accounting_policies

Accounting Policies

General information

NIBC Bank N.V. (the Company), together with its subsidiaries (NIBC or the Group) is a Dutch merchant bank that offers integrated solutions to mid-cap clients in the Benelux and Germany through a combination of advising, financing and co-investing. The bank is also a meaningful player in a select number of clearly-defined asset classes. It employs its expertise to provide asset financing in sectors such as corporate lending, leveraged finance, oil & gas services, infrastructure and renewables, shipping and real estate. NIBC’s clients are mid-cap companies, financial institutions, institutional investors, financial sponsors, family offices and high net worth entrepreneurs/owners. NIBC has offices in The Hague, Brussels, Frankfurt, London and Singapore.

NIBC is domiciled in the Netherlands, and is a 100% subsidiary of NIBC Holding N.V.

These Consolidated Financial Statements were approved for issue by the Managing Board of NIBC Bank N.V. on 5 March 2009.

Summary of significant accounting policies

The principal accounting policies applied in the preparation of these Consolidated Financial Statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Where necessary comparative figures have been adjusted to conform to changes in presentation in the current year.

Basis of preparation

The Group’s Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards as endorsed by the European Union (IFRS). The Consolidated Financial Statements have been prepared under the historical cost convention, as modified by the revaluation of property, Available for Sale financial assets, financial assets and financial liabilities held at Fair Value through Profit or Loss, and all derivative contracts.

The preparation of Financial Statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Consolidated Financial Statements are disclosed in the ‘Critical Accounting Estimates and Judgements’.

Standards, amendments and interpretations effective in 2008

The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2008:

IFRIC 11, IFRS 2 - Group and treasury share transactions. IFRIC 11 provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options on parent’s shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. IFRIC 11 was implemented with effect from 1 January 2008. The retrospective application of IFRIC 11 affected the Group’s equity position as of 1 January 2007 and 31 December 2007. The impact at 1 January 2007 amounts to a credit of EUR 24 million and at 31 December 2007 to a credit of EUR 36 million compared to the amounts presented in the Financial Statements of NIBC Bank N.V. for the year ended 31 December 2007. See Consolidated Statement of Changes in and note 46 about Shareholders’ equity; and
IFRIC 14, IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction. IFRIC 14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. NIBC has applied IFRIC 14 from 1 January 2008, but it has no material impact on NIBC’s financial position.

Amendments effective from 1 July 2008

The IAS 39, Financial instruments: Recognition and measurement, amendment on reclassification of financial assets permits reclassification of certain financial assets out of the Held for Trading and Available for Sale categories if specified conditions are met. The related amendment to IFRS 7, Financial instruments: Disclosures, introduces disclosure requirements with respect to financial assets reclassified out of the Held for Trading and Available for Sale categories. The amendment is effective prospectively from 1 July 2008. The Group adopted the amendment from 1 July 2008.

Standards, amendments and interpretations early adopted by NIBC

IFRS 8, Operating segments (effective 1 January 2009). IFRS 8 replaces IAS 14 Segment reporting and aligns segment reporting with the requirements of the US standard SFAS 131, Disclosures about segments of an enterprise and related information. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. NIBC decided to early adopt IFRS 8 as of the third quarter of 2008. This has resulted in a decrease in the number of reportable segments presented. In addition, the segments are reported in a manner that is consistent with the internal reporting provided to the chief operating decision-maker.

Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2009 or later periods, but the Group has not early adopted them:

IAS 27 (Revised), Consolidated and separate Financial Statements (effective from 1 July 2009). The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value and a gain or loss is recognised in profit or loss. The Group will apply IAS 27 (Revised) prospectively to transactions with non-controlling interests from 1 January 2010;
IFRS 3 (Revised), Business combinations (effective from 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently remeasured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The Group will apply IFRS 3 (Revised) prospectively to all business combinations from 1 January 2010;
IAS 23 (Amendment), Borrowing costs. The amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. NIBC will apply IAS 23 (Amended) from 1 January 2009, but the Standard is currently not applicable to NIBC as NIBC has no qualifying assets;
IFRIC 13, Customer loyalty programmes. IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. IFRIC 13 is not relevant to NIBC’s operations because NIBC does not operate any loyalty programmes;
IAS 1 (Revised), Presentation of Financial Statements (effective from 1 January 2009). The revised standard will prohibit the presentation of items of income and expenses (that is, Non-owner changes in equity) in the statement of changes in equity, requiring Non-owner changes in equity to be presented separately from Owner changes in equity. All Non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning of the comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The Group will apply IAS 1 (Revised) from 1 January 2009. It is likely that both the Income Statement and statement of comprehensive income will be presented as performance statements; and
IFRS 2 (Amendment), Share-based payment: Vesting conditions and cancellations (effective from 1 January 2009). The amended standard deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. As such these features would need to be included in the grant date fair value for transactions with employees and others providing similar services, that is, these features would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group will apply IFRS 2 (Amendment) from 1 January 2009, but this is not expected to have a material impact on the Consolidated Financial Statements.

Company Income Statement

Under Article 402 of Part 9, Book 2 of the Netherlands Civil Code, it is sufficient for a company’s statutory Income Statement to present only results of participating interests after tax and other results after tax.

Basis of consolidation

The Consolidated Financial Statements are comprised of the Financial Statements of NIBC and its subsidiaries as at and for the years ended 31 December 2007 and 2008.

