ING Direct 2013 Annual Report Download - page 106

To include credit risk in the fair valuation, ING applies both credit and debit valuation adjustments (CVA, DVA). Own issued debt and
structured notes that are valued at fair value are adjusted for credit risk by means of a DVA. Additionally, derivatives valued at fair value are
adjusted for credit risk by a CVA. The CVA is of a bilateral nature as both the credit risk on the counterparty as well as the credit risk on
ING are included in the adjustment. All market data that is used in the determination of the CVA is based on market implied data.
Additionally, wrong-way risk (when exposure to a counterparty is increasing and the credit quality of that counterparty decreases) and
right way risk (when exposure to a counterparty is decreasing and the credit quality of that counterparty increases) are included in the
adjustment. ING also applies CVA for pricing credit risk into new external trades with counterparties.
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 significantly 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 incorrect or misused models.
Reference is made to Note 46 ‘Fair value of assets and liabilities’ and the ‘Risk management’ section 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 significant
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 a significant or
prolonged decline of the 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 the (acquisition) cost and fair value is removed from equity and
recognised in net result. 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 cannot be reversed.
Impairments on other debt instruments (Loans and held-to-maturity investments) are part of the loan loss provision as described above.
Impairment reviews with respect to goodwill and intangible assets are performed at least annually and more frequently if events indicate
that impairments may have occurred. Goodwill is tested for impairment by comparing the carrying value (including goodwill) of the
reporting unit to the best estimate of the recoverable amount of that reporting unit. The carrying value is determined as the IFRS-EU net
asset value including goodwill. The recoverable amount is estimated as the higher of fair value less cost to sell and value in use. Several
methodologies are applied to arrive at the best estimate of the recoverable amount. A reporting unit is the lowest level at which goodwill
is monitored. Intangible assets are tested for impairment by comparing the carrying value with the best estimate of the recoverable amount.
The identification of impairment is an inherently uncertain process involving various assumptions and factors, including financial condition
of the counterparty, expected future cash flows, statistical loss data, discount rates, observable market prices, etc. Estimates and
assumptions are based on management’s judgement and other information available prior to the issuance of the financial statements.
Significantly different results can occur as circumstances change and additional information becomes known.
Employee benefits
Group companies operate various defined benefit retirement plans covering a significant number of ING’s employees.
The net defined benefit asset/liability recognised in the balance sheet in respect of the defined benefit pension plans is the fair value of the
plan assets less the present value of the defined benefit obligation at the balance sheet date.
The determination of the defined benefit obligation is based on internal and external actuarial models and calculations. The defined
benefit obligation is calculated using the projected unit credit method. Inherent in these actuarial models are assumptions including
discount rates (in particular based on market yields on high quality corporate bonds), rates of increase in future salary and benefit levels,
mortality rates, trend rates in health care costs and consumer price index and are updated on a quarterly basis.
Notes to the consolidated annual accounts of ING Group continued
104 ING Group Annual Report 2013