pwc
About this Chairman's Corporate Consolidated Financial Company Financial
Report Foreword Management Report Appendices Governance Statements Statements
Key audit matter
Models and assumptions
For financial instruments in active markets and for
which observable market prices or other market
information is available, there is a high degree of
objectivity involved in determining the fair value (level
l financial instruments). However, when observable
market data does not consist of quoted prices in active
markets (level 2 financial instruments) or market
information is not available at all (level 3 financial
instruments, which mainly relate to Private Equity
investments and the loan portfolio of ACC), the fair
value is subject to significant judgement by
management. The fair value of such financial
instruments (level 2 and level 3 financial instruments)
is determined using valuation techniques (such as
discounted cash flow models and option valuation
models) and the use of assumptions and estimates
such as market prices of comparable instruments,
credit spreads, yield curves, correlations and
volatilities.
The most significant estimates by management in this
respect relate to:
The credit valuation adjustment (CVA) and debit
valuation adjustment (DVA) used in the valuation
of derivatives;
The credit yield curves used in the valuation of
financial liabilities designated at fair value.
The multiplier, which is applied to the EBITDA
used in the valuation of private equity
investments; and
The valuation of the collateral with respect the
loan portfolio of ACC and the appetite to buy this
type of assets.
Given the size of the portfolios, the level of judgement
and complexity involved in determining the fair value
of these financial instruments, this areas is subject to a
higher risk of material misstatement due to error or
fraud. Therefore, we determined this to be a key audit
matter in our audit.
Our audit work and observations
We assessed the CVA and DVA used in the valuation
of derivatives, by comparing assumptions and
inputs to market data; and
Assessing the data points used by management in
determining the credit yield curves used in the
valuation of financial liabilities designated at fair
value by comparing these data points against
available market data. Furthermore we evaluated
the interpolation for data points for which limited
market data is available.
Although our own valuation tools and techniques also
provide inherently judgemental outcomes, we
considered this to be an appropriate basis for
challenging management's outcomes. We found that
management's outcomes derived from the model used
for the fair value of the financial instruments, fell within
an acceptable range of outcomes.
For the private equity investments, we evaluated, with
assistance of our internal valuation specialists, the
multiplier that is applied to the EBITDA to determine if
this is in line with best practices in the market.
For the loan portfolio of ACC, with assistance of internal
specialists, we assessed and challenged the key value
drivers and assumptions used by management,
evaluated the sensitivities analysis performed,
recalculated for a sample of loans the fair value and
tested the completeness and accuracy of the input data
by reconciling to the underlying source systems
(including the valuation of collateral). Based on these
procedures we determine that the methodology, and
inputs used by the Bank are reasonable and in line with
best practices applied in the market.
Furthermore, we assessed the adequacy of the
disclosures to assess compliance with the disclosure
requirements included in EU-IFRS.
Coöperatieve Rabobank UA. - EH44X5NCPJUJ-1288894667-935
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