ING Direct 2015 Annual Report Download - page 37

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
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.
Fair values of financial assets and liabilities
Fair values of financial assets and liabilities are based on unadjusted 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 may be
obtained from independent market vendors, brokers or market makers. In general, positions are valued taking the bid price for a long
position and the offer price for a short position or are valued at the price within the bid-offer spread that is most representative of fair
value in the circumstances. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated.
When markets are less liquid there may be a range of prices for the same security from different price sources, selecting the most
appropriate price requires judgement and could result in different estimates of fair value.
For certain financial assets and liabilities quoted market prices are not available. For these financial assets and liabilities, fair value is
determined using valuation techniques. These valuation techniques range from discounting of cash flows to valuation models, where
relevant pricing factors including the market price of underlying reference instruments, market parameters (volatilities, correlations
and credit ratings) and customer behaviour are taken into account. All valuation techniques used are subject to internal review and
approval. Most data used in these valuation techniques are validated on a daily basis.
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. To address the
risk associated with the illiquid nature of the derivative portfolio, ING applies an additional ‘liquidity valuation adjustment’. The
adjustment is based on the market price of funding liquidity and is applied to the uncollateralised derivatives. This additional
discounting is taken into account in both the credit and debit valuation adjustments.
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.
ING Bank Annual Report 2015 35