ING Direct 2011 Annual Report Download - page 161

Notes to the consolidated annual accounts of ING Group continued
Fair value hedge accounting
ING Group’s fair value hedges principally consist of interest rate swaps and cross-currency interest rate swaps that are used to protect
against changes in the fair value of fixed-rate instruments due to movements in market interest rates.
Gains and losses on derivatives designated under fair value hedge accounting are recognised in the profit and loss account. The effective
portion of the fair value change on the hedged item is also recognised in the profit and loss account. As a result, only the net accounting
ineffectiveness has an impact on the net result.
For the year ended 31 December 2011, ING Group recognised EUR –1,028 million (2010: EUR –748 million) of fair value changes on
derivatives designated under fair value hedge accounting in the profit and loss account. This amount was partly offset by EUR 1,047 million
(2010: EUR 752 million) fair value changes recognised on hedged items. This resulted in EUR 19 million (2010: EUR 4 million) net accounting
ineffectiveness recognised in the profit and loss account. As at 31 December 2011, the fair values of outstanding derivatives designated under
fair value hedge accounting was EUR –6,286 million (2010: EUR –4,474 million), presented in the balance sheet as EUR 3,192 million (2010:
EUR 4,127 million) positive fair values under assets and EUR 9,478 million (2010: EUR 8,601 million) negative fair values under liabilities.
ING Group applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-EU.
The EU ‘carve-out’ macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly designated as the
hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core deposits and under-hedging
strategies. Under the IFRS-EU ‘carve-out’, hedge accounting may be applied to core deposits and ineffectiveness only arises when the revised
estimate of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket. ING Group applies the
IFRS-EU ‘carve-out’ to its retail operations in which the net exposure of retail funding (savings and current accounts) and retail lending
(mortgages) is hedged. The hedging activities are designated under a portfolio fair value hedge on the mortgages, using the IFRS-EU provisions.
Cash flow hedge accounting
ING Group’s cash flow hedges principally consist of (forward) interest rate swaps and cross-currency interest rate swaps that are used to
protect against its exposure to variability in future interest cash flows on non-trading assets and liabilities that bear interest at variable rates
or are expected to be refunded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and
interest flows, are projected for each portfolio of financial assets and liabilities, based on contractual terms and other relevant factors
including estimates of prepayments and defaults. The aggregate principal balances and interest cash flows for the respective portfolios
form the basis for identifying the notional amount subject to interest rate risk that is designated under cash flow hedge accounting.
Gains and losses on the effective portions of derivatives designated under cash flow hedge accounting are recognised in Shareholders’
equity. Interest cash flows on these derivatives are recognised in the profit and loss account in interest result consistent with the manner
inwhich the forecast cash flows affect net result. The gains and losses on ineffective portions of such derivatives are recognised
immediately in the profit and loss account.
For the year ended 31 December 2011, ING Group recognised EUR 1,124 million (2010: EUR 475 million) after tax in equity as effective
fairvalue changes on derivatives under cash flow hedge accounting. As a consequence, the balance of the cash flow hedge reserve in
equity as at 31 December 2011 was EUR 2,611 million (2010: EUR 1,110 million) gross and EUR 1,971 million (2010: EUR 847 million) after
deferred tax. This cash flow hedge reserve will fluctuate with the fair value changes of the underlying derivatives and will be reflected in
the profit and loss account under Interest income/expense over the remaining term of the underlying hedged items. The cash flow hedge
reserve relates to a large number of derivatives and hedged items with varying maturities, up to 45 years for insurance operations and
47years for banking operations, with the largest concentrations in the range of 2 to 9 years for insurance operations and 1 to 6 years for
banking operations. Accounting ineffectiveness on derivatives designated under cash flow hedge accounting resulted in a loss of EUR 17
million (2010: EUR 7 million loss) which was recognised in the profit and loss account.
As at 31 December 2011, the fair value of outstanding derivatives designated under cash flow hedge accounting was EUR 179 million
(2010: EUR –824 million), presented in the balance sheet as EUR 6,641 million (2010: EUR 4,440 million) positive fair values under assets
and EUR 6,462 million (2010: EUR 5,264 million) negative fair values under liabilities.
As at 31 December 2011, the fair value of outstanding non-derivatives designated as hedging instruments for cash flow hedge accounting
purposes was EUR –21 million (2010: nil).
Included in Interest income and interest expense on non-trading derivatives is EUR 2,966 million (2010: EUR 3,613 million) and EUR 2,959
million (2010: EUR 3,138 million), respectively, relating to derivatives used in cash flow hedges.
Hedges of net investments in foreign operations
ING Group’s net investment hedges principally consist of derivatives (including currency forwards and swaps) and non-derivative financial
instruments such as foreign currency denominated funding that are used to protect against foreign currency exposures on foreign subsidiaries.
1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information
159ING Group Annual Report 2011