Ársskýrsla Landsbankans - Landsbankinn

Notes to the Consolidated Financial Statements
4. Critical accounting estimates and judgements in applying accounting policies (continued)
(i) Denomination currencies and interest rates of lease and loan agreements
On 16 June 2010 the Supreme Court of Iceland ruled in two separate cases that the foreign currency linked lease agreements that were under
dispute were in fact loan agreements which fall under the scope of law no. 38/2001 on interest and indexation. The Supreme Court ruled that the
agreements are in fact obligations in Icelandic Krona which are indexed to foreign currencies, which is not permitted by the law. Accordingly, the
Supreme Court ruled that the foreign currency provisions of those lease agreements are unbinding. In addition, on 16 September 2010 the Supreme
Court ruled that the interest rate applicable to the agreement is the same as the interest rate published by the Central Bank of Iceland based on the
lowest interest rates on new unindexed loans offered by commercial banks in Iceland.
On 18 December 2010 the Parliament of Iceland passed a bill (law no. 151/2010) which amended, among other things, the law no. 38/2001 on
interest and indexation. According to the amendments, certain types of foreign currency linked agreements are considered as denominated in
Icelandic Krona. Furthermore, if the term of the agreements does not exceed 5 years, they are considered to bear from inception the lowest interest
rates on unindexed ISK denominated loans as published by the Central Bank of Iceland. If the term of the agreements exceed 5 years, the borrowers
can choose whether the agreements bear from inception the lowest interest rates on indexed or unindexed ISK denominated loans as published by
the Central Bank of Iceland. The amendments also clarify that borrowers are entitled to reimbursement of payments which are in excess of the
amount of their obligations calculated in accordance with the provisions of the law.
On 23 February 2011 the District Court of Reykjavik ruled in a case involving a foreign currency loan agreement of NBI hf. that the loan is in fact
denominated in Icelandic Krona bearing from inception the lowest interest rates on unindexed ISK denominated loans as published by the Central
Bank of Iceland.
Changes in the denomination currencies and interest rates of lease and loan agreements
Based on the rulings of the Icelandic Courts and on the guidelines from the Financial Supervisory Authority in Iceland (FME), the Group has changed
during the year 2010 the accounting for all types of foreign currency lease agreements which are within the scope of law no. 38/2001 and for certain
types of foreign currency loan agreements. Accordingly, the Group accounts for these agreements as denominated in Icelandic Krona (ISK) bearing
from inception the lowest interest rates on unindexed ISK denominated loans as published by the Central Bank of Iceland. Previously, the Group
accounted for these agreements as loans and advances to customers denominated in foreign currencies, whereby the Group estimated their cash
flows, among other things, based on their contractual interest rates in foreign currencies. The change in the accounting for these agreements has
lead to a decrease in their carrying amount in the consolidated statement of financial position from ISK 173,303 million to ISK 162,327 million. The
decrease of ISK 10,976 million is accounted for as a change in accounting estimate and it is recognised in the consolidated income statement in the
line „Loss from foreign currency linkage of loans and advances to customers“. Part of this decrease, ISK 8,193 million, was recognised in the last
quarter of 2010.
The law no. 151/2010 did not have any effect on the Group's consolidated financial statements for the year 2010 since by the time the law was
passed by the Parliament of Iceland the Group had already accounted for the agreements falling under the scope of the law as agreements
denominated in Icelandic Krona.
Provision for excess payments
The Group has recognised a provision in respect of those lease and loan agreements for which the Group changed its accounting as described above.
The provision is a liability of the Group arising from the legal obligation of the Group to repay the cash it received from customers in excess of the
payments that they should have paid based on the rulings of the Icelandic courts and law no. 151/2010. The provision amounted to ISK 7,182 million
as at 31 December 2010 and it is recognised in the consolidated statement of financial position among „Other liabilities”. Part of this amount, ISK
1,714 million, was recognised in the last quarter of 2010.
The provision is measured at the amount that represents the management’s best estimate of the expenditure required to settle the excess payment
obligation. However, the amount and timing of the payments that the Group will ultimately have to settle is uncertain as the claims may be subject
to further legal processes. The Group has recognised the amount of the provision as an expense in the consolidated income statement in the line item
„Loss from foreign currency linkage of loans and advances to customers“.
Nature and extent of financial risks arising from lease and loan agreements
The changes in the currencies and interest rates of lease and loan agreements described above have resulted in changes in the nature and extent of
financial risks arising from those agreements since they were disclosed in the consolidated financial statements for the year 2009. In particular, the
change in respect of the denomination currency of those agreements has affected the extent of currency risk disclosed by the Group in respect of
loans and advances to customers. This is because previously to the change, the carrying amount of those agreements were disclosed in Note 78 as
financial assets denominated in foreign currencies but after the change they are no longer included in that disclosure. Prior to the change, the
carrying amount of those agreements was specified by currency as follows:
Carrying amount
EUR GBP USD JPY CHF Other Total
34,942 3,180 12,791 60,203 56,856 5,332 173,303
NBI hf. Consolidated Financial Statements 2010 24
All amounts are in ISK million
124 Ársreikningur 2010 Allar upphæðir eru í milljónum króna