IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

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Notes to the financial statements continued1. General information and accounting policies continued1.10 Financial assetsFinancial assets are classified into the following categories: financial assets at fair value through profit or loss; loans and receivables; heldto-maturityinvestments; and available-for-sale financial assets. Management determines the classification of financial assets at initialrecognition.Financial assets at fair value through profit or lossThis category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss atinception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if sodesignated by management.A financial asset may be designated at fair value through profit or loss in the following circumstances:a) it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuringassets or liabilities or recognising gains and losses arising on them on different bases; orb) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, inaccordance with a documented risk management or investment strategy; orc) a financial instrument contains one or more embedded derivatives that significantly modify the cash flows arising from theinstrument and would otherwise need to be accounted for separately.The principal categories of financial assets designated at fair value through profit or loss are (a) policyholders’ assets underpinninginvestment contracts issued by the Group's assurance company - fair value designation significantly reduces the measurementinconsistency that would arise if these assets were classified as available-for-sale; and (b) certain investment securities containingembedded derivatives that are not closely related to the host contracts.Interest on financial assets at fair value through profit or loss held on own account is included in net interest income. Other gains andlosses arising from changes in fair value are included directly in the income statement within financial assets designated at fair value.Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active marketand which are not classified as available-for-sale. They arise when the Group provides money to a customer with no intention of tradingthe receivable. Loans and receivables are initially recognised at fair value including direct and incremental transaction costs, and aresubsequently carried on an amortised cost basis.Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that theGroup's management has the positive intention and ability to hold to maturity. Were the Group to sell other than an insignificantamount of held-to-maturity assets, the entire category would be tainted and reclassified as available-for-sale financial assets.Available-for-sale financial assetsAvailable-for-sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to needsfor liquidity or changes in interest rates, exchange rates, asset prices or other factors.Purchases of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets arerecognised on a trade date basis, being the date on which the Group commits to purchase the asset. Loans and receivables arerecognised when funds are advanced to the borrowers. Financial assets are initially recognised at fair value plus directly attributabletransaction costs, with the exception of financial assets carried at fair value through profit or loss whose transaction costs are takendirectly to the income statement. Financial assets are derecognised when the rights to receive cash flows from the financial assets haveexpired or where the Group has transferred substantially all the risks and rewards of ownership.Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans andreceivables and held-to-maturity investments are subsequently carried at amortised cost using the effective interest rate method.Gains and losses arising from changes in the fair value of financial assets at fair value through profit or loss held on own account areincluded within fair value movements in the income statement in the period in which they arise. Gains and losses arising from changes inthe fair value of available-for-sale financial assets are recognised in other comprehensive income and accumulated under a separatecomponent of shareholders' equity until the financial assets are derecognised or impaired, at which time the cumulative gain or losspreviously recognised in other comprehensive income is transferred to the income statement. Interest on both financial assets at fairvalue through profit or loss held on own account and available-for-sale financial assets is reported in interest and similar income.Interest is calculated using the effective interest rate method and is recognised in profit or loss. Dividends on available-for-sale equityinstruments are recognised in profit or loss when the Group's right to receive payment is established.The Bank accounts for investments in subsidiary undertakings at cost less provisions for impairment.1.11 Financial liabilitiesFinancial liabilities other than those at fair value through profit or loss are initially recognised at fair value, being their issue proceeds netof transaction costs incurred. Transaction costs on liabilities at fair value are expensed to the income statement. All liabilities, other thanthose designated at fair value through profit or loss, are subsequently carried at amortised cost. For financial liabilities measured atamortised cost any difference between initial fair value and redemption value is recognised in profit and loss using the effective interestrate method.46
Irish Bank Resolution Corporation LimitedAnnual Report & Accounts 2011A 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 measuringassets or liabilities or recognising the gains and losses on them on different bases; orb) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, inaccordance with a documented risk management or investment strategy; orc) a financial instrument contains one or more embedded derivatives that significantly modify the cash flows arising from theinstrument 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 theGroup's assurance company: fair value designation significantly reduces the measurement inconsistency that would arise if theseliabilities were measured at amortised cost, and (b) structured liabilities issued by the Group: designation significantly reduces themeasurement 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 expense. Gains andlosses arising from changes in the fair value of derivatives that are managed in conjunction with financial liabilities designated at fairvalue through profit or loss are included in net trading expense.The classification of instruments as a financial liability or an equity instrument is dependent upon the substance of the contractualarrangement. Instruments which carry a contractual obligation to deliver cash or another financial asset to another entity are classified asfinancial liabilities.Preference shares and other subordinated capital instruments issued are classified as financial liabilities if coupon payments are notdiscretionary. Distributions on these instruments are recognised in profit or loss as interest expense using the effective interest ratemethod.1.12 Financial guaranteesA financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss itincurs because the guaranteed party fails to meet a contractual obligation or to make payment when due in accordance with the originalor 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 andother 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 theexpenditure 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 parentBank considers these contracts to be insurance arrangements and accounts for them as such. The parent Bank treats these guaranteecontracts as contingent liabilities until such time as it becomes probable that it will be required to make a payment under theseguarantees.1.13 Impairment of financial assetsIt is Group policy to make provisions for impairment of financial assets to reflect the losses inherent in those assets at the end of thereporting period.The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a portfolio offinancial assets is impaired. A financial asset or a portfolio of financial assets is impaired and impairment losses are incurred if, and onlyif, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the assetand that loss event (or events) has had an impact such that the estimated present value of future cash flows is less than the currentcarrying 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 tothe 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, thatthe 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; orf) observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financialassets since the initial recognition of those assets, although the decrease cannot yet be identified within the individualfinancial 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.47
Page 1 and 2: Irish Bank Resolution Corporation L
Page 3 and 4: ContentsIrish Bank Resolution Corpo
Page 5 and 6: Chairman’s statementIrish Bank Re
Page 7 and 8: Group Chief Executive’s reviewIri
Page 9 and 10: Group Chief Executive’s review co
Page 11 and 12: Business review continuedIrish Bank
Page 17 and 18: Board of DirectorsIrish Bank Resolu
Page 19 and 20: Corporate Responsibility continuedI
Page 21 and 22: Principal risks and uncertainties c
Page 23 and 24: Principal risks and uncertainties c
Page 25 and 26: Report of the DirectorsIrish Bank R
Page 27 and 28: Corporate governance statementIrish
Page 29 and 30: Corporate governance statement cont
Page 31 and 32: Corporate governance statement cont
Page 33 and 34: OpinionIn our opinion:• the Group
Page 35 and 36: Consolidated statement of comprehen
Page 37 and 38: Bank statement of financial positio
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Supplementary information (unaudite
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Irish Bank ResolutionCorporation Li
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IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

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