Subsidiaries

Subsidiaries are all entities (including special purpose entities) controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. The Financial Statements of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed at the date of acquisition, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets acquired, the difference is recognised directly in the Income Statement.

The accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by NIBC.

Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the assets transferred.

Minority interests

The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Minority interests in the net assets and net results of consolidated subsidiaries are shown separately on the Balance Sheet and Income Statement.

At the date of acquisition, minority interests are stated at the share of fair value of the net assets acquired (excluding goodwill). Subsequent to the date of acquisition, minority interests comprise the amount calculated at the date of acquisition adjusted for the minority’s share of changes in equity since the date of acquisition.

Disposals of minority interests result in gains or losses for NIBC that are recorded in the Income Statement. Purchases of minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.

Joint ventures

A joint venture exists where the Group has a contractual arrangement with one or more parties to undertake activities typically, though not necessarily, through entities that are subject to joint control.

The Group’s interests in jointly controlled entities are accounted for by proportionate consolidation. NIBC combines its share of the joint venture’s individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Group’s Financial Statements. The Group recognises the portion of gains or losses on the sale of assets by the Group to the joint venture that is attributable to the other venturers. The Group does not recognise its share of profits or losses from the joint venture that result from the Group’s purchase of assets from the joint venture until it resells the assets to an independent party. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of current assets, or an impairment loss.

With effect from 1 January 2007, to the extent that newly acquired joint ventures are held by the venture capital organisation within the operating segment Merchant Banking, which is considered to be a venture capital organisation as that term is used in IAS 31, the Group designates upon initial recognition all newly acquired investments in such joint ventures as financial assets at Fair Value through Profit or Loss. These assets are initially recognised at fair value, and subsequent changes in fair value are recognised in the Income Statement in the period of the change in fair value.

Associates

Associates are those entities over which NIBC has significant influence, but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights.

Except as otherwise described below, investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition.

With effect from 1 January 2007, all newly acquired investments in associates held by the venture capital organisation within the operating segment Merchant Banking, which is considered to be a venture capital organisation, as that term is used in IAS 28, are designated upon initial recognition as financial assets at Fair Value through Profit or Loss. These assets are initially recognised at fair value and subsequent changes in fair value are recognised in the Income Statement in the period of the change in fair value.

Under the equity method, the Group’s share of its associates’ post-acquisition profits or losses is recognised in the Income Statement; its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of NIBC’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by NIBC.

Dilution gains or losses in associates are recognised in the Income Statement.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Managing Board of NIBC.

Foreign currency translation

Functional and presentational currency

Items included in the Financial Statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’).

The Consolidated Financial Statements are presented in euros, the functional currency and presentation currency of NIBC.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement, except when deferred in equity as qualifying net investment hedges.

Changes in the fair value of monetary loans denominated in foreign currency that are classified as Available for Sale are analysed between foreign exchange translation differences and other changes in the carrying amount of the loan. Foreign exchange translation differences are recognised in the Income Statement, and other changes in the carrying amount are recognised in equity.

Foreign exchange translation differences on non-monetary assets and liabilities that are stated at Fair Value through Profit or Loss are reported as part of the fair value gain or loss. Translation differences on non-monetary items classified as Available for Sale assets are included in the fair value reserve in equity.

Group companies

The results and financial positions of all Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
All resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is disposed of, or partially disposed of, such exchange differences are recognised in the Income Statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Recognition of financial instruments

A financial instrument is recognised in the Balance Sheet when NIBC becomes a party to the contractual provisions that comprise the financial instrument.

NIBC applies trade date accounting to all financial instruments. All purchases and sales of financial assets requiring delivery within the time frame established by regulation or market convention are recognised on the trade date, which is the date on which NIBC commits to purchase or sell the asset.

Forward purchases and sales other than those requiring delivery within the time frame established by regulation or market convention are treated as derivative forward contracts.

De-recognition of financial assets and liabilities

Financial assets (or, where applicable, a part of a financial asset or part of a group of similar financial assets) are derecognised when:

The rights to receive cash flows from the financial assets have expired; or
When NIBC has transferred its contractual right to receive the cash flows of the financial assets, and either
substantially all risks and rewards of ownership have been transferred; or
substantially all the risks and rewards have neither been retained nor transferred but control is not retained.

If NIBC has transferred its contractual rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of NIBC’s continuing involvement in the asset.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that NIBC could be required to repay.

When continuing involvement takes the form of a written and/or purchased option (including a cash settled option or similar provision) on the transferred asset, the extent of NIBC’s continuing involvement is the amount of the transferred asset that NIBC may repurchase, except that in the case of a written put option (including a cash settled option or similar provision) on an asset measured at fair value, the extent of NIBC’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

If an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the Income Statement.

Classification of financial instruments

Financial assets are classified as:

Financial instruments at Fair Value through Profit or Loss, including derivative instruments that do not qualify for cash flow hedge accounting;
Available for Sale financial instruments; and
Loans and Receivables at Amortised Cost.

Financial liabilities are classified as:

Financial instruments at Fair Value through Profit or Loss, including derivative instruments that do not qualify for cash flow hedge accounting; and
Financial instruments at Amortised Cost.

The measurement and income recognition in the Income Statement depends on the IFRS classification of the financial asset or liability. The classification of financial instruments is determined upon initial recognition.

