Critical Accounting Estimates And Judgements
IFRS First Time Adoption
Financial Risk Management
Notes to the Consolidated Annual Accounts
Company Annual Accounts
Company Accounting Policies
NIBC is an independent private merchant bank focusing on the mid-market segment in Northwest Europe with a global distribution network. NIBC’s business model as a merchant bank is aimed at offering innovative corporate finance, risk management and structured investment solutions. Its clients are corporates, financial institutions, institutional investors and family offi ces. The Bank has offi ces in The Hague, London, Brussels, Frankfurt, Greenwich (US), Singapore and Curaçao, as well as representations through strategic partnerships in New York.
NIBC N.V. (the “company” or NIBC) is domiciled in The Netherlands.
These consolidated annual accounts have been approved for issue by the Managing Board of NIBC on March 2, 2006.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The principal accounting policies applied in the preparation of the consolidated annual accounts are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
The consolidated annual accounts of NIBC N.V. have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union.
The consolidated annual accounts are prepared on a fair value basis for financial assets and financial liabilities held for trading or those which are initially designated as Fair Value through Profit or Loss and for all derivative financial instruments. Th is fair value basis is also applicable for Available for Sale assets, except those for which a reliable measure of fair value is not available and which consequently are valued at cost less impairment. Recognised financial assets and financial liabilities, initially measured at amortised cost, which are hedged, are adjusted for changes in fair value in respect of the risk being hedged. Short term financial assets classified as Loans and Receivables and other financial liabilities classified as Other Liabilities, are measured at amortised cost or historical cost.
The preparation of these annual accounts in conformity with IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the period (see separate paragraph “Critical accounting estimates and judgements”). Furthermore this is applicable for the disclosure of contingent assets and liabilities and risk positions at the date of the annual accounts. Although these estimates are based on management’s best knowledge of current events and actions, actual results ultimately may diff er from those estimates.
The annual accounts are presented in euro, rounded to the nearest million. The euro is the functional and presentation currency of NIBC N.V.
Early adoption of standards
NIBC decided to an early adoption of the following published standards:
- IAS 1 Amendment - Presentation of Financial Statements: Capital Disclosures;
- IAS 39 Amendment - The Fair Value Option;
- IAS 39 and IFRS 4 Amendment – Financial Guarantee Contracts;
- IFRS 7 Financial Instruments: Disclosures as at 1 January 2005. IFRS 7 supersedes IAS 30 and the disclosure requirements of IAS 32.
The early adoption of these (amendments to) standards did not result in substantial changes to NIBC’s accounting policies. All changes in the accounting policies have been made in accordance with the transition provisions in the respective (amendments to) standards.
Standards, interpretations and amendments to published standards that are not yet eff ective
- IAS 19 Amendment – Actuarial Gains and Loss, Group Plans and Disclosures;
- IAS 39 Amendment – Cash Flow Hedge Accounting of Forecast Intragroup Transactions;
- IFRS 6 – Exploration for and Evaluation of Mineral Resources;
- IFRIC 4 – Determining whether an Arrangement contains a Lease;
- IFRIC 5 – Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds;
- IFRIC 6 – Liabilities arising from Participating in a Specific Market: Waste Electrical and Electronic Equipment.
The IAS 19 amendment introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As NIBC does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment will only impact the format and extent of disclosures presented in the accounts. The Group will apply this amendment as of 1 January 2006.
Management assessed that neither the IAS 39 Amendment with respect to Cash Flow Hedge Accounting of Forecast Intragroup Transactions nor IFRS 6 nor the above mentioned interpretations are relevant to NIBC’s operations.
Statutory income statement
Under Article 402 of Part 9, Book 2 of the Netherlands Civil Code, it is suffi cient for a Company’s statutory income statement to present only the income of Group companies and other income and expenses after income tax.
IFRS First Time Adoption
IFRS 1 First Time Adoption has been consistently applied in the preparation of these annual accounts. NIBC’s transition date is 1 January 2004. NIBC prepared its opening IFRS balance sheet at that date. NIBC’s IFRS adoption date is 1 January 2005. In preparing this financial information in accordance with IFRS 1, the Group has applied the mandatory exceptions and certain of the optional exemptions from full retrospective application of IFRS, i.e.
- As NIBC has deferred the transition of IAS 32 and 39 on Financial Instruments to 1 January 2005, comparable figures 2004 do not include the related IFRS adjustments. With the First Time Adoption at 1 January 2004, respectively 1 January 2005 for the adjustments related to IAS 32 and 39, all the adjustments of the transition to IFRS are included in the opening balance retained earnings, except for the changes in fair value of the corporate loan portfolio which are adjusted in the opening balance of the revaluation reserve and except for changes in fair value of the cash flow hedging instruments, which are adjusted in the opening balance of the hedging reserve. The 2004 financial information is based on Generally Accepted Accounting Principles in the Netherlands (Dutch GAAP) in respect of measurement and recognition, however included is a translation from Dutch GAAP to IFRS presentation (referred to as “Remapped Dutch GAAP balance sheet”);
- Upon initial Adoption of IAS 39 NIBC has designated all debt securities, included in the Investment Portfolio, certain structured funding portfolios and all the (securitised) mortgages as Fair Value through Profi t or Loss;
- NIBC has applied the business combinations exemption in IFRS 1. It has not restated business combinations that took place prior to the 1 January 2004 transition date;
- Employee benefits exemption. NIBC has elected to recognise all cumulative actuarial gains and losses as at 1 January 2004.
