ING Direct 2015 Annual Report Download - page 107

Contents
Who we are
Report of the
Management
Board
Corporate
Governance
Consolidated
annual accounts
Parent company
annual accounts
Other
information
Additional
information
Notes to the Consolidated annual accounts of ING Bank - continued
The estimated fair values represent the price at which an orderly transaction to sell the financial asset or to transfer the financial
liability would take place between market participants at the balance sheet date (‘exit price’). The fair value of financial assets and
liabilities is based on quoted market prices, where available. Such quoted market prices are primarily obtained from exchange prices
for listed instruments. Where an exchange price is not available, market prices are obtained from independent vendors, brokers or
market makers. Because substantial trading markets do not exist for all financial instruments, various techniques have been
developed to estimate the approximate fair values of financial assets and liabilities that are not actively traded. These techniques are
subjective in nature and involve various assumptions about the relevant pricing factors, especially for inputs that are not readily
available in the market (such as credit spreads for own-originated loans and advances to customers). Changes in these assumptions
could significantly affect the estimated fair values. Consequently, the fair values presented may not be indicative of the net realisable
value. In addition, the calculation of the estimated fair value is based on market conditions at a specific point in time and may not be
indicative of future fair values. Where exposures of a group of financial assets and financial liabilities are managed on a net basis ING
applies the IFRS-EU exception that allows ING to measure the fair value of the group of financial assets and financial liabilities on the
basis of the price that would be received to sell a net long position or settle a net short position.
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 increasing 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.
The following methods and assumptions were used by ING Bank to estimate the fair value of the financial instruments:
a.1) 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.
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