Financial assets - reclassification

In accordance with the amendment to IAS 39: Reclassifications of Financial Assets NIBC may reclassify certain non-derivative financial assets Held for Trading to either the Loans and Receivables at Amortised Cost or Available for Sale categories. The amendment also allows for the transfer of certain non-derivative financial assets from Available for Sale to Loans and Receivables at Amortised Cost.

NIBC is allowed to reclassify certain financial assets out of the Held for Trading category if they are no longer held for the purpose of selling or repurchasing them in the near term.

NIBC now has the intention and ability to hold these financial assets for the foreseeable future. In order to align with market practice accounting treatment for such financial assets, NIBC has chosen to reclassify the assets to Loans and Receivables at Amortised Cost or Available for Sale.

The amendments distinguish between those financial assets, which would be eligible for classification as Loans and Receivables at Amortised Cost and those which would not. The former are those instruments which, apart from being held with the intent of sale in the near term, have fixed or determinable payments, are not quoted in an active market and contain no features that could cause the holder not to recover substantially all of its initial investment, except through credit deterioration.

Financial assets that are not eligible for classification as Loans and Receivables at Amortised Cost, may be transferred from Held for Trading to Available for Sale, only in rare circumstances arising from a single event that is unusual and highly unlikely to recur in the near term.

Financial assets that would now meet the criteria to be classified as Loans and Receivables at Amortised Cost, may be transferred from Held for Trading or Available for Sale to Loans and Receivables at Amortised Cost, if the entity has the intention and ability to hold them for the foreseeable future.

Reclassifications are recorded at the fair value of the financial asset as of the reclassification date. The fair value at the date of reclassification becomes the new cost or amortised cost as applicable. Gains or losses due to changes in the fair value of the financial asset recognised in profit or loss prior to reclassification date shall not be reversed. Effective interest rates for financial assets reclassified to the Loans and Receivables at Amortised Cost category are determined at the reclassification date as the discount rate applicable to amortise the fair value back to expected future cash flows at that date. Subsequent increases in estimated future cash flows will result in a prospective adjustment to the effective interest rate applied.

For financial assets reclassified from Available for Sale to Loans and Receivables at Amortised Cost, previous changes in fair value that have been recognised in the equity revaluation reserve shall be amortised to profit or loss over the remaining life of the asset using the effective interest rate method. If such assets are subsequently determined to be impaired, the remaining balance of losses previously recognised in equity shall be released to profit or loss to the extent of the impairment loss amount and if necessary, additional impairment losses shall be recorded in profit or loss to the extent they exceed the remaining (Available for Sale) Revaluation reserve in equity.

Reclassification of financial assets (as of 1 July 2008)

As of 1 July 2008, the effective date of the amendments to IAS 39 and IFRS 7, the following financial assets were reclassified:

Loans and Receivables: Loans, except for those that were designated at Fair Value through Profit or Loss, were reclassified out of the Available for Sale category to Loans and Receivables at Amortised Cost;

Debt investments:
EU structured credits originated after 1 July 2007 were reclassified out of the Available for Sale category to Loans and Receivables at Amortised Cost to the extent the assets meet the definition of Loans and Receivables;
EU corporate credits and EU structured credits originated before 1 July 2007 were reclassified out of the Held for Trading category to Loans and Receivables at Amortised Cost to the extent the assets meet the definition of Loans and Receivables; and
EU CDO equity was reclassified out of the Held for Trading category to the Available for Sale category. Any subsequent change in fair value from the fair value at the date of reclassification will be recorded in the (Available for Sale) Revaluation reserve unless it is determined to be impaired or until the instrument is derecognised.

Changes to classification of financial assets (in 2007)

In 2007, NIBC made the following changes:

Loans and Receivables: Loans originated before 1 July 2007 are accounted for at Fair Value through Profit or Loss (residential mortgages, commercial real estate loans and leveraged loan warehouses, secondary loan trading, and distressed asset trading) or Available for Sale (all other corporate lending). With the exception of residential mortgages, Loans originated after 1 July 2007 are classified as Loans and Receivables at Amortised Cost. These loans are initially measured at fair value plus directly attributable transaction costs, and are subsequently measured at Amortised Cost using the effective interest method. The reason for this change in classification was to align with market practice;
Debt investments: with effect from 1 July 2007, newly originated assets in the EU structured credits books were classified as Available for Sale. Assets acquired before 1 July 2007 were classified as Held for Trading. The reason for this change in classification was to align with market practice;
Equity investments in associates and joint ventures: with effect from 1 January 2007, all newly acquired investments in associates and joint ventures held by the venture capital organisation (as that term is used in IAS 28 and IAS 31) are designated at Fair Value through Profit or Loss. Previously acquired investments in associates, where material, were accounted for using the equity method and investments in joint ventures were proportionally consolidated. The reason for this change in classification was to align with market practice; and
Equity investments: equity investments acquired before 1 January 2007 held in the investment portfolio of the venture capital organisation are classified as Available for Sale assets in the Consolidated Balance Sheet. With effect from 1 January 2007, all newly acquired equity investments held by the venture capital organisation are designated upon initial recognition as financial assets at Fair Value through Profit or Loss. The reason for this change in classification was to align with market practice.

