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 Given the significance of the number of accounting policy choices, judgements taken by management, the complexity and the inherent limitations to the inputs required by the loan impairment models, this areas is subject to a higher risk of material misstatement due to error or fraud. Therefore, we considered this a key audit matter in our audit. Valuation of financial instruments at fair value Refer to note 2.3 'Derivatives and hedging', note 2.4 'Financial assets and liabilities held for trading', note 2.5 'Financial assets and financial liabilities designated at fair value', note 2.7 'Financial assets at fair value through other comprehensive income' and note 4.9 'Fair value of financial assets and liabilities'. The financial instruments that are measured at fair value which are significant to the financial statements are: Derivatives (EUR 22.6 billion of derivative assets and EUR 23.9 billion of derivative liabilities are level 2 and level 3 financial instruments at 31 December 2018); Financial assets held for trading (EUR 0.5 billion of financial assets held for trading are level 2 or level 3 financial instruments at 31 December 2018); Financial assets designated at fair value (EUR 0.01 billion of financial assets designated at fair value are level 2 or level 3 financial instruments at 31 December 2018); Financial assets mandatorily at fair value (EUR 2.1 billion of financial assets mandatorily at fair value are level 2 or level 3 financial instruments at 31 December 2018); Financial assets at fair value through other comprehensive income (EUR 4.3 billion of financial assets at fair value through other comprehensive income are level 2 or level 3 financial instruments at 31 December 2018); Non-current assets held for sale (EUR 0.3 billion of non-current assets held for sale are level 2 or level 3 financial instruments at 31 December 2018); and Financial liabilities designated at fair value (EUR 6.6 billion of financial liabilities designated at fair value are level 2 or level 3 financial instruments at 31 December 2018). Control design and operation effectiveness Our audit work included, amongst others, understanding and evaluating the design and testing the operating effectiveness of the controls at the Bank that cover the valuation process for financial instruments such as: The governance over valuation models, including the validation and approval process of such models, subsequent changes thereto and an assessment of the impact of limitations inherent to the models used; Controls that cover the collateral valuation and dispute process for collateralised derivatives; Controls over the completeness and accuracy of data inputs used in the valuation of financial instruments; and The Bank's independent price verification process where the reasonableness of models and outputs is assessed. Based on these audit procedures, we determined that we could place reliance on these controls for the purpose of our audit. Substantive audit procedures With assistance of our internal valuation specialists, we tested the appropriateness of the methodologies, models and inputs applied in the valuation of the level 2 and 3 financial instruments in the balance sheet. Based on these procedures we determine that the methodologies, models and inputs used by the Bank are fit-for-purpose and in line with best practices applied in the market. Furthermore, we reconciled the most significant inputs to independent sources and external available market data, where possible. Where assumptions and estimates were made by management on key valuation inputs, we assessed and evaluated these by comparing them to (other) available market data. In particular, we performed the following procedures on the most significant judgements in the assumptions and estimates used by management in respect of the level 2 instruments: Coöperatieve Rabobank UA. - EH44X5NCPJUJ-1288894667-935 Page 9 of 17

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Annual Reports Rabobank | 2018 | | pagina 251