ING Direct 2009 Annual Report Download - page 176

Level 3 – Valuation technique supported by unobservable inputs
This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model) for which more than
an insignificant part of the inputs in terms of the overall valuation are not market observable. This category also includes financial assets
and liabilities whose fair value is determined by reference to price quotes but for which the market is considered inactive. Level 3 Available-
for-sale investments include mainly asset backed securities in the US as described above under ‘Debt securities’. Level 3 Trading assets,
Non-trading derivatives and Assets designated at fair value through profit and loss account and Level 3 Financial liabilities at fair value
through profit and loss include financial instruments with different characteristics and nature, which are valued on the basis of valuation
techniques that feature one or more significant inputs that are unobservable. An instrument in its entirety is classified as valued using
significant unobservable inputs if a significant portion of the instrument’s fair value is driven by unobservable inputs. Unobservable in this
context means that there is little or no current market data available from which the price at which an arm’s length transaction would be
likely to occur can be derived. More details on the determination of the fair value of these instruments is included above under
‘Derivatives’, ‘Debt securities’ and ‘Loans and advances to customers’.
Revised IFRS 7 (effective 2009)
IFRS 7 ‘Financial Instruments: Disclosures’ was revised in March 2009 when the IASB published the amendment: ‘Improving Disclosures
about Financial Instruments’. The revised IFRS 7 is applicable as of the 2009 Annual Accounts and requires a disclosure of assets and
liabilities at fair value in a three-level hierarchy. ING Group already provided a disclosure of a three-level hierarchy in its previous years’
financial statements as of 2007. Although ING Group’s previous disclosure is conceptually in line with the new requirements in IFRS 7, the
specific requirements of IFRS 7 result in a number of differences. As a result, certain financial instruments that were previously classified in
the category ‘Reference to published price quotations in active markets’ (the equivalent of Level 1 in IFRS 7) are classified in Level 2 as of
2009. The 2008 comparatives have been adjusted accordingly, resulting in a reclassification in the 2008 comparatives from Level 1 to Level
2. This mainly relates to derivatives (trading and non-trading) for EUR 38.6 billion (assets) and EUR 38.0 billion (liabilities) and to debt
securities (available-for-sale investments, designated at fair value through profit and loss and investments /liabilities for risk of
policyholders) for EUR 28.9 billion (assets) and EUR 1.8 billion (liabilities).
Derivatives
In previous years, certain non-listed derivatives whose fair value is determined using market-quoted rates in a valuation technique (which
qualifies as a quoted price under IAS 39) were classified in the category ‘Reference to published price quotations in active markets’. This
included derivatives for which it is market convention to price these based on a single published reference rate (e.g. a published yield curve
in the case of plain vanilla interest rate swaps). Under the revised IFRS 7, only derivatives for which quoted prices are directly available
(mainly exchange traded derivatives) are classified in Level 1. Other derivatives are classified in Level 2 or 3.
Debt Securities
In previous years, certain debt securities whose fair value is determined using prices from brokers, dealers and/or pricing services (which
qualifies as a quoted price under IAS 39) were classified in the category ‘Reference to published price quotations in active markets’ if the
market for those securities was actively trading. Under the revised IFRS 7, these securities are only classified in Level 1 if it can be
demonstrated by ING on an individual security-by-security basis that these are quoted in an active market, i.e. that the price quotes
obtained are representative of actual trades in the market (e.g. through obtaining binding quotes or through corroboration to published
market prices). Otherwise, these are now classified in Level 2.
Other changes (2009 compared to 2008)
As a result of changes in portfolios and/or markets during 2009, the following main changes in the fair value hierarchy occurred:
Decrease in Level 1 and Level 2 – reclassifications from Available-for-sale investments to Loans and advances and Amounts due •
from banks:
The reclassification in the first quarter from Available-for-sale investments to Loans and advances (EUR 17.2 billion) and Amounts due
from banks (EUR 5.6 billion) resulted in a reduction in Level 2 of approximately EUR 22.8 billion. Furthermore, certain asset backed
securities (approximately EUR 6.1 billion) were reclassified from Level 2 to Level 3 during the first quarter because the relevant markets
had become inactive; subsequently these were reclassified to Loans and advances during the second quarter. After reclassification to
Loans and advances and Amounts due from banks these are no longer recorded at fair value and therefore no longer subject to
disclosure in the fair value hierarchy;
Decrease in Level 3 – derecognition of asset backed securities in the US:•
The Illiquid Assets Back-up Facility agreed with the Dutch State resulted in the derecognition of asset backed securities in the United
States that were classified in Level 3. As a result of this transaction, financial assets in Level 3 (Available-for-sale investments) decreased
by approximately EUR 15.2 billion. This decrease includes the sale proceeds of EUR 22.4 billion and revaluation recognised in equity of
EUR 7.2 billion;
Decrease in Level 3 – reclassification of asset backed securities in the US and certain private equities to Level 2: •
During 2009, the pricing transparency and the level of trading activity in the secondary markets for asset backed securities in the United
States increased and the price of the securities as provided by the external pricing services converged . Accordingly, in the fourth quarter
of 2009, investments in asset backed securities in the United States of approximately EUR 2.8 billion were transferred from Level 3 to
Level 2. These assets were transferred into Level 3 during 2008, when the market became inactive and the dispersion between prices
for the same security from different prices sources increased significantly. Furthermore approximately EUR 0.7 billion of equity securities
in the private equity business (included in Trading and Available-for-sale) were transferred from Level 3 to Level 2 as pricing inputs
became market observable;
2.1 Consolidated annual accounts
ING Group Annual Report 2009
174
Additional information to the consolidated balance sheet of ING Group (continued)