An overview of the classification of different classes of financial assets is presented in the following table:

	Before Reclassification	After Reclassification

Financial assets
Loans and Receivables
Commercial real estate loan portfolio
Originated before 1 July 2007	Designated at FVPL	Designated at FVPL
Originated after 1 July 2007	L&R at AC	L&R at AC

Leveraged loan warehouses
Originated before 1 July 2007	Designated at FVPL	Designated at FVPL
Originated after 1 July 2007	L&R at AC	L&R at AC

Secondary loan trading portfolio
Originated before 1 July 2007	Designated at FVPL	Designated at FVPL
Originated after 1 July 2007	L&R at AC	L&R at AC

Distressed asset trading portfolio
Originated before 1 July 2007	Designated at FVPL	Designated at FVPL
Originated after 1 July 2007	L&R at AC	L&R at AC

Other corporate lending portfolios
Originated before 1 July 2007	AFS	L&R at AC
Originated after 1 July 2007	L&R at AC	L&R at AC

Debt investments
structured credits EU
Originated before 1 July 2007	HFT	L&R at AC
Originated after 1 July 2007	AFS	L&R at AC
Assets that do not meet the definition of Loans and Receivables	HFT or AFS	HFT or AFS

Corporate credits EU
Originated before 1 July 2007	HFT	L&R at AC
Originated after 1 July 2007	AFS	L&R at AC

EU equity tranche notes
Originated before 1 July 2007	HFT	AFS
Originated after 1 July 2007	AFS	AFS

Equity investments (held by venture capital organisation)
Investments in associates
Originated before 1 January 2007	Equity method	Equity method
Originated after 1 January 2007	Designated at FVPL	Designated at FVPL

Investments in joint ventures
Originated before 1 January 2007	Proportionately consolidated	Proportionately consolidated
Originated after 1 January 2007	Designated at FVPL	Designated at FVPL

Other investments
Originated before 1 January 2007	AFS	AFS
Originated after 1 January 2007	Designated at FVPL	Designated at FVPL
AC: Amortised Cost - AFS: Available for Sale - FVPL: Fair Value through Profit or Loss - HFT: Held for Trading - L&R: Loans and Receivables.

The amendments to IFRS 7 regarding reclassifications require disclosure of the impact of the reclassification of each category of financial assets on the financial position and performance of NIBC.

Changes to classification of financial liabilities (in 2007)

In 2007, a change was made to the classification of certain financial liabilities (debt securities in issue) upon origination. During the period commencing 1 January 2007, plain vanilla fixed rate long-term debt securities (liabilities) were issued together with matching interest rate swaps as part of a documented interest rate risk management strategy. An accounting mismatch would arise if the Debt securities in issue were accounted for at Amortised Cost, because the related derivatives are measured at fair value with movements in the fair value taken through the Income Statement. By designating the long-term debt as Fair Value through Profit or Loss, the movement in the fair value of the long-term debt will also be recorded in the Income Statement, and thereby off-set the gains and/or losses on the derivative instrument that is also included in the Income Statement.

Financial instruments at Fair Value through Profit or Loss

This category has two subcategories: financial instruments Held for Trading and financial instruments designated as Fair Value through Profit or Loss at inception.

Financial instruments Held for Trading

A financial instrument is classified as Held for Trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near future with the objective of generating a profit from short-term fluctuations in price or dealer’s margin. Derivatives are also categorised as Held for Trading unless they are designated as effective hedging instruments.

The measurement of these financial instruments is initially at fair value, with transaction costs taken to the Income Statement. Subsequently, their fair value is remeasured, and all gains and losses from changes therein are recognised in the Income Statement in Net trading income as they arise.

Financial instruments designated upon initial recognition as Fair Value through Profit or Loss

Financial instruments are classified in this category if they meet one or more of the criteria set out below, and provided they are so designated by management. NIBC may designate financial instruments at fair value when the designation:

Eliminates or significantly reduces valuation or recognition inconsistencies that would otherwise arise from measuring financial assets or financial liabilities, or recognising gains and losses on them, on different bases. Under this criterion, the main classes of financial instruments designated by NIBC at Fair Value through Profit or Loss are:
Residential mortgage loans (own book and securitised);
Certain debt investment portfolios;
Structured investments;
Equity investments (including associates and joint ventures held by the venture capital organisation within the operating segment Merchant Banking); and
Certain fixed rate long-term debt securities issued after 1 January 2007.
Applies to groups of financial assets, financial liabilities or combinations thereof that are managed, and their performance evaluated, on a fair value basis in accordance with a documented risk management or investment strategy, and where information about the groups of financial instruments is reported to management on that basis. Under this criterion, the main classes of financial instruments designated by NIBC at Fair Value through Profit or Loss are:
Equity investments
(originated after 1 January 2007);
Commercial real estate loans (originated before 1 July 2007);
Leveraged loan warehouses;
Secondary loan trading; and
Distressed asset trading.

NIBC has documented risk management and investment strategies designed to manage such assets at fair value, taking into consideration the relationship of assets to liabilities in a way that mitigates market risks. Reports are provided to management on the fair value of the assets; and

Relates to financial instruments containing one or more embedded derivatives that significantly modify the cash flows resulting from those financial instruments. Under this criterion, the main classes of financial instruments designated by NIBC at Fair Value through Profit or Loss are:
Debt securities in issue structured; and
Subordinated liabilities at Fair Value through Profit or Loss.

