Ársskýrsla Landsbankans - Landsbankinn

Notes to the Consolidated Financial Statements
3. Significant accounting policies (continued)
Derivative instruments
Derivatives are initially recognised in the statement of financial position at fair value, with transaction costs being recognised in the income
statement. Subsequently, derivatives are carried at fair value, with all fair value changes recognised in the line item "Net gain on financial assets and
liabilities held for trading" in the income statement, except for fair value changes of derivative currency forwards and net foreign exchange
differences arising from OTC currency options, which are included in the line item "Net foreign exchange gain (loss)" in the income statement. In the
statement of financial position, derivatives with positive fair values are recognised as assets and derivatives with negative fair values are recognised
as liabilities. The Group does not apply hedge accounting.
Loans and advances
Loans and advances are initially measured at fair value plus directly attributable transaction costs, and are subsequently measured at amortised cost
using the effective interest method. Accrued interest is included in the carrying amount of loans and advances. Interest income on loans and
advances is recognised in the line item "Interest income" in the income statement and foreign exchange differences in the line item "Net foreign
exchange gain (loss)".
Loans and advances acquired at deep discount
The Bank acquired loans and advances from Landsbanki Íslands hf. at deep discount that reflected credit losses which were already incurred at
acquisition date. The deep discount was included in the fair value of these loans and advances estimated at initial recognition. The deep discount is
also included in the estimated future cash flows used by the Group to calculate the amortised cost and effective interest rate of these loans and
advances.
At each reporting date, the Group assesses the current status of these loans and advances and whether there is any objective evidence of changes in
expected cash flows, for example due to differences in estimated and actual payments, changes in the value of collaterals and improvement in the
financial situation of debtors. If there is any change in expected cash flows, the Group recalculates the carrying amount of these loans and advances
as the present value of the revised estimated future cash flows, using their effective interest rate. The difference between the revised carrying
amount of the loans and their current carrying amount, which includes accrued interest, indexation, foreign exchange differences and actual
payments received by the Group, is recognised on a portfolio basis as follows:
• Positive differences are recognised in the income statement in the line “Net impairment loss on loans and advances” in order to reverse any
negative differences recognised by the Group as impairment of the corresponding loan portfolio in previous accounting periods. The excess amount, if
any, is recognised in the income statement in the line “Net adjustments to loans and advances acquired at deep discount”.
• Negative g differences are recognised g in the income statement in the line “Net adjustments j to loans and advances acquired q at deepp discount” in
order to reverse any positive differences recognised in respect of the corresponding loan portfolio in previous accounting periods. The excess amount,
if any, is recognised in the income statement in the line “Net impairment loss on loans and advances”.
The Group recognises interest and indexation on these loans and advances based on their carrying amount and only to the extent that the interest
and indexation are deemed to be collectible. The interest and indexation are recognised in the income statement in the line ”Interest income”.
Due to varying customer financial strength, the Group has assessed the increase in credit risk due to exchange fluctuations in the foreign currency
denominated loan portfolio. While some customers have part of or all of their income in foreign currency, other customers have very limited or no
income in foreign currency. In many instances, customers with limited or no income in foreign currency will encounter difficulty in meeting their
obligations if the ISK depreciates. Therefore, for customers who have limited or no income in foreign currency, the foreign exchange differences
arising through loans and advances to these customers is presented in the income statement net of the amount of foreign exchange difference
deemed to be uncollectible.
The amount of foreign exchange difference deemed to be uncollectible is calculated based on the estimated FX-delta on the FX loan book. The Bank
implemented the FX-delta methodology during the valuation process of the loans acquired from Landsbanki Íslands hf. During that process the Bank
analysed its largest corporate customers in great detail and estimated the FX-delta by analysing major customers which have loans denominated in
foreign currency. Industry specialists performed this estimate by reviewing financial strength, collaterals and the currency composition of cash flows.
The Group estimated the ability of customers to raise income in foreign currencies and to fulfil their obligations in regard to foreign currency
dominated loans. The Group revises its estimated FX-delta at each reporting date if changes occur in the circumstances on which the FX-delta is
based or as a result of new information or more experience.
NBI hf. Consolidated Financial Statements 2010 16
All amounts are in ISK million
116 Ársreikningur 2010 Allar upphæðir eru í milljónum króna