Ársskýrsla Landsbankans - Landsbankinn

Notes to the Consolidated Financial Statements
3. Significant accounting policies (continued)
New standards, amendments to standards and interpretations not yet adopted (continued)
IFRS 9 Financial instruments , which replaces those parts of IAS 39 Financial Instruments: Recognition and Measurement relating to the classification
and measurement of financial assets and financial liabilities. The key features of IFRS 9 are the following:
• Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be
measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model
for managing its financial instruments and the contractual cash flow characteristics of the instrument.
• An instrument is subsequently measured at amortised cost only if it is a debt instrument and both the objective of the entity’s business model is to
hold the asset to collect the contractual cash flows, and the asset’s contractual cash flows represent only payments of principal and interest. All
other debt instruments are to be measured at fair value through profit or loss.
• All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value
through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised
fair value gains and losses through other comprehensive income rather than profit or loss. There will be no recycling of fair value gains and losses to
profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they
represent a return on investment.
• Derivatives embedded in contracts with a host that is a financial asset within the scope of the standard are not to be separated; instead the hybrid
financial instrument is to be assessed in its entirety as to whether it should be measured at amortised cost or fair value.
• IFRS 9 (2010) generally requires that the amount of change in fair value attributable to changes in the credit risk of liabilities designated by an
entity as at fair value through profit or loss be presented in other comprehensive income, with only the remaining amount of the total gain or loss
included in profit or loss. The amounts presented in other comprehensive income may not be subsequently reclassified to profit or loss but may be
transferred within equity. However, if the recognition of gains and losses in other comprehensive income creates or enlarges an accounting mismatch
in profit or loss, then the whole fair value change must be presented in profit or loss. Additionally, all fair value gains and losses continue to be
included in profit or loss for loan commitments and financial guarantee contracts designated as fair value through profit or loss.
Currently, IASB has issued two versions of IFRS 9. The first version was issued in 2009 and the second version was issued in 2010. The 2010 version
includes all the requirements of the 2009 version without amendment, but in addition, it also includes the requirements with respect to the
classification and measurement of financial liabilities and the derecognition of financial assets and financial liabilities. The 2010 version supersedes
the 2009 version. However, for annual periods beginning before 1 January 2013, an entity may elect to apply the 2009 version rather than the 2010
version.
If endorsed by the EU, IFRS 9 will become mandatory for the Group's 2013 consolidated financial statements, with retrospective application required
with certain exceptions. Earlier application of the standard is permitted and prior periods need not be restated if the Group adopts the standard for
reporting periods beginning before 1 January 2012. The Group is currently in the process of evaluating the potential effect of this standard and the
timing of its adoption by the Group Group. Given the nature of the Group’s operations operations, the standard is expected to have a pervasive impact on the
consolidated financial statements of the Group.
4. Critical accounting estimates and judgements in applying accounting policies
(a) Effective interest rate on loans and advances
The Bank acquired loans and advances from Landsbanki Íslands hf. at a deep discount, reflecting incurred credit losses. The effective interest rate is
computed for these loans by estimating their future cash flows and comparing it with their acquisition prices. Estimating the cash flows involves
management judgements about the debtors' financial situation and ability to pay their debts, the net realisable value of any underlying collateral and
the timing of any potential cash flows. These estimates have a significant risk of resulting in material adjustments to the carrying amounts of loans
within the next financial year.
(b) Impairment losses on loans and advances
To assess impairment, the Group reviews its loan portfolios on at least a quarterly basis. To determine whether an impairment loss should be
recognised, the Group judges whether there is any observable data indicating a measurable decrease in estimated future cash flows from a portfolio
of loans, before any decreases in individual loans become identifiable within that portfolio. The evidence may include either observable data
indicating that an adverse change has occurred in the payment status of the borrowers in a group, or national or local economic conditions
correlating with defaults on assets in the group. In order to schedule its future cash flows, management uses estimates based on historical loss
experience, together with objective evidence of impairment in homogenous portfolios. The methodology and assumptions for estimating both the
amount and timing of future cash flows are reviewed regularly in order to reduce potential discrepancies between loss estimates and actual loss
experience.
NBI hf. Consolidated Financial Statements 2010 22
All amounts are in ISK million
122 Ársreikningur 2010 Allar upphæðir eru í milljónum króna