The fair value designation, once made, is irrevocable.

Gains and losses arising from changes in the fair value of derivatives that are managed in conjunction with designated financial assets or liabilities are included in Net trading income.

Financial instruments at Fair Value through Profit or Loss (comprising the categories described above) are initially recognised at fair value, and transaction costs are expensed in the Income Statement. Subsequent measurement is at fair value and all changes in fair value are reported in the Income Statement, either as Net trading income or as Gains less losses from financial assets. Interest is recorded in Interest income using the effective interest rate method, while dividend income is recorded in Dividend income when NIBC’s right to receive payment is established.

Available for Sale financial assets

Available for Sale financial assets are non-derivative financial assets that are designated at Available for Sale and are not classified as (a) Loans and Receivables, (b) Held-to-Maturity investments or (c) financial assets at Fair Value through Profit or Loss.

The main classes of financial instruments designated at Available for Sale assets at 31 December 2008 include:

Equity investments (originated before 1 January 2007);
Certain debt investments that do not meet the definition of Loans and Receivables; and
EU equity tranche notes.

Available for Sale financial assets are intended to be held for an indefinite period of time, but may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.

Available for Sale financial assets are initially measured at fair value plus transaction costs and are subsequently measured at fair value. Changes in fair value are recognised directly in the Revaluation reserve in equity, until the financial instrument is derecognised or impaired. When Available for Sale investments are sold, cumulative gains or losses previously recognised in equity are recognised in the Income Statement as Net trading income or as Gains less losses from financial assets (including equity investments).

Interest calculated using the effective interest method and foreign currency gains and losses on monetary instruments classified as Available for Sale are recognised in the Income Statement as Interest and similar income and Net trading income respectively. Dividends on Available for Sale financial instruments are recognised in the Income Statement as Dividend income when NIBC’s right to receive payment is established.

Loans and Receivables at Amortised Cost

Loans and Receivables at Amortised Cost are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

those that NIBC intends to sell immediately or in the short-term, which are classified as Held for Trading;
those that NIBC upon initial recognition designates as at Fair Value through Profit or Loss;
those that NIBC upon initial recognition designates as Available for Sale; and
those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration.

An interest acquired in a pool of assets that are not Loans and Receivables (for example an interest in a mutual fund or similar fund) is not a loan or receivable.

The main classes of Loans and Receivables at Amortised Cost at 31 December 2008 include corporate lending (excluding commercial real estate and leverage loan warehouses, secondary loan trading and distressed asset trading) and investments in the EU corporate credits and EU structured credits portfolio that meet the Loans and Receivables definition.

Loans and Receivables are initially measured at fair value plus directly attributable transaction costs, and are subsequently measured at Amortised Cost using the effective interest method (including interest accruals less provision for impairment).

Financial liabilities

With the exception of those financial liabilities designated as at Fair Value through Profit or Loss, these are initially recognised at fair value net of transaction costs, and subsequently measured at Amortised Cost using the effective interest method (including interest accruals), with the periodic amortisation recorded in the Income Statement.

The main classes of financial liabilities at Amortised Cost include amounts Due to other banks, Deposits from customers, Own debt securities in issue under NIBC’s European Medium Term Note programme, Covered Bonds programme and the Dutch State’s Credit Guarantee Scheme and Debt securities in issue related to securitised mortgages. The main classes of financial liabilities at Fair Value through Profit or Loss include Debt securities in issue structured that consist of notes issued with embedded derivatives and derivative financial liabilities Held for Trading and hedging.

NIBC classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument. The Group’s perpetual bonds are not redeemable by the holders but bear an entitlement to distributions that is not at the discretion of the Group. Accordingly, they are presented as a financial liability.

Preference shares, which are mandatorily redeemable on a specific date, are classified as liabilities. The dividends on these preference shares are recognised in the Income Statement as interest expense.

Subordinated liabilities are recognised initially at fair value net of transaction costs incurred. Subordinated liabilities without embedded derivatives are subsequently stated at Amortised Cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the Income Statement over the period of the financial liability using the effective interest method. Subordinated liabilities containing one or more embedded derivatives that significantly modify the cash flows are designated at Fair Value through Profit or Loss.

Recognition of day one profit or loss

The best evidence of fair value at initial recognition is the transaction price (i.e. the fair value of the consideration given or received), unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets.

The Group has entered into transactions where fair value is determined using valuation models for which not all inputs are market observable prices or rates. Such financial instruments are initially recognised at the transaction price, which is the best indicator of fair value, although the value obtained from the relevant valuation model may differ. Significant differences between the transaction price and the model value, commonly referred to as ‘day one profit or loss’, are not recognised immediately in the Income Statement.

Deferred ‘day one profit or loss’ is amortised to income over the life until maturity or settlement. The financial instrument is subsequently measured at fair value as determined by the relevant model adjusted for any deferred ‘day one profit or loss’.

Offsetting

Financial assets and liabilities are offset, and the net amount is reported in the Balance Sheet when a legally enforceable right to set-off the recognised amounts exists and the Group intends to settle on a net basis, or realise the asset and settle the liability simultaneously.

Collateral

The Group enters into master agreements and credit support annexes with counterparties whenever possible and when appropriate. Master agreements provide that, if the master agreement is being terminated as a consequence of an event of default or termination event, all outstanding transactions with the counterparty will fall due and all amounts outstanding will be settled on a net basis. In case of a Credit Support Annex with counterparties, the Group has the right to obtain collateral for the net counterparty exposure.

