Ársskýrsla Landsbankans - Landsbankinn

Notes to the Consolidated Financial Statements
3. Significant accounting policies (continued)
Financial assets and liabilities (continued)
(e) Amortised cost measurement
The amortised cost of a financial asset or liability is the amount of the financial asset or liability, as measured at initial recognition, minus principal
repayments, plus or minus cumulative amortisation using the effective interest method of any difference between the initial amount recognised and
the maturity amount, minus any reduction for impairment.
(f) Fair value measurement
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length
transaction at the measurement date.
The Group measures the fair value of an instrument using quoted prices in an active market for that instrument, if available. A market is regarded as
active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.
Where available, the relevant market’s closing price determines the fair value of financial assets held for trading and of assets designated at fair
value through profit or loss; this will generally be the last trading price.
If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. Valuation techniques include using
recent arm’s length transactions between knowledgeable, willing parties, if available, reference to the current fair value of other instruments that are
substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of market
inputs, relies as little as possible on estimates specific to the Group, incorporates every factor that market participants would consider in setting a
price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent
market expectations and measures of the risk-return factors inherent in the financial instrument. The Bank has a valuation committee which
estimates fair value by applying models and incorporating observable market information and professional judgement. The Group calibrates valuation
techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available,
observable market data.
Should the transaction price differ from the fair value of other observable, current market transactions in the same instrument or be based on a
valuation technique whose variables include only data from observable markets, the Group immediately recognises the difference between the
transaction price and fair value (a Day 1 profit or loss). In cases where fair value is determined using data which is not observable, the difference
between the transaction price and the model value is recognised in the income statement depending on the individual circumstances of the
transaction but not later than when the inputs become observable, or when the instrument is derecognised.
(g) Impairment of financial assets
Impairment of loans and advances
At each reporting date, the Group assesses whether there is any objective evidence that a loan or loan portfolio is impaired. A loan or loan portfolio is
considered impaired and impairment losses are incurred only when there is objective evidence of impairment as a result of one or more events
occurring after initial recognition of the asset (“loss events”) and these loss events impact future cash flows that can be estimated reliably for the
loan or group of loans. Objective evidence of impairment includes observable data on the following loss events:
• significant financial difficulties of the borrower;
• a breach of contract, such as defaulting on instalments or on interest or principal payments;
• the Group granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty, a refinancing concession that the
lender would not otherwise consider;
• it becomes probable that the borrower will enter into bankruptcy or undergo other financial reorganisation; or
• observable data indicate a measurable decrease in estimated future cash flows from a group of loans since the initial recognition of those assets,
even if the decrease cannot yet be identified with individual financial assets within the group, including adverse changes in the payment status of
borrowers in the group or a general deterioration of economic conditions connected to that group of loans.
The Group defines loans that are individually significant and assesses first whether objective evidence of their impairment exists, and then makes
individual or collective assessments for loans and advances that have not been defined as individually significant. If the Group determines that no
objective evidence of impairment exists for a significant loan, it includes this loan in a group of loans with similar credit risk characteristics and
collectively assesses them for impairment. Individual significant assets for which an impairment loss is recognised are not included in collective
impairment assessments.
If there is objective evidence that an impairment loss has been incurred on loans or advances, the amount of the loss is measured as the difference
between the asset’s carrying amount and its recoverable value. The recoverable value is 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 by the amount of impairment, using an allowance account, and the amount of the loss is recognised in the line item "Net impairment loss on
loans and advances" in the income statement. In the case of loans with variable interest rates, the discount rate for measuring impairment losses is
the current effective interest rate.
NBI hf. Consolidated Financial Statements 2010 14
All amounts are in ISK million
114 Ársreikningur 2010 Allar upphæðir eru í milljónum króna