ING Direct 2015 Annual Report Download - page 122

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
To qualify for hedge accounting under IFRS-EU, strict criteria must be met. Certain hedges that are economically effective from a risk
management perspective do not qualify for hedge accounting under IFRS-EU. The fair value changes of derivatives relating to such
non-qualifying hedges are taken to the profit and loss account. However, in certain cases, the Bank mitigates the profit and loss
account volatility by designating hedged assets and liabilities at fair value through profit and loss. If hedge accounting is applied under
IFRS-EU, it is possible that during the hedge a hedge relationship no longer qualifies for hedge accounting and hedge accounting
cannot be continued, even if the hedge remains economically effective. As a result, the volatility arising from undertaking economic
hedging in the profit and loss account may be higher than would be expected from an economic point of view.
With respect to exchange rate and interest rate derivative contracts, the notional or contractual amount of these instruments is
indicative of the nominal value of transactions outstanding at the balance sheet date; however they do not represent amounts at risk.
ING Bank uses credit derivatives to manage its exposure to credit risk, including total return swaps and credit default swaps, to sell or
buy protection for credit risk exposures in the loan, investment and trading portfolios. Hedge accounting is not applied in relation to
credit derivatives.
Fair value hedge accounting
ING Bank’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 2015, ING Bank recognised EUR 1,243 million (2014: EUR –486 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 –1,308
million (2014: EUR 536 million) fair value changes recognised on hedged items. This resulted in EUR 65 million (2014: EUR 50 million)
net accounting ineffectiveness recognised in the profit and loss account. As at 31 December 2015, the fair values of outstanding
derivatives designated under fair value hedge accounting was EUR –1,401 million (2014: EUR –1,987 million), presented in the balance
sheet as EUR 1,010 million (2014: EUR 1,223 million) positive fair values under assets and EUR 2,411 million (2014: EUR 3,210 million)
negative fair values under liabilities.
ING Bank 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’ for 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 Bank 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 Bank’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.
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