The Group obtains collateral in respect of counterparty liabilities when this is considered appropriate. The collateral normally takes the form of a lien over the counterparty’s assets and gives the Group a claim on these assets for both existing and future liabilities.

The Group also pays and receives collateral in the form of cash or securities in respect of other credit instruments, such as derivative contracts, in order to reduce credit risk. Collateral paid or received in the form of cash together with the underlying is recorded on the Balance Sheet at net realisable value. Any interest payable or receivable arising is recorded as interest expense or interest income respectively.

Derivative financial instruments and hedging

NIBC uses derivative financial instruments both for trading and hedging purposes. NIBC uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks and to credit spread risk.

Derivative financial instruments are initially measured, and are subsequently remeasured, at fair value. The fair value of exchange-traded derivatives is obtained from quoted market prices. Fair values of over-the-counter derivatives are obtained using valuation techniques, including discounted cash flow models and option pricing models.

The method of recognising fair value gains and losses depends on whether the derivatives are Held for Trading or are designated as hedging instruments, and if the latter, the nature of the risks being hedged. All gains and losses from changes in the fair value of derivatives Held for Trading are recognised in the Income Statement.

When derivatives are designated as hedges, NIBC classifies them as either a (i) fair value hedge of interest rate risk (‘portfolio fair value hedges’); (ii) a fair value hedge of interest rate risk and foreign exchange rate risk (‘micro fair value hedges’) (iii) cash flow hedge of the variability of highly probable cash flows (‘cash flow hedges’); or (iv) hedges of net investments in a foreign operation (‘net investment hedge’). Hedge accounting is applied to derivatives designated as hedging instruments, provided certain criteria are met.

Hedge accounting

Where derivatives are held for risk management purposes, and when transactions meet the criteria specified in IAS 39, the Group applies fair value hedge accounting, cash flow hedge accounting, or hedging of a net investment in a foreign operation, as appropriate, to the risks being hedged.

At the inception of a hedging relationship, NIBC documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. NIBC also requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the derivatives that are used in hedging relationships are highly effective in offsetting changes attributable to the hedged risk in the fair value or cash flows of the hedged items. Interest on designated qualifying hedges is included in Net interest income.

The Group discontinues hedge accounting prospectively when:

It is determined that a derivative is not, or has ceased to be, highly effective as a hedge;
The derivative expires, or is sold, terminated or exercised;
The hedged item matures or is sold or repaid; or
A forecast transaction is no longer deemed highly probable.

Fair value hedge

NIBC applies portfolio fair value hedge accounting and fair value hedge accounting on a micro level.

Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recorded in the Income Statement together with changes in the fair value of the hedged items attributable to the hedged risk.

If a hedge relationship no longer meets the criteria for hedge accounting, the cumulative fair value adjustment to the carrying amount of the hedged item is amortised to the Income Statement over the remaining period to maturity using the effective interest method. If the hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the Income Statement.

Portfolio fair value hedge

NIBC applies portfolio fair value hedge accounting to the interest rate risk arising on portfolios of fixed interest rate corporate loans (classified as Available for Sale financial assets or as Amortised Cost assets) and to portfolios of plain vanilla fixed interest rate funding (liabilities classified at Amortised Cost).

In order to apply portfolio fair value hedge accounting, the cash flows arising on the portfolios are scheduled into time buckets based upon when the cash flows are expected to occur. For the first two years, cash flows are scheduled using monthly time buckets; thereafter annual time buckets are used. Hedging instruments are designated for each time bucket, together with an amount of assets or liabilities that NIBC is seeking to hedge. Designation and de-designation of hedging relationships is undertaken on a monthly basis, together with an assessment of the effectiveness of the hedging relationship at a portfolio level, across all time buckets.

Micro fair value hedge

NIBC applies micro fair value hedge accounting to the interest rate risk and or the foreign exchange risk arising from plain vanilla fixed interest rate funding denominated in a foreign currency. Cross-currency interest rate swaps are used as hedging instruments. Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recorded in the Income Statement together with changes in the fair value of the hedged items attributable to the hedged risks.

Retrospective effectiveness is tested monthly, by comparing the cumulative fair value movement excluding interest (since inception) of the hedged item, due to changes in both benchmark interest rates and foreign exchange rates, to the total fair value movement excluding interest of the hedging instrument (the cumulative dollar offset method).

Ineffectiveness within the 80%-125% bandwidth is recognised in the Income Statement through the actual hedge adjustment. Ineffectiveness outside the 80%-125% bandwidth is recognised by not posting a hedge adjustment to the hedged item. In this case, the micro hedge relationship is de-designated and it is re-designated at the beginning of the next period.

Cash flow hedge

Cash flow hedging is applied to hedge the variability arising on expected future cash flows due to interest rate risk on Available for Sale corporate loans and/or corporate loans at Amortised Cost with floating interest rates. As interest rates fluctuate, the future cash flows on these instruments also fluctuate. NIBC uses interest rate swaps to hedge the risk of such cash flow fluctuations.

The effective portion of changes in the fair value of hedging instruments that are designated and qualify as cash flow hedges is recognised in equity within the cash flow hedging reserve. Any gain or loss in fair value relating to an ineffective portion is recognised immediately in the Income Statement.