Basis of consolidation
Subsidiaries are the companies and other entities (Special Purpose Entities) controlled by NIBC. Control exists when NIBC has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The annual accounts of subsidiaries are included in the consolidated annual accounts from the date that control commences until the date that control ceases.
For the purpose of consolidation the annual accounts of the subsidiaries are based on the same accounting principles as NIBC itself.
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, shares issued or liabilities undertaken at the date of acquisition, plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. For the accounting of goodwill we refer to the accounting policy for goodwill as described below.
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. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by NIBC.
Joint ventures are those entities over whose activities, entities or assets NIBC has joint control. The financial figures of joint ventures are consolidated on a proportionate basis in the consolidated annual accounts according to the interest held, from the date that joint control commences until the date that joint control ceases.
Intercompany transactions, balances and unrealised gains on transactions between NIBC and its joint ventures are eliminated to the extent of NIBC’s interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies have been changed where necessary to ensure consistency with the policies adopted by NIBC.
Associates are those entities in which NIBC has signifi cant influence, but not control, over the financial and operating policies. The consolidated annual accounts include the Group’s share of the total recognised gains and losses of associates on an equity method basis, from the date that signifi cant influence commences until the date that signifi cant infl uence ceases.
Unrealised gains on transactions between NIBC 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 have been changed where necessary to ensure consistency with the policies adopted by NIBC.
Use of Dutch GAAP for financial instruments in the balance sheet as at 31 December 2004 and income statement 2004
As mentioned in the paragraph ‘IFRS first time adoption’, NIBC has chosen to present comparative information that does not comply with IAS 32 and IAS 39. As a consequence, the financial instruments reflected on the balance sheet as at 31 December 2004 and the related 2004 income statement items are based on the recognition and measurement principles according to Dutch GAAP. The principles of valuation and determination of results for financial instruments are set out below.
The trading portfolio, measured at market value, comprises all interest-bearing securities, shares and other financial instruments (including derivatives) that are not treated as fixed assets but are basically intended for generating transaction results.
The investment portfolio, measured at redemption value or cost, minus any provisions deemed necessary, includes all interest-bearing securities and shares treated as fi xed assets and form a permanent component of the groups’ activities.
Off -Balance Sheet Instruments
Off-balance sheet instruments are used to hedge the group’s own positions and are accounted for in accordance with the principles of valuation and determination of results applicable to the underlying positions. Rights and obligations under option contracts and similar contracts forming part of the trading portfolio are measured at market value. The market value is determined by the quoted price (if available) or the estimated liquidation value.
To cover possible future hedging costs and option risks, part of the initial transaction result is included in a provision. These risks include volatility risks, credit risks, liquidity risks, financial model risks and other uncertainties. These provisions are adjusted to the market value of the underlying positions.
Banks and Loans and Advances
Amounts receivable from credit institutions and clients are included at face value less any provisions deemed necessary.
Bonds and other interest-bearing securities forming part of the investment portfolio are stated at redemption value less diminutions in value for credit risks. The diff erence between the carrying amount and cost is recognised as interest on a pro rata basis according to the remaining term of the securities.
Results on the sale of bonds and other interest-bearing securities treated as part of the investment portfolio are recognised as interest in the year under review and ensuing years based on the remaining term to maturity of the securities concerned, provided it does not, on balance result, in the capitalisation of losses. Securities on which interest is paid entirely or largely on redemption are included at cost less any diminutions in value for credit risks. The carrying amount is increased each year by the accrued interest calculated on the basis of the interest rate applicable at the time of acquisition. Interest-bearing securities forming part of the trading portfolio are stated at market value.
Where NIB Capital Bank N.V. has purchased its own – non-subordinated – bonds or other securities for the purpose of resale, these are stated at the lower of cost and market value. Short positions in bonds and other fixed-income securities forming part of the trading portfolio are included in other liabilities. Transfers of interest-bearing securities between portfolios are made at market value. Results on transfers are treated in the same way as results on disposals.
Shares forming part of the trading portfolio are included at market value or, if the securities concerned are not officially listed, at estimated net realisable value. Valuation differences are accounted for in the profit and loss account as results on financial transactions. Short positions in shares and other non-fi xed income securities forming part of the trading portfolio are included in other liabilities. Equity investments, i.e. capital interests not held on a lasting basis in connection with the company’s own activities and not treated purely as investments, are included at market value. Unrealised (positive and negative) valuation diff erences and any reversals thereof are accounted for in the revaluation reserve. Only realised transaction results are accounted for in the profit and loss account as results on financial transactions. If the amount of the revaluation reserve is insufficient to absorb the total amount of negative valuation differences, the remaining amount is charged to the result. Dividends are accounted for as income from securities and participating interests. Equity investments which are underwritten by the government are stated at cost.
