ING Direct 2011 Annual Report Download - page 110

If there is objective evidence that an impairment loss on an asset carried at amortised cost has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future
credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the
asset is reduced through the use of an allowance account (‘Loan loss provision’) and the amount of the loss is recognised in the profit and
loss account under ‘Addition to loan loss provision’. If the asset has a variable interest rate, the discount rate for measuring any impairment
loss is the current effective interest rate determined under the contract.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics.
Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability
to pay all amounts due according to the contractual terms of the assets being evaluated. The collective evaluation of impairment includes
the application of a ‘loss confirmation period’ to default probabilities. The loss confirmation period is a concept which recognises that
there is a period of time between the emergence of impairment triggers and the point in time at which those events are captured by the
Group’s credit risk systems. Accordingly, the application of the loss confirmation period ensures that impairments that are incurred but not
yet identified are adequately reflected in the Group’s loan loss provision. Although the loss confirmation periods are inherently uncertain,
the Group applies estimates to sub-portfolios (e.g. large corporations, small and medium size enterprises and retail portfolios) that reflect
factors such as the frequency with which customers in the sub-portfolio disclose credit risk sensitive information and the frequency with
which they are subject to review by the Group’s account managers. Generally, the frequency increases in relation to the size of the
borrower. Loss confirmation periods are based on historical experience and are validated, and revised where necessary, through regular
back-testing to ensure that they reflect recent experience and current events.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring
after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is
reversed by adjusting the provision. The amount of the reversal is recognised in the profit and loss account.
When a loan is uncollectible, it is written off against the related loan loss provision. Such loans are written off after all the necessary
procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written
off are recognised in the profit and loss account.
IMPAIRMENT OF OTHER FINANCIAL ASSETS
At each balance sheet date, the Group assesses whether there is objective evidence that a financial asset or a group of financial assets is
impaired. In the specific case of equity investments classified as available-for-sale, (the combination of) a significant or prolonged decline
inthe fair value of the security below its cost is considered in determining whether the assets are impaired. ‘Significant’ and ‘prolonged’
are interpreted on a case-by-case basis for specific equity securities; generally 25% and 6 months are used as triggers. If any objective
evidence exists for available-for-sale debt and equity investments, the cumulative loss – measured as the difference between the
acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in net result – is removed
from equity and recognised in the profit and loss account. Impairment losses recognised on equity instruments can never be reversed. If, in
a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related
to an event occurring after the impairment loss was recognised in the profit and loss account, the impairment loss is reversed through the
profit and loss account.
INVESTMENTS IN ASSOCIATES
Associates are all entities over which the Group has significant influence but not control. Significant influence generally results from a
shareholding of between 20% and 50% of the voting rights, but also is the ability to participate in the financial and operating policies
through situations including, but not limited to one or more of the following:
• Representation on the board of directors;
• Participation in the policymaking process; and
• Interchange of managerial personnel.
Investments in associates are initially recognised at cost and subsequently accounted for using the equity method of accounting.
The Group’s investment in associates (net of any accumulated impairment loss) includes goodwill identified on acquisition. The Group’s
share of its associates’ post-acquisition profits or losses is recognised in the profit and loss account, and its share of post-acquisition
changes in reserves is recognised in equity. The cumulative post-acquisition changes are adjusted against the carrying amount of the
investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured
receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the
associates. Unrealised losses are also eliminated unless they provide evidence of an impairment of the asset transferred. Accounting
policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. The reporting
dates of all material associates are consistent with the reporting date of the Group.
Accounting policies for the consolidated annual accounts of ING Group continued
108 ING Group Annual Report 2011