Annual report 2009 - Dexia.com

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Notes to the consolidated fi nancial statementsManagement reportConsolidatedfinancial statementsAnnual financial statementsAdditional informationdetermined under the contract for variable-rate instruments.The recoverable amount of an instrument measured at fairvalue is the present value of expected future cash flows discountedat the current market rate of interest for a similarfinancial asset.Off-balance-sheet exposures such as credit substitutes (e.g.:guarantees and standby letters of credit) and loan commitmentsare usually converted into on-balance-sheet items whencalled. However, there may be circumstances such as uncertaintyabout the counterparty, where the off-balance-sheetexposure should be regarded as impaired. Loan commitmentsshould be classified as impaired if the credit worthiness of theclient has deteriorated to an extent that makes repayment ofany loan and associated interest payments doubtful.Allowances for impairment losses are recorded on assetswithin “Loans and advances due from banks” and “Loansand advances to customers” in the following way:• Specific impairments – The amount of the impairment onspecifically identified assets is the difference between the carryingamount and the recoverable amount, being the presentvalue of expected cash flows, including amounts recoverablefrom guarantees and collateral, discounted using the effectiveinterest rate at the time of impairment or using the effectiveinterest rate at the reclassification date for reclassified assets.Assets with small balances (including retail loans) that sharesimilar risk characteristics are generally aggregated in thismeasurement. When an asset is assessed as being impaired,a specific impairment loss will be recognised, the underlyingasset will be excluded from the portfolio on which a collectiveimpairment is calculated.• Collective impairments – Loss impairments cover incurredlosses where there is no specific impairment but objectiveevidence that losses are present in segments of the portfolioor other lending related commitments at the balance-sheetdate. These have been estimated based upon historical patternsof losses in each segment, the credit ratings allocatedto the borrowers and reflecting the current economic environmentin which the borrowers operate. Dexia develops forthat purpose credit risk models using an approach that combinesappropriate default probabilities and loss-given defaultsthat are subject to regular back testing and are based onBasel II data and risk models. Considering the stressed marketconditions, Dexia has recalibrated its model to betterreflect the impact of the financial crisis on the ratings andthe expected losses.• Country risk component – Included within specific andcollective impairment.When an asset is determined by management as beinguncollectable, it is written off against its related impairment;subsequent recoveries are reversed via the statement ofincome, in the heading “Impairment on loans and provisionsfor credit commitments”. If the amount of the impairmentsubsequently decreases due to an event occurring after thewrite-down of the initial impairment, the write-back of theimpairment is credited to the “Impairment on loans and provisionsfor credit commitments”.“Available for sale” (AFS) assets are only subject to specificimpairment.“Available for sale” quoted equities are measured at fairvalue through “Gain and losses on securities not recognisedin the statement of income” or within the statement ofincome in the case of impairment. Dexia analyses all equitiesthat have declined by more than 25% compared to theacquisition price or when a risk is identified by managementand takes the decision to impair and assess whether thereis an objective evidence of impairment according to IAS 39.A significant or prolonged decline in the fair value below itscost is also objective evidence of impairment. Impairmentson equity securities cannot be reversed in the statement ofincome due to later recovery of quoted prices.Reversal impairment on debt securities is addressed on acase-by-case basis in accordance with the standard.When AFS financial assets are impaired, the total impairmentlosses are reported in the statement of income as “Netincome on investments”.We also refer to 4.3.”Credit Risk” for more information onhow credit risk is monitored by Dexia.1.9. Interest income and expenseInterest income and expense are recognised in the statementof income for all interest bearing instruments on an accrualbasis using the effective interest-rate method based on thepurchase price (including transaction costs).Transaction costs are incremental costs that are directly attributableto the acquisition of a financial asset or liability andare included the calculation of the effective interest rate. Anincremental cost is one that would not have been incurred ifthe entity had not acquired the financial instrument.Accrued interest is reported in the same line as the relatedfinancial asset or liability in the balance sheet.Once an interest-bearing financial asset has been writtendown to its estimated recoverable amount, interest incomeis thereafter recognised based on the rate of interest thatwas used to discount the future cash flows for measuring therecoverable amount.1.10. Fee and commission incomeand expenseCommissions and fees are recognised in accordance withIAS 18. According to this standard, most of the commissionsarising from Dexia’s activities are recognised on an accrualbasis over the life of the underlying transaction.For significant acts such as commissions and fees arising fromnegotiating, or participating in the negotiation of a transactionfor a third party, such as the arrangement of the acquisitionof loans, equity securities or other securities or thepurchase or sale of businesses, are recognised based on thestage of completion of the underlying transaction, when theunderlying transaction has been completed.For asset management operations, revenue consists principallyof unit trust and mutual fund management and administrationfees. Revenue from asset management is recognisedas earned when the service is provided. Performance fees arerecognised when they are definitively acquired, i.e. when allunderlying conditions are met.Loan commitment fees are recognised as part of the effectiveinterest rate if the loan is granted, and recorded as revenueon expiry if no loan is granted.110Dexia Annual report 2009
