ING Direct 2008 Annual Report Download - page 93

The valuation of real estate involves various assumptions and techniques. The use of different assumptions and techniques could produce
significantly different revaluations.
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
Fair values of financial assets and liabilities are determined using quoted market prices where available. Market prices are 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 materially 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, 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 materially 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 materially incorrect or misused models.
Certain asset backed securities in the Unites States are valued using external price sources that are obtained from third party pricing
services and brokers. During 2008 the markets for these assets have become inactive and as a result, the dispersion between different
prices for the same security is significant. In such cases, management applies additional processes to select the most appropriate external
price, including an internally developed price validation matrix and a process to challenge the price source. The valuation of these
portfolios would have been significantly different had different prices been selected.
See Note 33 ‘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 material
impact on the 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 or 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 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 amortised cost and fair value is removed from equity and recognised in net profit or loss.
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 may not 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 an impairment may have occurred. Goodwill is tested for impairment by comparing the book value (including goodwill)
to the best estimate of the fair value of the reporting unit to which the goodwill has been allocated. A reporting unit is the lowest level
at which goodwill is monitored. Intangible assets are tested for impairment by comparing its book value with the best estimate of its
recoverable amount.
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ING Group Annual Report 2008