ING Direct 2011 Annual Report Download - page 102

CRITICAL ACCOUNTING POLICIES
ING Group has identified the accounting policies that are most critical to its business operations and to the understanding of its results.
These critical accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to insurance
provisions, deferred acquisition costs and value of business acquired, the loan loss provision, the determination of the fair values of real estate
and financial assets and liabilities, impairments and employee benefits. In each case, the determination of these items is fundamental to the
financial condition and results of operations, and requires management to make complex judgements based on information and financial
data that may change in future periods. As a result, determinations regarding these items necessarily involve the use of assumptions and
subjective judgements as to future events and are subject to change, as the use of different assumptions or data could produce materially
different results. For a further discussion of the application of these accounting policies, reference is made to the applicable notes to the
consolidated financial statements and the information below under ‘Principles of valuation and determination of results’.
INSURANCE PROVISIONS, DEFERRED ACQUISITION COSTS (DAC) AND VALUE OF BUSINESS ACQUIRED (VOBA)
The establishment of insurance provisions, DAC and VOBA is an inherently uncertain process, involving assumptions about factors such as
court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns, policyholder behaviour and other
factors, and, in the life insurance business, assumptions concerning mortality and morbidity trends. Specifically, significant assumptions
related to these items that could have a material impact on financial results include interest rates, mortality, morbidity, property and
casualty claims, investment yields on equity and real estate, foreign currency exchange rates and reserve adequacy assumptions.
The use of different assumptions about these factors could have a material effect on insurance provisions and underwriting expenditure.
Changes in assumptions may lead to changes in the insurance provisions over time. Furthermore, some of these assumptions can be volatile.
In addition, the adequacy of insurance provisions, net of DAC and VOBA, is evaluated regularly. The test involves comparing the
established insurance provision with current best estimate assumptions about factors such as court decisions, changes in laws, social,
economic and demographic trends, inflation, investment returns, policyholder behaviour, mortality and morbidity trends and other factors.
The use of different assumptions in this test could lead to a different outcome.
Insurance provisions also include the impact of minimum guarantees which are contained within certain variable annuity products.
Thisimpact is dependent upon the difference between the potential minimum benefits payable and the total account balance, expected
mortality and surrender rates. The determination of the potential minimum benefits payable also involves the use of assumptions about
factors such as inflation, investment returns, policyholder behaviour, and mortality and morbidity trends. The use of different assumptions
about these factors could have a material effect on insurance provisions and underwriting expenditure.
The process of defining methodologies and assumptions for insurance provisions, DAC and VOBA is governed by ING Insurance risk
management as described in the ‘Risk management’ section.
Reference is made to the ‘Risk management’ section for a sensitivity analysis of net result and shareholders’ equity to insurance, interest
rate, equity, foreign currency and real estate risks. These sensitivities are based on changes in assumptions that management considers
reasonably likely at the balance sheet date.
LOAN LOSS PROVISIONS
Loan loss provisions are recognised based on an incurred loss model. Considerable judgement is exercised in determining the extent of the
loan loss provision (impairment) and is based on the management’s evaluation of the risk in the portfolio, current economic conditions,
loss experience in recent years and credit, industry, geographical and concentration trends. Changes in such judgements and analyses may
lead to changes in the loan loss provisions over time.
The identification of impairment and the determination of the recoverable amount are an inherently uncertain processes involving various
assumptions and factors including the financial condition of the counterparty, expected future cash flows, observable market prices and
expected net selling prices.
Future cash flows in a portfolio of financial assets that are collectively evaluated for impairment are estimated on the basis of the
contractual cash flows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those
in the portfolio. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions
that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical
period that do not exist currently. Current observable data may include changes in unemployment rates, property prices and commodity
prices. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between
loss estimates and actual loss experience.
FAIR VALUES OF REAL ESTATE
Real estate investments are reported at fair value. The fair value of real estate investments is based on regular appraisals by independent
qualified valuers. The fair values are established using valuation methods such as: comparable market transactions, capitalisation of income
methods or discounted cash flow calculations. The underlying assumption used in the valuation is that the properties are let or sold to
third parties based on the actual letting status. The discounted cash flow analyses and capitalisation of income method are based on
Accounting policies for the consolidated annual accounts of ING Group continued
100 ING Group Annual Report 2011