Annual Report & Accounts 2009 - Anglo Irish Bank

Anglo Irish Bank
Annual Report & Accounts 2009
The Group has evaluated the impact on its specific impairment charge, for both loans and advances to customers and loans classified as
held for sale, of applying a lower estimate of the realisable value of collateral and of a change in the timing of the realisation of these
assets. The Bank estimates that a decrease of 10% in realisable collateral values on currently impaired loans would have increased the
impairment charge for the period by approximately €2.0bn. Similarly, an extension of one year in the timing of the realisation of these
assets would have increased the impairment charge by approximately €0.6bn. These estimates are based on impaired loans at
31 December 2009. The methodology and assumptions used for estimating both the amount and timing of future cash flows are
reviewed regularly.
An additional incurred but not reported ('IBNR') collective provision is required to cover losses inherent in the loan book where there is
objective evidence to suggest that it contains impaired loans, but the individual impaired loans cannot yet be identified. This provision
takes account of observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of loans
with similar credit risk characteristics, although the decrease cannot yet be identified within the individual loans in the group.
This provision is calculated by applying incurred loss factors to groups of loans sharing common risk characteristics. Loss factors are
determined by historical loan loss experience as adjusted for current observable market data. Adjustments reflect the impact of current
conditions that did not affect the years on which the historical loss experience is based and remove the effects of conditions in the
historical period that do not exist currently. The provision amount is also adjusted to reflect the appropriate loss emergence period. The
loss emergence period represents the time it takes following a specific loss event on an individual loan for that loan to be identified as
impaired. The loss emergence period applied in the period was six months (30 September 2008: twelve months).
The future credit quality of loan portfolios against which an IBNR collective provision is applied is subject to uncertainties that could
cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include factors such as local
and international economic conditions, borrower specific factors, industry trends, interest rates, unemployment levels and other external
factors. For loan impairment details, see note 27.
Assets classified as held for sale
Assets that the Bank believes will be transferred to NAMA are classified as held for sale in the statement of financial position. The Bank
has no control over the quantity of eligible assets that NAMA will acquire or over the valuation NAMA will place on those assets. NAMA
has not confirmed to the Bank the total value of eligible assets it expects to purchase or the consideration it will pay in respect of those
assets. Assets continue to be measured on the same basis as prior to their reclassification as held for sale.
Assets will continue to be carried in the statement of financial position until they legally transfer to NAMA. The amount of consideration
received from NAMA will be measured at fair value and any difference between the carrying value of the asset on the date of transfer
and the consideration received will be recognised in the income statement.
Impairment of available-for-sale financial assets
In the case of debt instruments classified as available-for-sale financial assets the Group has considered the decline in fair values to
ascertain whether any impairment has occurred. Impairment is recognised when there is objective evidence that a specific financial asset
is impaired. Evidence of impairment is assessed by reference to the underlying assets of the debt instrument, the most up to date market
valuations and whether there is evidence of a significant or prolonged decline in fair value, and all other available information. The
determination of whether or not objective evidence of impairment is present requires the exercise of management judgement,
particularly in relation to asset backed securities (‘ABS’) where exposures are not to a single obligor but rather to a diverse pool of
underlying collateral. In addition, these investments also include credit enhancement features such as over-collateralisation or
subordination that must also be evaluated in the impairment assessment.
Carrying amount of investment property
Investment properties held at cost are reviewed regularly to determine their recoverable values and to assess impairment, if any. Where a
value in use calculation is performed as part of this review, management estimates the future cash flows expected to be derived from the
asset. Expectations of future cash flows, and any variations in their amount or timing, are subject to management judgement. In some
cases, recoverable amount is based on management estimates.
Fair value
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable and willing parties in an
arm's length transaction. Fair values are determined by reference to observable market prices where these are available and are reliable.
Where representative market prices are not available or are unreliable, fair values are determined by using valuation techniques which
refer to observable market data. These include prices obtained from independent third party pricing service providers, comparisons with
similar financial instruments for which market observable prices exist, discounted cash flow analyses, option pricing models and other
valuation techniques commonly used by market participants. Where non-observable market data is used in valuations, any resulting
difference between the transaction price and the valuation is deferred. The deferred day one profit or loss is either amortised over the life
of the transaction, deferred until the instrument’s fair value can be determined using market observable inputs or realised through
settlement, depending on the nature of the instrument and availability of market observable inputs. The accuracy of fair value
calculations could be affected by unexpected market movements when compared to actual outcomes. Due to the increasing significance
of credit related factors, determining the fair value of corporate interest rate derivative financial assets requires considerable judgement.
In the absence of unadjusted quoted market prices, valuation techniques take into consideration the credit quality of the underlying
loans when determining fair value.
Expected life of lending
IAS 39 requires interest and arrangement fees which form an integral part of the return earned from lending to be measured using the
effective interest rate method. The effective interest rate is the rate that discounts estimated future cash receipts and payments through
the expected life of the loan or, when appropriate, a shorter period to the net carrying amount of the loan.
Management uses judgement to estimate the expected life of each loan and hence the expected cash flows relating to it. The accuracy
of the effective interest rate would therefore be affected by unexpected market movements resulting in altered customer behaviour and
differences in the models used when compared to actual outcomes.
57