Amounts accumulated in equity are recycled to the Income Statement in the periods in which the hedged item will affect profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss in equity at that time remains in equity until the forecast cash flow is recognised in the Income Statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the Income Statement.

Net investment hedge

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the Income Statement. Gains and losses accumulated in equity are included in the Income Statement when the foreign operation is sold.

Hedge effectiveness testing

To qualify for hedge accounting, NIBC requires that at the inception of the hedge and throughout its life, each hedge must be expected to be highly effective (prospective effectiveness). Actual effectiveness (retrospective effectiveness) must also be demonstrated on an ongoing basis.

The documentation of each hedging relationship describes how effectiveness will be assessed. For prospective effectiveness, the hedging instrument must be expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated. For actual effectiveness, the changes in fair value or cash flows must offset each other in the range of 80%-125% for the hedge to be deemed effective.

Hedge ineffectiveness is recognised in the Income Statement in Net trading income.

Derivatives managed in conjunction with financial instruments designated as Fair Value through Profit or Loss

All gains and losses arising from changes in the fair value of any derivatives that do not qualify for hedge accounting are recognised immediately in the Income Statement. Derivatives used to manage the interest rate and credit spread exposure on certain financial assets and liabilities (mainly structured funding, debt investments and residential mortgage loans) are not designated in hedging relationships. Gains and losses on these derivatives together with the fair value movements on these financial assets and liabilities are reported within Net trading income.

Embedded derivatives

Some hybrid contracts contain both a derivative and a non-derivative component. In such cases, the derivative component is termed an embedded derivative. Certain derivatives embedded in financial instruments are bifurcated when their risks and characteristics are not closely related to those of the host contract and the host contract is not reported as Fair Value through Profit or Loss. These embedded derivatives are separately accounted for and measured at fair value, with fair value movements reported in the Income Statement. The amendments to IFRIC 9 require the Group to assess whether these are embedded derivatives that should be separated from financial assets reclassified out of the Fair Value through Profit or Loss category.

Sale and repurchase agreements

Securities sold subject to repurchase agreements (‘repos’) are reclassified in the Financial Statements as pledged assets when the transferee has the right by contract or custom to sell or re-pledge the collateral; the counterparty liability is included in amounts Due to other banks or Deposits from customers as appropriate.

Securities purchased under agreements to resell (‘reverse repos’) are recorded as Loans and Receivables to other banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the Financial Statements.

Impairment

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The criteria that the Group uses to determine that there is objective evidence of an impairment loss include:

Delinquency in contractual payments of principal or interest;
Cash flow difficulties experienced by the borrower (for example, equity ratio, net income percentage of sales);
Breach of loan covenants or conditions;
Initiation of bankruptcy proceedings;
Deterioration of the borrower’s competitive position; and
Deterioration in the value of collateral.

The estimated period between a loss occurring and its identification is determined by management for each identified portfolio (corporate loans, EU corporate credits and EU structured credits).The average period used is three months for the different corporate loan portfolios.

Losses expected from future events, no matter how likely, are not recognised.

Financial assets reported at Amortised Cost

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 evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment.

Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Income Statement. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair value using an observable market price.

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Group’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors).

Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.

Future cash flows from a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Group and historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist.

Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

Following impairment, interest income is recognised using the original effective rate of interest that was used to discount the future cash flows for the purpose of measuring the impairment loss.

When a loan is uncollectible, it is written-off against the related allowance for loan impairment. Such loans are written-off after all the necessary procedures have been completed and the amount of the loss has been determined.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the Income Statement under Impairment of corporate loans or Impairment of other interest bearing assets.

Financial Assets classified as Available for Sale

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired.

In the case of equity investments classified as Available for Sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired.

If objective evidence of impairment exists for Available for Sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the Income Statement - is removed from equity and recognised in the Income Statement under Gains less losses from financial assets (including equity investments).

Reversals of impairment losses are subject to contrasting treatments depending on the nature of the instrument concerned:

Impairment losses recognised in the Income Statement on equity instruments are not reversed through the Income Statement; and
If, in a subsequent period, the fair value of a debt instrument classified as Available for Sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the Income Statement, the impairment loss is reversed through the Income Statement.

Non-financial assets

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.

For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment losses and the reversal of such losses, for non-financial assets other than goodwill, are recognised directly in the Income Statement.

Renegotiated loans

Loans that are subject to collective impairment assessment and whose terms have been renegotiated are no longer considered past due but are treated as new loans only after the minimum number of payments required under the new arrangements have been received.

Intangible assets

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in Intangible assets. Goodwill on acquisitions of associates is included in Investments in associates. Goodwill is tested annually for impairment or more frequently when there are indications that impairments may have occurred and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash generating units that are expected to benefit from the business combination in which the goodwill arose identified according to operating segment.

Trademarks and licences

Separately acquired trademarks and licences are shown at historical cost. Trademarks and licences acquired in a business combination are recognised at fair value at the acquisition date. Trademarks and licences have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method to allocate the cost of trademarks and licences over their estimated useful lives of five years.

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives of three years.

Order backlog

An order backlog acquired in a business combination is recognised at fair value at the acquisition date. The order backlog has a finite useful life and is carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of two years of the order backlog.

