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

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Notes to the financial statements continued1. General information and accounting policies continued1.13 Impairment of financial assets continuedSpecific examples of loss events or impairment triggers for commercial lending include loan covenant breaches, material decreases in thevalue of the underlying collateral securing the loan facility or the financial difficulty of the borrower. In respect of the residentialmortgage portfolio, all loans that are more than 60 days past due or where a borrower has been granted a forbearance measure areconsidered at risk and included in the pool of loans that are assessed for specific impairment.The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant,and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidenceof impairment exists for an individually assessed financial asset, whether significant or not, it includes that asset in a group of financialassets with similar credit risk characteristics and includes these performing assets under the collective incurred but not reported ('IBNR')assessment. An IBNR impairment provision represents an interim step pending the identification of impairment losses on an individualasset in a group of financial assets. As soon as information is available that specifically identifies losses on individually impaired assets in agroup, those assets are removed from the group. Assets that are individually assessed for impairment and for which an impairment lossis, or continues to be, recognised are not included under the collective assessment of impairment. In the calculation of the IBNRimpairment provision on the residential mortgage portfolio the Bank specifically considers the additional credit risk in respect ofperforming loans where forbearance has been granted or is being considered.For loans and receivables and held-to-maturity investments, the amount of impairment loss is measured as the difference between theasset's carrying amount and the present value of estimated future cash flows discounted at the asset's original effective interest rate. If aloan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the currenteffective interest rate determined under the contract. The amount of the loss is recognised using an allowance account and is included inthe income statement.The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that mayresult from foreclosure, less costs for obtaining and selling the collateral, whether or not foreclosure is probable.If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an eventoccurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowanceaccount. The amount of the reversal is recognised in profit or loss.When a borrower fails to make a contractually due payment of interest or principal but the Group believes that impairment is notappropriate on the basis of the level of security/collateral available and/or the stage of collections of amounts owed to the Group, a loanis classified as past due but not impaired. In this instance the entire exposure is reported as past due but not impaired, rather than justthe amount in arrears.Renegotiated loans are those loans and receivables outstanding at the end of the reporting period whose terms have been renegotiatedduring the financial period, resulting in an upgrade from impaired to performing status. This is based on subsequent good performanceand/or an improvement in the profile of the borrower.When a loan is deemed to be uncollectible, it is written off against the related provision for loan impairment. Such loans are written offafter all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries ofamounts previously written off decrease the amount of the provision for impairment in the income statement.In the case of equity instruments classified as available-for-sale financial assets, a significant or prolonged decline in the fair value of theinstrument below its cost is considered in determining whether impairment exists. Where such evidence exists, the cumulative net lossthat has been previously recognised in other comprehensive income is reclassified to profit or loss. Impairment losses recognised in profitor loss on equity shares are not reversed through the income statement. All increases in the fair value of equity shares after impairmentare recognised in other comprehensive income and accumulated in equity.In the case of debt instruments classified as available-for-sale financial assets, impairment is assessed based on the same criteria as for allother financial assets. Impairment charges are made where there is objective evidence to suggest that the recovery value of the debtinstrument will be permanently lower than its amortised cost. A significant or prolonged decline in the fair value of such an instrumentbelow its amortised cost is considered in determining whether an impairment loss has been incurred. Other factors for asset backedsecurities include evidence of deterioration in the quantum or quality of the collateral pools underlying the investments and the nonpaymentor deferral of interest. Reversals of impairments of debt securities are recognised in profit or loss if the increase in fair value canbe objectively related to an event occurring after the impairment loss was recognised.1.14 Derivative financial instruments and hedge accountingDerivativesDerivative instruments, including swaps, futures, forward foreign exchange contracts, forward rate agreements and options, are used forbalance sheet risk management purposes.Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequentlyremeasured at their fair value. Fair values are obtained from quoted market prices in active markets and where these are not availablefrom valuation techniques including discounted cash flow and option pricing models. Fair values are adjusted for counterparty credit risk.All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Derivatives areclassified as held for trading unless they are designated and effective as hedging instruments.48
