ING Direct 2011 Annual Report Download - page 103

calculations of the future rental income in accordance with the terms in existing leases and estimations of the rental values for new leases
when leases expire and incentives like rental free periods. The cash flows are discounted using market based interest rates that reflect
appropriately the risk characteristics of real estate.
Market conditions in recent years have led to a reduced level of real estate transactions. Transaction values were significantly impacted
bylow volumes of actual transactions. As a result comparable market transactions have been used less in valuing ING’s real estate
investments by independent qualified valuers. More emphasis has been placed on discounted cash flow analysis and capitalisation
ofincome method.
The valuation of real estate involves various assumptions and techniques. The use of different assumptions and techniques could produce
significantly different valuations. To illustrate the uncertainty of our real estate investments valuation, a sensitivity analysis on the changes
in fair value of real estate is provided in the ‘Risk management’ section.
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
Fair values of financial assets and liabilities are determined using quoted market prices where available. Such quoted market prices are
primarily obtained from exchange prices for listed instruments. Where an exchange price is not available, market prices may be obtained
from independent market vendors, brokers or market makers. In general, positions are valued taking the bid price for a long position and
the offer price for a short position. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated.
In certain markets that have become significantly less liquid or illiquid, the range of prices for the same security from different price sources
can be significant. Selecting the most appropriate price within this range requires judgement. The choice of different prices could produce
significantly different estimates of fair value.
For certain financial assets and liabilities quoted market prices are not available. For these financial assets and liabilities, fair value is
determined using valuation techniques. These valuation techniques range from discounting of cash flows to valuation models, where
relevant pricing factors including the market price of underlying reference instruments, market parameters (volatilities, correlations and
credit ratings) and customer behaviour are taken into account. All valuation techniques used are subject to internal review and approval.
Most data used in these valuation techniques are validated on a daily basis.
Valuation techniques are subjective in nature and significant judgement is involved in establishing fair values for certain financial assets
andliabilities. Valuation techniques involve various assumptions regarding pricing factors. The use of different valuation techniques and
assumptions could produce significantly different estimates of fair value.
Price testing is performed to assess whether the process of valuation has led to an appropriate fair value of the position and to an
appropriate reflection of these valuations in the profit and loss account. Price testing is performed to minimise the potential risks for
economic losses due to incorrect or misused models.
Reference is made to Note 34 ‘Fair value of financial assets and liabilities’ for the basis of the determination of the fair value of financial
instruments and related sensitivities.
IMPAIRMENTS
Impairment evaluation is a complex process that inherently involves significant judgements and uncertainties that may have a significant
impact on ING Group’s consolidated financial statements. Impairments are especially relevant in two areas: Available-for-sale debt and
equity securities and Goodwill/Intangible assets.
All debt and equity securities (other than those carried at fair value through profit and loss) are subject to impairment testing every
reporting period. The carrying value is reviewed in order to determine whether an impairment loss has been incurred. Evaluation for
impairment includes both quantitative and qualitative considerations. For debt securities, such considerations include actual and estimated
incurred credit losses indicated by payment default, market data on (estimated) incurred losses and other current evidence that the issuer
may be unlikely to pay amounts when due. Equity securities are impaired when management believes that, based on (the combination of)
a significant or prolonged decline of the fair value below the acquisition price, there is sufficient reason to believe that the acquisition cost
may not be recovered. ‘Significant’ and ‘prolonged’ are interpreted on a case-by-case basis for specific equity securities. Generally 25%
and 6 months are used as triggers. Upon impairment, the full difference between (the acquisition) cost and fair value is removed from
equity and recognised in net result. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment
which can be objectively related to an observable event. Impairments on equity securities cannot be reversed.
Impairments on other debt instruments (Loans and held-to-maturity investments) are part of the loan loss provision as described above.
Impairment reviews with respect to goodwill and intangible assets are performed at least annually and more frequently if events indicate
that impairment may have occurred. Goodwill is tested for impairment by comparing the carrying value (including goodwill) of the reporting
unit to the best estimate of the recoverable amount of that reporting unit. The carrying value is determined as the IFRS-EU net asset value
including goodwill. The recoverable amount is estimated as the higher of fair value less cost to sell and value in use. Several methodologies
Accounting policies for the consolidated annual accounts of ING Group continued
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101ING Group Annual Report 2011