ING Direct 2013 Annual Report Download - page 196

Notes to the consolidated annual accounts of ING Group continued
The following methods and assumptions were used by ING Group to estimate the fair value of the financial instruments:
Financial assets
Cash and balances with central banks
The carrying amount of cash approximates its fair value.
Amounts due from banks
The fair values of receivables from banks are generally based on quoted market prices or, if unquoted, on estimates based on discounting
future cash flows using available market interest rates offered for receivables with similar characteristics, similar to Loans and advances to
customers described below.
Financial assets at fair value through profit and loss and Investments
Derivatives
Derivatives contracts can either be exchange-traded or over the counter (OTC). The fair value of exchange-traded derivatives is determined
using quoted market prices in an active market and those derivatives are classified in Level 1 of the fair value hierarchy. For those
instruments not actively traded, fair values are estimated based on valuation techniques. OTC derivatives and derivatives trading in an
inactive market are valued using valuation techniques because quoted market prices in an active market are not available for such
instruments. The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instruments. The
principal techniques used to value these instruments are based on discounted cash flows, Black-Scholes option models and Monte Carlo
simulation. These valuation models calculate the present value of expected future cash flows, based on ‘no-arbitrage’ principles. These
models are commonly used in the financial industry. Inputs to valuation models are determined from observable market data where
possible. Certain inputs may not be observable in the market directly, but can be determined from observable prices via valuation model
calibration procedures. The inputs used include prices available from exchanges, dealers, brokers or providers of pricing, yield curves, credit
spreads, default rates, recovery rates, dividend rates, volatility of underlying interest rates, equity prices and foreign currency exchange
rates. These inputs are determined with reference to quoted prices, recently executed trades, independent market quotes and consensus
data, where available.
Equity securities
The fair values of publicly traded equity securities are based on quoted market prices when available. Where no quoted market prices are
available, fair value is determined based on quoted prices for similar securities or other valuation techniques.
The fair value of private equity is based on quoted market prices, if available. In the absence of quoted prices in an active market, fair value
is estimated on the basis of an analysis of the investee’s financial position and results, risk profile, prospects, price, earnings comparisons
and revenue multiples and by reference to market valuations for similar entities quoted in an active market.
Debt securities
Fair values for debt securities are based on quoted market prices, where available. Quoted market prices may be obtained from an
exchange, dealer, broker, industry group, pricing service or regulatory service. If quoted prices in an active market are not available, fair
value is based on an analysis of available market inputs, which may include values obtained from one or more pricing services or by a
valuation technique that discounts expected future cash flows using a market interest rate curves, referenced credit spreads, maturity of
the investment and estimated prepayment rates where applicable.
Loans and receivables
Reference is made to Loans and advances to customers below.
Loans and advances to customers
For loans and advances that are repriced frequently and have had no significant changes in credit risk, carrying amounts represent a
reasonable estimate of fair values. The fair values of other loans are estimated by discounting expected future cash flows using interest
rates offered for similar loans to borrowers with similar credit ratings.
The fair values of mortgage loans are estimated by taking into account prepayment behaviour and discounting future cash flows using
interest rates currently being offered for similar loans to borrowers with similar credit ratings. The fair values of fixed rate policy loans are
estimated by discounting cash flows at the interest rates charged on policy loans of similar policies currently being issued. Loans with similar
characteristics are aggregated for calculations purposes. The carrying values of variable rate policy loans approximate their fair value.
Other assets
The other assets are stated at their carrying value which is not significantly different from their fair value.
194 ING Group Annual Report 2013