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Rothschild & Co | Annual Report 2017
2 Impairment of loans and advances to
customers on an individual and collective
basis
Key audit matter
As at 31 December 2017, the Group reports loans and advances to
customers amounting to a net of €2 990 million, representing 24% of
total assets, and recognised individual and collective impairment losses
of €77 million.
Loans and advances to customers are recorded at amortised cost, taking
into account objective evidence of impairment and their impact on expected
future cash flows through the recording of an impairment.
When such an individual loss has been incurred, the amount of the loss
is measured as the difference between the carrying amount of the asset
and the value of the expected future cash flows, discounted at the initial
effective interest rate of the financial asset.
Management determines expected future cash flows using a variety of
factors such as the realisable value of the collateral, the likelihood of
recovery in a bankruptcy or liquidation, the viability of the clients’ business
model and their ability to recover financing during their financial difficulties,
and the capacity to generate sufficient cash flows to reimburse their debts.
Collective impairments are valued for portfolios of receivables whose
economic characteristics are similar and for which objective indications
suggest that they contain individually indebted impairments. Collective
impairments are calculated using future cash flows valued on the basis
of historical losses incurred.
The methodology and assumptions used to measure both the amount and
the occurrence of the expected future cash flows require the exercise of the
judgement of the Group’s management. For this reason, and considering
the relative importance of these financings in the Group’s balance sheet,
we considered that the assessment of individual and collective impairments
of loans and receivables to customers is a key audit matter for consolidated
financial statements.
Information on impairment of loans and advances to customers is
presented in note III.B.1, note III.B.10, and note V.5 of the notes to the
consolidated financial statements on pages 128-129, 132 and 147.
Our response
We considered the internal control system put in place by Management to
identify loans and advances that present objective evidence of impairment
and to measure the amount of write-downs to be recorded. We have :
• tested the operational effectiveness of key controls on the approval,
registration and tracking of loans and advances to customers;
• examined the methodologies and assessed the relevance of the data
and assumptions used by the Group to determine impairment losses
on loans and advances to customers assessed individually and on a
collective basis;
We have also implemented the following substantive procedures:
• assess, for a sample of loans and advances, the level of impairment
used with regard to the analysis of the risk of loss realised, the
assumptions used, the value of collateral and estimated future
cash flows;
• check the quality of the outstanding amounts used and the arithmetic
accuracy of the impairment calculations.
We have ensured that the information presented in the notes is appropriate.
3 Provision for claims and litigation
Key audit matter
As at 31 December 2017, the Group recognises provisions for claims and
litigation of €31 million arising from litigation proceedings and claims.
The Group may be involved in legal proceedings or receive claims arising
from the conduct of its business. Based on available information and, where
appropriate, legal advice, provisions are recognised when it is probable that
a settlement will be necessary and a reliable estimate of this amount can
be made.
We considered the determination of litigation and claims provisions as a
key audit matter because of the significant judgement required to evaluate
these estimates.
Information on provisions for claims and litigation is presented in note V.14
of the notes to the consolidated financial statements on page 152.
Our response
Our procedures consisted in obtaining an understanding of the internal
control and governance system put in place by Management to identify,
evaluate and measure potential obligations arising from legal proceedings
or claims in the conduct of the Group’s business.
For significant legal proceedings that have undergone significant
developments or that have emerged during the period, we have:
• assessed the facts and circumstances that motivate the existence
of the obligation and the need to recognise a provision;
• questioned the Group’s internal and external legal advice;
• carried out a critical analysis of the assumptions retained and the
key judgements applied;
• appreciated the impact of possible alternative results.
For the other procedures, we ensured that there was no development that
could question Management’s assessment of the level of the obligation and
the resulting provision.
We have ensured that the information presented in the financial statements
is appropriate.
Statutory auditors’ report on the consolidated financial
statements for the nine-month period ended 31 December 2017