ING Direct 2008 Annual Report Download - page 102

2.1 Consolidated annual accounts
The Group as the lessor
When assets are held subject to a finance lease, the present value of the lease payments is recognised as a receivable under Loans and
advances to customers or Amounts due from banks. The difference between the gross receivable and the present value of the receivable
is unearned lease finance income. Lease income is recognised over the term of the lease using the net investment method (before tax),
which reflects a constant periodic rate of return. When assets are held subject to an operating lease, the assets are included under Assets
under operating leases.
PURCHASE ACCOUNTING, GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
ING Group’s acquisitions are accounted for under the purchase method of accounting, whereby the cost of the acquisitions is allocated to
the fair value of the assets, liabilities and contingent liabilities acquired. Goodwill, being the difference between the cost of the acquisition
(including assumed debt) and the Group’s interest in the fair value of the acquired assets, liabilities and contingent liabilities as at the date
of acquisition, is capitalised as an intangible asset. The results of the operations of the acquired companies are included in the profit and
loss account from the date control is obtained.
Goodwill is only capitalised on acquisitions after the implementation date of IFRS-EU (1 January 2004). Accounting for acquisitions before
that date has not been restated; goodwill and internally generated intangibles on these acquisitions were charged directly to
shareholders’ equity. Goodwill is allocated to reporting units for the purpose of impairment testing. These reporting units represent the
lowest level at which goodwill is monitored for internal management purposes. This test is performed annually or more frequently if there
are indicators of impairment. Under the impairment tests, the carrying value of the reporting units (including goodwill) is compared to its
recoverable amount which is the higher of its fair value less costs to sell and its value in use.
Adjustments to the fair value as at the date of acquisition of acquired assets and liabilities that are identified within one year after
acquisition are recognised as an adjustment to goodwill; any subsequent adjustment is recognised as income or expense. However,
recognition of deferred tax assets after the acquisition date is recognised as an adjustment to goodwill, even after the first year. On
disposal of group companies, the difference between the sale proceeds and book value (including goodwill) and the unrealised results
(including the currency translation reserve in equity) is included in the profit and loss account.
Computer software
Computer software that has been purchased or generated internally for own use is stated at cost less amortisation and any impairment
losses. Amortisation is calculated on a straight-line basis over its useful life. This period will generally not exceed three years. Amortisation
is included in Other operating expenses.
Value of business acquired (VOBA)
VOBA is an asset that reflects the present value of estimated net cash flows embedded in the insurance contracts of an acquired
company, which existed at the time the company was acquired. It represents the difference between the fair value of insurance liabilities
and their book value. VOBA is amortised in a similar manner to the amortisation of deferred acquisition costs as described in the section
‘Deferred acquisition costs’.
Other intangible assets
Other intangible assets are capitalised and amortised over their expected economic life, which is generally between three and ten years.
Intangible assets with an indefinite life are not amortised.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs (DAC) are an asset and represent costs of acquiring insurance and investment contracts that are deferred and
amortised. The deferred costs, all of which vary with (and are primarily related to) the production of new and renewal business, consist
principally of commissions, certain underwriting and contract issuance expenses, and certain agency expenses.
For traditional life insurance contracts, certain types of flexible life insurance contracts, and non-life contracts, DAC is amortised over the
premium payment period in proportion to the premium revenue recognised.
For other types of flexible life insurance contracts DAC is amortised over the lives of the policies in relation to the emergence of estimated
gross profits. Amortisation is adjusted when estimates of current or future gross profits, to be realised from a group of products, are
revised. The estimates and the assumptions are reassessed at the end of each reporting period. For DAC on flexible insurance contracts
the approach is that in determining the estimate of future gross profits ING assumes the short-term and long-term separate account
growth rate assumption to be the same. Higher/lower expected profits (e.g. reflecting stock market performance or a change in the level
of assets under management) may cause a lower/higher amortisation of DAC due to the catch-up of amortisation in previous and future
years. This process is known as DAC unlocking. The impact of the DAC unlocking is recognised in the profit and loss account of the
period in which the unlocking occurs.
Accounting policies for the consolidated balance sheet
and profit and loss account of ING Group (continued)
ING Group Annual Report 2008
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