Annual Report - VÚB banka

2.28 Significant accounting judgements and estimates
Judgements
In the process of applying the Bank’s accounting
policies, management has made judgements, apart
from those involving estimations, that signifi cantly
affect the amounts recognized in the fi nancial statements.
The most signifi cant judgements relate to the classifi
cation of fi nancial instruments.
Held-to-maturity investments
The Bank follows the guidance of IAS 39 on classifying
non-derivative fi nancial assets with fi xed
or determinable payments and fi xed maturity as
held-to-maturity. This classifi cation requires signifi
cant judgement. In making this judgement, the
Bank evaluates its intention and ability to hold such
investments to maturity. If the Bank fails to keep
these investments to maturity other than for the
specifi c circumstance, for example selling a higher
than insignifi cant amount close to maturity, it will
be required to reclassify the entire class as available
for sale. The investments would therefore be
measured at fair value and not at amortized cost.
Fair value of fi nancial instruments
Where the fair values of fi nancial assets and fi nancial
liabilities recorded on the balance sheet cannot
be derived from active markets, they are determined
using a variety of valuation techniques that include
the use of mathematical models. The input
to these models is taken from observable markets
where possible, but where this is not feasible, a
degree of judgement is required in establishing fair
values. The judgements include considerations of
liquidity and model inputs such as correlation and
volatility for longer dated derivatives.
Impairment losses on loans and advances
The Bank reviews its loans and advances at each
reporting date to assess whether an allowance for
impairment should be recorded in the income statement.
In particular, judgement by management is
required in the estimation of the amount and timing
of future cash fl ows when determining the level of
allowance required. Such estimates are based on
assumptions about a number of factors and actual
results may differ, resulting in future changes to the
specifi c allowance.
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Financial assets held for trading
The Bank classifi es a fi nancial asset as held for trading
if it is acquired principally for the purpose of
selling it in the near term, or if it is part of a portfolio
of identifi ed fi nancial instruments that are managed
together and for which there is evidence of recent
actual pattern of short-term profi t taking, or if it is
a derivative.
Estimates
The preparation of the financial statements required
management to make certain estimates and assumptions,
which impact the carrying values of the Bank’s
assets and liabilities and the disclosure of contingent
items at the balance sheet date and reported revenues
and expenses for the period then ended.
Estimates are used for, but not limited to: fair values
of fi nancial instruments, impairment losses on
loans and advances to customers, provisions for
off-balance sheet risks, depreciable lives and residual
values of tangible and intangible assets, impairment
losses on tangible and intangible assets,
provisions for employee benefi ts and legal claims.
In addition to specifi c allowances against individually
signifi cant loans and advances, the Bank also
makes a collective impairment allowance against
exposures which, although not specifi cally identifi
ed as requiring a specifi c allowance, have a greater
risk of default than when originally granted. This
take into consideration factors such as any deterioration
in country risk, industry and technological
obsolescence, as well as identifi ed structural weaknesses
or deterioration in cash fl ows.
Future events and their effects cannot be perceived
with certainty. Accordingly, the accounting estimates
made require the exercise of judgement and
those used in the preparation of the fi nancial statements
will change as new events occur, as more
experience is acquired, as additional information is
obtained and as the Bank’s operating environment
changes. Actual results may differ from those estimates.
VUB, a bank of Intesa Sanpaolo group