Annual Report & Accounts 2009

Anglo Irish Bank
Annual Report & Accounts 2009
A liability upon initial recognition may be designated at fair value through profit or loss when:
a) it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring
assets or liabilities or recognising the gains and losses on them on different bases; or
b) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment strategy; or
c) a financial instrument contains one or more embedded derivatives that significantly modify the cash flows arising from the
instrument and would otherwise need to be accounted for separately.
The principal categories of financial liabilities designated at fair value through profit or loss are (a) investment contracts issued by the
Group's assurance company: fair value designation significantly reduces the measurement inconsistency that would arise if these
liabilities were measured at amortised cost; and (b) structured liabilities issued by the Group: designation significantly reduces the
measurement inconsistency between these liabilities and the related derivatives carried at fair value.
Net gains and losses on financial liabilities designated at fair value through profit or loss are recognised in net trading income. Gains and
losses arising from changes in the fair value of derivatives that are managed in conjunction with financial liabilities designated at fair
value through profit or loss are included in net trading income.
The classification of instruments as a financial liability or an equity instrument is dependent upon the substance of the contractual
arrangement. Instruments which carry a contractual obligation to deliver cash or another financial asset to another entity are classified as
financial liabilities.
Preference shares and other subordinated capital instruments issued are classified as financial liabilities if coupon payments are not
discretionary. Distributions on these instruments are recognised in profit or loss as interest expense using the effective interest rate
method.
1.10 Financial guarantees
A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it
incurs because the guaranteed party fails to meet a contractual obligation or to make payment when due in accordance with the original
or modified terms of a debt instrument.
Financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and
other banking facilities and to other parties in connection with the performance of customers under obligations related to contracts,
advance payments made by other parties, tenders, retentions and the payment of import duties and taxes.
Financial guarantees are initially recognised in the financial statements at fair value on the date that the guarantee was given.
Subsequent to initial recognition, the Group's liabilities under such guarantees are measured at the higher of the initial measurement,
less amortisation calculated to recognise in the income statement the fee income earned over the period, and the best estimate of the
expenditure required to settle any financial obligation arising as a result of the guarantees at the end of the reporting period.
Where the parent Bank enters into financial guarantee contracts to guarantee the indebtedness of other Group companies, the parent
Bank considers these contracts to be insurance arrangements and accounts for them as such. The parent Bank treats these guarantee
contracts as contingent liabilities until such time as it becomes probable that it will be required to make a payment under these
guarantees.
1.11 Impairment of financial assets
It is Group policy to make provisions for impairment of financial assets to reflect the losses inherent in those assets at the end of the
reporting period.
The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a portfolio of
financial assets is impaired. A financial asset or a portfolio of financial assets is impaired and impairment losses are incurred if, and only
if, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the asset
and that loss event (or events) has had an impact such that the estimated present value of future cash flows is less than the current
carrying value of the financial asset, or portfolio of financial assets, and can be reliably measured.
Objective evidence that a financial asset, or a portfolio of financial assets, is potentially impaired includes observable data that comes to
the attention of the Group about the following loss events:
a) significant financial difficulty of the issuer or obligor;
b) a breach of contract, such as a default or delinquency in interest or principal payments;
c) the granting to the borrower of a concession, for economic or legal reasons relating to the borrower's financial difficulty, that
the Group would not otherwise consider;
d) it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
e) the disappearance of an active market for that financial asset because of financial difficulties; or
f) observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial
assets since the initial recognition of those assets, although the decrease cannot yet be identified within the individual
financial assets in the portfolio, including:
- adverse changes in the payment status of borrowers in the portfolio; or
- national or local economic conditions that correlate with defaults on the assets in the portfolio.
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