ING Direct 2009 Annual Report Download - page 100

FAIR VALUES OF REAL ESTATE
Real estate investments are reported at fair value; all changes in fair value are recognised directly in the profit and loss account. The
fair value of real estate investments is based on regular appraisals by independent qualified valuers. The fair values represent the
estimated amount for which the property could be exchanged on the date of valuation between a willing buyer and willing seller in an
at-arm’s-length transaction after proper marketing wherein the parties each acted knowledgeably, prudently and without compulsion.
The valuations are based on the assumption that the properties are let and sold to third parties based on the actual letting status. The
valuations are based on a discounted cash flow analysis of each property. The discounted cash flow analyses are based on calculations
of the future rental income in accordance with the terms in existing leases and estimations of the rental values when leases expire.
For each reporting period every property is valued either by an independent valuer or internally. Indexation is used when a property is
valued internally. The index is based on the results of the independent valuations carried out in that period. Market transactions and
disposals are monitored as part of the procedures to back test the indexation methodology. Valuations performed earlier in the year are
updated if necessary to reflect the situation at year end.
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. 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
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.
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 material
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 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.
2.1 Consolidated annual accounts
ING Group Annual Report 2009
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Accounting policies for the consolidated balance sheet and profit and loss account of ING Group (continued)