Customer relationships

Customer relationships acquired in a business combination are recognised at fair value at the acquisition date. The (contractual) customer relations have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of thirteen years of the customer relationship.

Computer software

Costs associated with research and maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the development of identifiable and unique software products controlled by NIBC and that generate economic benefits exceeding one year are capitalised as intangible assets. Computer software development costs recognised as assets are amortised over their estimated useful lives of three to five years.

At each reporting date, NIBC assesses whether there is any indication that an asset may be impaired or whenever events or changes in circumstances indicate that the carrying value may not be recoverable (see Impairment - Non-financial assets).

Tangible assets

Property (land and buildings), plant and equipment

Land and buildings comprise mainly factories and offices. Land and buildings are shown at fair value. This fair value is based on the most recent appraisals by independent registered appraisers, less straight-line depreciation for buildings over the estimated economic life taking into account any residual value. Any accumulated depreciation at the date of revaluation is eliminated against the carrying amount of the asset, and the net amount is restated to the re-valued amount of the asset. All other property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Income Statement during the financial period in which they are incurred.

Increases in the carrying amount arising from revaluation of land and buildings are credited to Other reserves in Shareholders’ equity. Decreases that offset previous increases of the same asset are charged against Other reserves directly in equity; all other decreases are charged to the Income Statement. Each year the difference between depreciation based on the re-valued carrying amount of the asset charged to the Income Statement and depreciation based on the asset’s original cost is transferred from Other reserves to Retained earnings.

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows:

Buildings 30-50 years
Machinery 4-10 years
Furniture, fittings and equipment 4-10 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within Other operating income. When re-valued assets are sold, the amounts included in Other reserves are transferred to Retained earnings.

Investment property

Investment property is property (land, or a building, -or part of a building, -or both) held to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services, for administrative purposes or sale in the ordinary course of business.

Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the balance sheet date. The fair value is the price at which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction, without any deduction for transaction costs it may incur on sale or other disposal. The unrealised gains and losses arising from the changes in fair value of the investment property as a result of appraisals are included in Other operating income in the Income Statement.

Investment properties are de-recognised when they have been disposed of.

Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to other Operating expenses in the Income Statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

The Group leases certain property, plant and equipment. Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding.

The corresponding rental obligations, net of finance charges, are included in Other liabilities. The interest element of the finance cost is charged to the Income Statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset and the lease term.

Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition, including cash and non-restricted balances with central banks and net credit balances on current accounts with other banks.

Cash balances are measured at face value while bank balances are measured at cost.

Other assets

Trade receivables related to consolidated non-financial companies

Trade receivables are recognised initially at fair value and subsequently measured at Amortised Cost using the effective interest method, less allowance for impairment. An allowance for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the Income Statement within Other operating expenses. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against Other operating expenses in the Income Statement.

Inventories related to consolidated non-financial companies

Inventories are stated at the lower of cost or net realisable value. Cost is determined using the weighted average cost formula. The cost of finished goods and work in progress is comprised of design costs, raw materials, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.

Construction contracts related to consolidated financial companies

Contract costs are recognised when incurred. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable.

When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognised over the period of the contract. When it is probable that the contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

Variations in contract work, claims and incentive payments are included in contract revenue to the extent that may have been agreed with the customer and are capable of being reliably measured.

The Group uses the percentage of completion method to determine the appropriate amount to recognise in a given period. The stage of completion is measured by reference to the contract costs incurred up to the balance sheet date as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. They are presented as inventories, prepayments or other assets, depending on their nature.

The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings. Progress billings not yet paid by customers and retention are included within other assets.

The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses).

Provisions

Provisions are recognised when NIBC has a present obligation (legal or constructive) as a result of a past event, it is more likely than not that an outflow of resources will be required to settle the obligations and a reliable estimate can be made of the amount of the obligation. Given their short-term nature, these provisions are not discounted.

Contingent liabilities are not recognised in the Financial Statements but are disclosed, unless they are remote.

Trade payables

Trade payables are recognised initially at fair value and subsequently measured at Amortised Cost

using the effective interest method.

Financial guarantee contracts

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, and other banking facilities.

Financial guarantees are initially recognised in the Financial Statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the 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 the expenditure required to settle any financial obligation arising at the balance sheet date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgement of Management. Any increase in the liability relating to guarantees is taken to the Income Statement under Other operating expenses. Any liability remaining is recognised in the Income Statement when the guarantee is discharged, cancelled or expires.

Employee benefit obligations

Pension obligations

NIBC and its subsidiaries have various pension arrangements in accordance with the local conditions and practices in the countries in which they operate. NIBC generally funds these arrangements through payments to insurance companies or trustee administered funds, determined by periodic actuarial calculations. These various pension arrangements consist of a defined contribution plan, a defined benefit plan or a combination of these plans.

A defined contribution plan is a pension plan under which NIBC pays fixed contributions to a separate entity; the contributions are recognised as an expense in the Income Statement as incurred. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. NIBC has no legal or constructive obligations to pay further defined contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

A defined benefit plan is a pension plan that is not a defined contribution plan. Typically defined benefit plans defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors, such as age, years of service and compensation.

The liability recognised in the Balance Sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs.

The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over the employees’ expected average remaining working lives. Past service costs are recognised immediately in administrative expenses, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, past-service costs are amortised on a straight-line basis over the vesting period.

Termination benefits

Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to their present value.