Irish Bank Resolution Corporation LimitedAnnual Report & Accounts 2011Hedge accountingThe method of recognising the resulting fair value gain or loss depends on whether the derivative is designated and effective as ahedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either fair value hedges(where the Group hedges changes in the fair value of recognised assets or liabilities or firm commitments), cash flow hedges (where theGroup hedges the exposure to variability of cash flows attributable to recognised assets or liabilities or highly probable forecastedtransactions) or hedges of a net investment in a foreign currency operation.The Group documents, at the inception of each hedging transaction, the relationship between hedging instruments and hedged items,as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents itsassessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions arehighly effective in offsetting changes in fair values or cash flows of hedged items.Fair value hedge accountingChanges in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement,together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.If the hedge no longer meets the criteria for hedge accounting, the fair value hedging adjustment cumulatively made to the carryingamount of the hedged item is, for items carried at amortised cost, amortised to profit or loss over the period to maturity of thepreviously designated hedge relationship using the effective interest rate method. For available-for-sale financial assets the fair valuehedging adjustment remains in equity until the hedged item affects profit or loss. If the hedged item is sold or repaid, the unamortisedfair value adjustment is recognised immediately in profit or loss.Cash flow hedge accountingThe effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are initiallyrecognised directly in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amountsaccumulated in equity are recycled to the income statement in the same periods as the hedged items affect profit or loss.When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, hedge accounting isdiscontinued. Any cumulative gain or loss existing in equity at that time remains in equity and is recognised in profit or loss when theforecast transaction arises. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported inequity is immediately transferred to the income statement. Interest income and expense on economic hedges that no longer meet thecriteria for hedge accounting are recognised in net interest income.Hedges of net investmentsHedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedginginstrument relating to the effective portion of the hedge is recognised directly in equity; the gain or loss relating to the ineffective portionis recognised immediately in profit or loss. Gains and losses accumulated in equity are included in the income statement on the disposalor partial disposal of the foreign operation. Hedges of net investments may include non-derivative liabilities.Derivatives that do not qualify for hedge accountingCertain derivative instruments entered into as economic hedges may not qualify for hedge accounting. These derivatives are classified asheld for trading. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognisedimmediately in profit or loss.Embedded derivativesCertain financial instruments contain both a derivative and a non-derivative component. In such cases, the derivative component istermed an embedded derivative. When the economic characteristics and risks of embedded derivatives are not closely related to those ofthe host contract and the host contract is not carried at fair value through profit or loss, the embedded derivative is treated as a separatederivative. Embedded derivatives separated from the host contract are measured at fair value with changes in fair value recognised in nettrading income.1.15 Collateral and nettingCollateralThe Group obtains collateral in respect of customer liabilities where this is considered appropriate. The collateral normally takes the formof a lien over the customer’s assets and gives the Group a claim on these assets for both existing and future liabilities. The collateral is, ingeneral, not recorded in the Group’s statement of financial position.The Group also pays and receives collateral in the form of cash or securities in respect of other credit instruments, such as stockborrowing or derivative contracts, in order to reduce credit risk. Collateral received in the form of securities is not recorded in thestatement of financial position. Collateral paid or received in the form of cash is recognised in the statement of financial position with acorresponding asset or liability. These items are typically assigned to loans and advances to banks and deposits from banks accordingly.Any interest receivable or payable arising is recorded as interest expense or interest income respectively.NettingThe Group enters into master netting agreements with counterparties whenever possible and, when appropriate, obtains collateral.Master netting agreements provide that, if an event of default occurs, all outstanding transactions with the counterparty will fall due andall amounts outstanding will be settled on a net basis.Financial assets and liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is acurrently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assetand settle the liability simultaneously.49
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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IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

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