ING Direct 2009 Annual Report Download - page 99

The presentation of, and certain terms used in, the consolidated balance sheet, the consolidated profit and loss account, consolidated
statement of cash flows, consolidated statement of changes in equity and certain notes has been changed to provide additional and more
relevant information.
CRITICAL ACCOUNTING POLICIES
ING Group has identified the accounting policies that are most critical to its business operations and to the understanding of its results.
These critical accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to insurance
provisions and deferred acquisition costs, the loan loss provision, the determination of the fair values of real estate and financial assets and
liabilities, impairments and employee benefits. In each case, the determination of these items is fundamental to the financial condition and
results of operations, and requires management to make complex judgements based on information and financial data that may change in
future periods. As a result, determinations regarding these items necessarily involve the use of assumptions and subjective judgements as
to future events and are subject to change, as the use of different assumptions or data could produce materially different results. For a
further discussion of the application of these accounting policies, reference is made to the applicable notes to the consolidated financial
statements and the information below under ‘Principles of valuation and determination of results’.
INSURANCE PROVISIONS, DEFERRED ACQUISITION COSTS (DAC) AND VALUE OF BUSINESS ACQUIRED (VOBA)
The establishment of insurance provisions, DAC and VOBA is an inherently uncertain process, involving assumptions about factors such as
court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns, policyholder behaviour and other
factors, and, in the life insurance business, assumptions concerning mortality and morbidity trends. Specifically, significant assumptions
related to these items that could have a material impact on financial results include interest rates, mortality, morbidity, property and casualty
claims, investment yields on equity and real estate, foreign currency exchange rates and reserve adequacy assumptions.
The use of different assumptions about these factors could have a material effect on insurance provisions and underwriting expenditure.
Changes in assumptions may lead to changes in the insurance provisions over time. Furthermore, some of these assumptions can be volatile.
In addition, the adequacy of insurance provisions, net of DAC and VOBA, is evaluated regularly. The test involves comparing the established
insurance provision with current best estimate assumptions about factors such as court decisions, changes in laws, social, economic and
demographic trends, inflation, investment returns, policyholder behaviour, mortality and morbidity trends and other factors. The use of
different assumptions in this test could lead to a different outcome.
Insurance provisions also include the impact of minimum guarantees which are contained within certain variable annuity products. This
impact is dependent upon the difference between the potential minimum benefits payable and the total account balance, expected
mortality and surrender rates. The determination of the potential minimum benefits payable also involves the use of assumptions about
factors such as inflation, investment returns, policyholder behaviour, and mortality and morbidity trends. The use of different assumptions
about these factors could have a material effect on insurance provisions and underwriting expenditure.
The process of defining methodologies and assumptions for insurance provisions, DAC and VOBA is governed by ING Insurance risk
management as described in the ‘Risk management’ section.
Reference is made to the ‘Risk management’ section for a sensitivity analysis of net result and shareholders’ equity to insurance, interest rate,
equity, foreign currency and real estate risks. These sensitivities are based on changes in assumptions that management considers reasonably
likely at the balance sheet date.
LOAN LOSS PROVISIONS
Loan loss provisions are recognised based on an incurred loss model. Considerable judgement is exercised in determining the extent of the
loan loss provision (impairment) and is based on the management’s evaluation of the risk in the portfolio, current economic conditions,
loss experience in recent years and credit, industry and geographical concentration trends. Changes in such judgements and analyses may
lead to changes in the loan loss provisions over time.
The identification of impairment and the determination of the recoverable amount are an inherently uncertain process involving various
assumptions and factors including the financial condition of the counterparty, expected future cash flows, observable market prices and
expected net selling prices.
Future cash flows in a portfolio of financial assets that are collectively evaluated for impairment are estimated on the basis of the
contractual cash flows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those
in the portfolio. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions
that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical
period that do not exist currently. Current observable data may include changes in unemployment rates, property prices and commodity
prices. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between
loss estimates and actual loss experience.
2.1 Consolidated annual accounts
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Accounting policies for the consolidated balance sheet and profit and loss account of ING Group (continued)