Annual report 2010 - Dexia.com

Notes to the consolidated financial statementsManagement reportConsolidatedfinancial statementsAdditional information Annual financial statementsare adequate, using current estimates of future cash flowsunder its insurance contracts.If that assessment (based on all individual Life and Non-lifeinsurance portfolios) shows that the carrying amount of itsinsurance liabilities (less the related deferred acquisition costsand related intangible assets) is inadequate in the light of theestimated future cash flows, the entire deficiency shall berecognised in profit or loss.If an adequacy test of the life obligations imposed by thelocal authorities is available, it will show whether or not theinsurance liabilities are sufficient.If this test is not available, a test such as the one describedbelow will be carried out in order to examine if the currentvalue of the future cash flows is covered by the concordanttechnical provision. Should this prove not to be the case, theentire deficiency would be recognised in profit or loss.For Life insurance liabilities set up where no local LAT test isimposed by the authorities, an IFRS LAT test will be carriedout using thefollowing parameters:• premiums: collected premiums plus contractually providedfuture premiums;• interest rate for actualisation cash flows: average OLOon 10 year during the last (consecutive) year until the 15thbefore closing;• mortality table: Assuralia experience table;• costs: calculation based on the latest tariff costs and thebooked costs;• tariff costs take into account the inventory surcharges,commercial surcharges and fixed sums;• real assigned costs take into account management expenses,claims handling expenses and commissions. These costs arestipulated by product group and are indexed. Taking intoaccount lapses, death and the expiry period the annual deltais stipulated as being somewhere between the tariff costs andthe real assigned costs. Deltas are then actualised to the LATrate.For Non-life insurance, the LAT that examines whetherthe premium and claim provisions are sufficient to settledefinitively the opened claim files and the claims that willoccur within the contractual duration of the contracts toopen and to settle definitively.All products are subject to LAT. The test is subdivided intotwo parts. Dexia first examines whether the built-up reservesfor claim files already opened are sufficient, then makes anestimation of the expected loss burden for the insuranceportfolios and examines whether the unearned premiumreserves are sufficient.Regarding reserves for the files already opened, Dexiaperforms run-off calculations, using estimates for the claimshandlingexpenses.1.10.2. ReinsuranceDexia's reinsurance contracts with third parties that containenough insurance risk to be classified as an insurancecontract continue to be accounted for in accordance withLocal GAAP.A reinsurance asset is impaired if, and only if:• there is objective evidence, as a result of an event thatoccurred after initial recognition of the reinsurance asset, thatthe cedant may not receive all amounts due to it under theterms of the contract; and• that event has a reliably measurable impact on the amountsthat the cedant will receive from the reinsurer.To measure the solvency of a reinsurer, Dexia refers to itsattributed credit rating and the impairment rules.1.11. NETWORK COSTSThis heading records the commission paid to intermediariesassociated by exclusive sales mandate for drumming upbusiness.1.12. HEDGING DERIVATIVESHedging derivatives are categorised as either:• a hedge of the fair value of a recognised asset or liability ora firm commitment (fair value hedge); or• a hedge of a future cash flow attributable to a recognisedasset or liability or a forecast transaction (cash flow hedge);or• a hedge of a net investment in a foreign operation.Dexia designates derivatives as hedging instruments if certaincriteria are met:• formal documentation of the hedging instrument, hedgeditem, hedging objective, strategy and relationship is availablebefore hedge accounting is applied;• the hedge is documented in such a way as to show that itis expected to be highly effective (within a range of 80% to125%) in offsetting changes in the fair value or cash flowsattributable to the hedged risk in the hedged item throughoutthe reporting period; and• the hedge is effective at inception and on an ongoingbasis.Dexia records changes in the fair value of derivatives that aredesignated, and qualify, as fair value hedges in the statementof income, along with the corresponding change in fair valueof the hedged assets or the liabilities that is attributable tothat specific hedged risk.If the hedge no longer meets the criteria for a fair value hedge,Dexia amortises the adjustment to the carrying amount of ahedged interest-bearing financial instrument to the statementof income over the remaining life of the hedged or hedginginstrument if shorter by an adjustment of the yield of thehedged item.Dexia recognises the effective part of the changes in thefair value of derivatives that are designated and qualifyas cash flow hedges, in “Other comprehensive income“under the heading “Gains and losses not recognised inthe statement of income“ (see “Consolidated statement ofchanges in shareholders' equity“). Any non-effective portionof the changes in the fair value of the hedging instrumentis recognised in the statement of income. Amounts deferredin equity are transferred to the statement of income andclassified as revenue or expense in the periods during which136 Dexia Annual report 2010