial instruments between stages 1 and 2, Rabobank uses criteria, such as days past due status, special asset management status and deterioration of the PD since origination. For portfolios without individual PD's or with PD's that are not updated on a frequent basis such that an assessment of the change in PD is not possible, a collective assessment on groups of financial instruments with shared credit risk characteristics is made. Hedge Accounting Hedge accounting is an option IFRS offers to mitigate profit or loss volatility caused by measurement differences between granted loans and issued debt securities measured at amortized cost, assets measured at fair value through OCI (hedged items) and related hedging derivatives measured at fair value through profit or loss (hedging instruments). Rabobank applies IFRS 9 for non-portfolio hedge accounting. IFRS 9 does not offer a solution for fair value hedge accounting for a portfolio hedge of interest rate risk. Rabobank opted to use the accounting policy choice of IFRS to continue to apply the IAS 39 EU carve-out for such portfolio hedge accounting. For non-portfolio hedge accounting an economic relationship between the hedged item and the hedging instrument is required without the possibility of a voluntary de-designation of the hedge relationship afterwards. Rabobank designates effective non-portfolio hedge accounting relationships with cross- currency swaps by bifurcating fair value changes resulting from the cross currency basis spread. The fair value changes caused by the bifurcated cross currency basis will be considered as costs of hedging and are separately recognized in other comprehensive income. Rabobank has implemented this change prospectively as from January 12018. Changes in Presentation of Interest Income Asa result ofa change in IAS 1 due to the implementation of IFRS 9, interest income on financial assets using the effective interest method should be presented separately in the statement of income. Interest income on financial assets using the effective interest method includes interest income on 'Cash and cash equivalents', 'Loans and advances to credit institutions', 'Loans and advances to customers','Financial assets at fair value through other comprehensive income' and 'Derivatives used for fair value hedge-accounting'. The line-item 'Other interest income' refers to interest income on all other financial instruments. Refer to note 36 'Net interest income' for an overview of all interest income items. Annual Report 2018 - Consolidated Financial Statements 133

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Annual Reports Rabobank | 2018 | | pagina 135