pwc About this Chairman's Corporate Consolidated Financial Company Financial Report Foreword Management Report Appendices Governance Statements Statements Key audit matter Our audit work and observations Forward-looking information: Rabobank includes forecasts of future events and economic conditions (forward looking information) in the modelled loan impairments. In doing so, the Bank prepares three macro- economic scenarios which include forecasts of future economic conditions, such as gross domestic product growth, unemployment rates and interest rates. Finally, these three macroeconomic forecasts are probability weighted in the expected credit losses calculation. The process of preparing the macro- economic scenarios and probability weighting these, require judgment. Measurement of expected credit losses: The probability of default (PD) multiplied by loss given default (LGD) multiplied by exposure at default (EAD) inputs are used to estimate expected credit losses. These inputs require estimates as follows: PD: The probability of default is an estimate of the likelihood of default over a given time horizon; EAD: The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after reporting date; and LGD: The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that are expected to be received, including cash flows expected from collateral and other credit enhancements. Top level adjustments to the model outcome: Adjustments to the outcome of models due to unexpected external developments or data quality issues require judgement. Measurement of individually assessed credit- impaired financial asset: For credit-impaired financial assets that are assessed on an individual basis, discounted cash flow calculations are performed for three scenarios. In such cases, judgement is required for the estimation of the expected future cash flows and the weighting of the three scenarios. Assessment of individually credit- impaired loans Considering the inherent estimation risk of individually credit-impaired loans, we selected appropriate samples and analysed the latest developments at the borrowers and considered whether the key judgements and significant estimtates applied in the impairment. Allowance were acceptable for both the balance per l January 2018 and 31 December 2018. This included the following procedures: Evaluate the feasibility of the forecasted cash flows (including the use of forward looking information) for each scenario by comparing them to historical performance of the customer and the expected future performance where applicable; assessing the external collateral valuator's credentials and the valuation with an independent valuation performed by our valuation experts; assessing management's analysis of the probability allocation of each individual scenario for each credit-impaired loan; and Recalculate the provision on the individually credit-impaired loans. In addition, we selected a risk-based sample of individual loans from the "performing book" and the so called "watch list". In doing so amongst others we selected loans with a large contribution to the loan impairment charge in 2018 as well as loans that have a high individual exposures. Based on the above we assessed the methodology and inputs to be in line with market and industry practice. Furthermore, we assessed the adequacy of the disclosures, including disclosures on estimation uncertainty and judgements, to assess compliance with the disclosure requirements included in EU-IFRS. Coöperatieve Rabobank UA. - EH44X5NCPJUJ-1288894667-935 Page 8 of 17

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Annual Reports Rabobank | 2018 | | pagina 250