Notes to the consolidated fi nancial statements1.11. Insurance and reinsurance activities1.11.1. InsuranceDexia is mainly active in banking products. Some insuranceproducts sold by insurance companies have been requalifiedas financial instruments as they do not meet the requirementsof insurance products under IFRS 4.IFRS 4 allows a company to account for insurance contractsunder local GAAP if they qualify as such under IFRS 4.Hence, Dexia has elected to use the local accounting policiesto evaluate technical provisions for contracts that fall underIFRS 4 and investment contracts with discretionary participationfeatures (DPF).A contract that complies with the conditions of an insurancecontract remains an insurance contract until all rights andobligations cease to exist or expire. An insurance contract isa contract under which one party (the insurer) accepts significantinsurance risk from another party (the policyholder)by agreeing to compensate the policyholder if a specifieduncertain future event (the insured event) adversely affectsthe policyholder.A contract can start as an investment contract and becomean insurance contract when containing significant insurancecomponents as time passes.The amounts received and paid relating to insurance products(including nonlife claims) are reported respectively underpremiums and technical income or technical expense frominsurance activity, whereas losses and changes in provisionsfor credit enhancement activities, which are similar to bankingactivities, are reported under “Impairment on loans andprovision for credit commitments”.All other items arising from insurance activities are classifiedaccording to their nature in the balance sheet, exceptfor technical provisions, which are identified on a separateheading.Insurance activities of Dexia are mainly performed by DexiaInsurance Services (DIS) for life and nonlife products andby Financial Security Assurance (FSA) in the USA for creditenhancement of municipal and corporate bonds.DIS activities: life and nonlifeInsurance products of DIS are recorded under local GAAP.This group is mainly constituted by Belgian entities, for whichBelgian GAAP (Royal Decree of 17 November 1994) are applicable,if they are qualified as such under IFRS 4. However,provisions for catastrophes and equalizations are reversed.The Life insurance portfolio features:• Insurance contracts including reinsurance contracts and theaccepted reinsurance treaties with exception of the in-housedefined employee benefit plans;• Financial instruments issued with a discretionary profit sharing(discretionary participation feature (DPF));• Unit-linked (UL) contracts stipulating that the policyholdercan switch at all times, without costs, to an investmentproduct with guaranteed interest rate and a probable profitsharing.ClassificationClassification is done policy by policy, whereas for groupinsurances, classification is done on the employer’s level.The nonlife insurance portfolio features include only insurancecontracts that contain a significant insurance risk.Shadow accountingAn insurer is permitted, but not required, to change itsaccounting policies so that a recognised but unrealised gainor loss on an asset affects those measurements in the sameway that a realised gain or loss does. The related adjustmentto the insurance liability (or deferred acquisition costs orintangible assets) shall be recognised in equity if, and onlyif, the unrealised gains or losses are recognised directly inequity.Dexia Group decided to apply shadow accounting, if underlegal and/or contract conditions the realisation of gains onan insurer’s assets have a direct effect on the measurementof some or all of its insurance contracts and investment contractswith discretionary participation features (DPF).Shadow loss adjustmentTo determine the need for a shadow loss adjustment Dexiadetermines if additional liabilities would be required, assumingcurrent market investment yields rather than the estimatedreturn of the assets. If the level of liabilities requiredis higher than total liabilities, then the deficiency shoulddecrease the unrealised gains recorded in equity and increaseliabilities through a shadow premium deficiency adjustment.This requires the liability adequacy test (see Liability AdequacyTest) to be performed after all shadow adjustments – if any.Should there be insufficient unrealised capital gains left inequity to accommodate the shadow loss adjustment, theadditional liability increase should be charged to income(P/L).Discretionary participation feature (DPF)Discretionary participation feature is a contractual right toreceive, as a supplement to guaranteed benefits, additionalbenefits:• that are likely to be a significant portion of the total contractualbenefits;• whose amount or timing is contractually at the discretionof the issuer; and• that are contractually based on:– the performance of a specified pool of contracts or a specifiedtype of contract; or– realised and/or unrealised investment returns on a specifiedpool of assets held by the issuer; or– the profit or loss of the company, fund or other entity thatissues the contract.All unrealised gains and losses coming from investmentsbacking insurance contracts and investment contracts withDPF are categorised proportionally for the part related to theinsurance contracts and investment contracts with discretionaryparticipation features in a separate line of the equity.Proportional calculation happens on the basis of the carriedreserves and by separated management of the assets.Insurance contracts with deposit component(unbundling)All unit-linked products that contain both an insurance contractand a deposit component will be unbundled. Accountingpolicies for insurance contracts are applied for the insuranceManagement reportConsolidatedfinancial statementsAnnual financial statementsAdditional informationAnnual report 2009 Dexia 111
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Group profi leSIMPLIFIED GROUP STRU
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2009 and early 2010 highlightsExit
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Corporate governanceIntroduction: t
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Shareholder informationStock market
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Shareholder informationPRINCIPAL DE
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Human resourcesAGE PYRAMID> 5955-59
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Sustainable developmentThe 2009 Dex
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Risk managementIntroductionIn 2009,
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Risk managementThe Rating Committee
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Dexia’s annual report 2009 has be
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Annual report 2009 - Dexia.com

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