ING Direct 2009 Annual Report Download - page 104

Available-for-sale financial assets
Available-for-sale financial assets include available-for-sale debt securities and available-for-sale equity securities. Available-for-sale financial
assets are initially recognised at fair value plus transaction costs. For available-for-sale debt securities, the difference between cost and
redemption value is amortised. Interest income is recognised using the effective interest method. Available-for-sale financial assets are
measured at fair value. Interest income from debt securities classified as available-for-sale is recognised in Interest income from banking
operations and Investment income in the profit and loss account using the effective interest method. Dividend income from equity
instruments classified as available-for-sale is generally recognised in Investment income in the profit and loss account when the dividend
has been declared. Unrealised gains and losses arising from changes in the fair value are recognised in equity. When the securities are
disposed of, the related accumulated fair value adjustments are included in the profit and loss account as investment income. For
impairments of available-for-sale financial assets reference is made to the section ‘Impairments of other financial assets’. Investments
in prepayment sensitive securities such as Interest-Only and Principal-Only strips are generally classified as available-for-sale.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturity for which the Group has the positive intent and
ability to hold to maturity and which are designated as held-to-maturity assets are initially recognised at fair value plus transaction costs.
Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Interest income from debt
securities classified as held-to-maturity is recognised in Interest income in the profit and loss account using the effective interest method.
Held-to-maturity investments include only debt securities.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
They are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest
method less any impairment losses. Loans and receivables include: Cash and balances with central banks, Amounts due from banks, Loans
and advances to customers and Other assets and are reflected in these balance sheet lines. Interest income from loans and receivables is
recognised in Interest income and Investment income in the profit and loss account using the effective interest method.
Credit risk management classification
Credit risk management disclosures are provided in the section ‘Risk management’. The relationship between credit risk classifications in
that section and the consolidated balance sheet classifications above is explained below:
Lending risk arises when ING Group grants a loan to a customer, or issues guarantees on behalf of a customer and mainly relates to the •
balance sheet classification Loans and advances to customers and off balance sheet items e.g. obligations under financial guarantees
and letters of credit;
Investment risk comprises the credit default and migration risk that is associated with ING Group’s investment portfolio and mainly •
relates to the balance sheet classification Investments (available-for-sale and held-to-maturity);
Money market risk arises when ING Group places short term deposits with a counterparty in order to manage excess liquidity and •
among others relates to the balance sheet classifications Amounts due from banks and Loans and advances to customers;
Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING Group has to replace the contract •
by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk classification
mainly relates to the balance sheet classification Financial assets at fair value through profit and loss (trading assets and non-trading
derivatives) and to securities financing;
Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and •
receipt is not verified or expected until ING Group has paid or delivered its side of the trade. Settlement risk mainly relates to the risk
arising on disposal of financial instruments that are classified in the balance sheet as Financial assets at fair value through profit and loss
(trading assets and non-trading derivatives) and Investments (available-for-sale and held-to-maturity).
DERIVATIVES AND HEDGE ACCOUNTING
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured
at fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation
techniques (such as discounted cash flow models and option pricing models), as appropriate. All derivatives are carried as assets when their
fair value is positive and as liabilities when their fair values are negative.
Some credit protection contracts that take the legal form of a derivative, such as certain credit default swaps, are accounted for as
financial guarantees.
Certain derivatives embedded in other contracts are measured as separate derivatives when their economic characteristics and risks are not
closely related to those of the host contract, the host contract is not carried at fair value through profit and loss, and if a separate
instrument with the same terms as the embedded derivative would meet the definition of a derivative. These embedded derivatives are
measured at fair value with changes in fair value recognised in the profit and loss account. An assessment is carried out when the Group
first becomes party to the contract. A subsequent reassessment is carried out only when there is a change in the terms of the contract that
significantly modifies the expected cash flows.
The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument
and, if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of the fair value of recognised assets
2.1 Consolidated annual accounts
ING Group Annual Report 2009
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Accounting policies for the consolidated balance sheet and profit and loss account of ING Group (continued)