ING Direct 2004 Annual Report Download - page 149

ING Group Annual Report 2004 147
Derivatives
Under ING Group accounting principles, derivative financial instruments, primarily interest rate swap contracts, used to manage
interest rate risk are accounted for as off-balance sheet transactions. The related interest income and expense is accounted
for on a basis in conformity with the hedged position, primarily on an accrual basis. Transactions qualify as hedges if these
transactions are identified as such and there is a negative correlation between the hedging results and the results of the
position being hedged.
US GAAP requires that derivatives be carried at fair value with changes in fair value recorded in income unless specified criteria
are met to obtain hedge accounting treatment.
SFAS 133, ‘Accounting for Derivative Instruments and Hedging Activities’ as amended by SFAS 138, requires that all derivative
instruments, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet, as either
an asset or liability, measured at its fair value. The change in a derivative's fair value is generally to be recognised in current
period's profit and loss account. However, if certain conditions are met, a derivative may be specifically designated as a hedge
of an exposure to changes in fair value, variability of cash flows, or certain foreign currency exposures.
For the purpose of reconciliation of shareholders' equity and net profit under ING Group accounting principles to US GAAP,
the change in the fair values of the hedged items have been set off against the gains and loss on the derivative instrument
for hedges that meet SFAS 133 hedge criteria.
Deferred acquisition costs of insurance business
In accordance with ING Group accounting principles, the acquisition costs of life insurance business involving the receipt
of regular premiums are capitalised and amortised to the profit and loss account.
In accordance with US GAAP, a similar policy applies, except that the method of amortisation is slightly different.
Under US GAAP, the revaluation reserve resulting from the valuation of fixed-interest securities at fair value is adjusted for
the impact thereof on the DAC.
Pension liabilities and other staff-related liabilities
Pension liabilities and pension expenses The pension rights of the vast majority of the staff are insured with separate pension
funds. In accordance with ING Group accounting principles, as from 1 January 1998, retroactive as from 1 January 1997, the
pension expenses are based on a specific method of actuarial valuation of plan assets and related projected liabilities for accrued
service including future salary indexation. Plan assets are taken at fair value.
The pension expenses under US GAAP are based on the same method of valuation of liabilities and assets. Differences in the
level of expense and liabilities (or assets) occur due to the different transition dates under US GAAP.
Furthermore, under US GAAP an additional liability is recognised immediately in a situation where the accumulated benefit
obligation exceeds the fair value of the plan assets. This additional liability is charged to shareholders' equity. The accumulated
benefit obligation differs from the projected benefit obligation in that it does not take into account future compensation
levels. Under ING Group accounting principles, in such situation the normal rules for differences between the projected benefit
obligation and the fair value of plan assets continue to apply and, therefore, a liability is not recognised immediately.
Other staff-related liabilities In accordance with ING Group accounting principles, the other staff-related liabilities are determined
under a similar methodology as described under pension liabilities and pension expenses.
The other staff-related liabilities under US GAAP are based on the same methods of valuation as for other assets and liabilities.
Differences in the level of expenses and liabilities (or assets) occur due to the different transition date under US GAAP.
Provision for life policy liabilities
In accordance with both ING Group accounting principles and US GAAP, the provision for life policy liabilities is calculated
on the basis of a prudent prospective actuarial method, having regard to the conditions of current insurance contracts.
The difference between the ING Group accounting principles and US GAAP primarily concerns the treatment of initial expenses
and the assumptions which are made in calculating the provisions with regard to the yield on the investments relating to these
liabilities. This item includes reserve strengthening provisions recorded under ING Group accounting principles not permitted
under US GAAP.
In addition, under US GAAP, the revaluation reserve resulting from the valuation of fixed-interest securities at fair value is
adjusted for the impact thereof on the deferred profit sharing to policyholders.