ING Direct 2008 Annual Report Download - page 97

Investments
Investments (including loans quoted in active markets) are classified either as held-to-maturity or available-for-sale and are initially
recognised at fair value plus transaction costs. Investment securities and loans quoted in active markets with fixed maturity where
management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Investment securities and actively
traded loans intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in
interest rates, exchange rates or equity prices, are classified as available-for-sale.
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 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 credit commitments in respect of off balance sheet items e.g.
financial guarantees;
Investment risk comprises the credit default and migration risk that is associated with ING’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 places short term deposits with a counterparty in order to manage excess liquidity and mainly •
relates to the balance sheet classification Amounts due from banks;
Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING 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);
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 has paid or delivered its side of the trade. Settlement risk mainly relates to the balance sheet
classification 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.
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ING Group Annual Report 2008