In determining market value, the valuation principles set by the European Venture Capital Association (EVCA) are applied. The EVCA Guidelines make a distinction according to:
- Unquoted venture investments (venture capital for start-ups) for which cost is taken as the basis for fair market value. A higher carrying amount than cost is possible if refinancing has taken place involving a third party, if the net asset value differs substantially from the cost or if the equity participation reports signifi cant profits and the application of a price/earnings ratio is possible, subject to a discount to reflect restricted marketability and uncertainty in view of the relatively short period over which profits have been made;
- Unquoted development investments (mature equity participations). Th is category of equity participations is carried at fair market value, using the price/earnings ratio method and allowing for a discount to reflect restricted marketability and any other relevant factors;
- Quoted investments (equity participations in listed companies). In this case the fair market value is derived from the quoted price less an allowance for formal restrictions or restricted marketability of the shares.
Participating interests, i.e. capital interests held on a lasting basis in connection with the company’s own activities, are subdivided into the following categories:
- Participating interests in which the company exercises a controlling infl uence on policy; these companies are stated at net asset value;
- Participating interests in which the company does not exercise a controlling influence on policy but is in a position to exercise signifi cant infl uence; these companies are also included at net asset value based on the most recent information available;
- Participating interests in which the company does not exercise a signifi cant influence on policy; these companies are included at market value, any rise or fall in their value being accounted for in the revaluation reserve; if the amount of the revaluation reserve is insufficient to absorb negative valuation diff erences, any remainder is charged to the result;
- If valuation is at net asset value, the amount recognised as income from securities and participating interests is the share of the result of the participating interest accruing to the company. In the case of valuation at market value, the amount recognised as income from securities and participating interests is the dividend received.
Income is allocated to the period to which it relates, or in which the service is provided, with the exception of differences in value of the trading portfolio stated at market value, that are credited or charged directly to results on financial transactions. Interest income and commissions on lending are not recognised if there is any doubt concerning the collection of this income. Results from the sale of debentures and other fixed-income securities held in the investment portfolio are treated as interest income over the remaining term to maturity of the securities sold and allocated according to the remaining term to maturity of the securities sold, unless the sales are made in connection with a structural reduction in the investment portfolio. Sale results are in that case credited or debited directly to the profit and loss account as results on financial transactions. If results attributable to future periods are a net loss, they are charged directly to the profit and loss account.
Expenses are allocated to the period to which they relate.
IFRS PRINCIPLES OF MEASUREMENT AND DETERMINATION OF RESULTS
Classification of financial instruments
NIBC applies the classification Fair Value through Profit or Loss to all financial instruments (including derivatives), which are principally held for trading and used with the objective of generating a profit from short-term fluctuations in price or dealer’s margin. Additionally NIBC has designated all debt securities, included in the investment portfolio and certain structured funding portfolios and residential mortgages (own book and securitised), as well as the derivatives economically hedging these instruments, by initial recognition as Fair Value through Profit or Loss. Financial assets that are not classified as Fair Value through Profit or Loss, are designated upon initial recognition as Available for Sale. All other financial liabilities are classifi ed as Other Liabilities. A financial instrument is recognised in the balance sheet when NIBC becomes party to a contract that comprises a financial instrument. NIBC applies trade date accounting for all financial instruments.
Foreign currency translation
Transactions in foreign currencies are translated at the foreign exchange rate at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate at reporting date. Foreign exchange differences arising on translation are recognised in the income statement.
Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated at the foreign exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the reporting currency at the foreign exchange rates ruling at the dates that the values were determined. When a gain or loss on a non-monetary item is recognised directly in equity, any exchange component of that gain or loss shall be recognised directly in equity. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss.
Exchange differences arising on a monetary item that forms part of NIBC’s net investment in a foreign operation are recognised in profit or loss in the separate annual accounts of NIBC or the individual annual accounts of the foreign operation, as appropriate. In the consolidated annual accounts such exchange diff erences are recognised initially in a separate component of equity and recognised in profit or loss on disposal of the net investment.
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
Derivative financial instruments and hedging
NIBC uses derivative financial instruments both for trading and for hedging purposes. Derivative financial instruments are initially recognised at fair value. Subsequently derivative financial instruments are measured at fair value.
NIBC uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. When applying hedge accounting, there is formal documentation of the hedge including its risk management objectives and policies at inception of the hedge.
Portfolio fair value hedge accounting is applied to swaps used for hedging fi xed rate exposures in plain vanilla funding and corporate loans. Fixed rate corporate loans are classified as Available for Sale and measured at fair value. Plain vanilla funding is classified as Other Liabilities and measured at amortised cost. Using (cross currency) interest rate swaps, the interest rate risk is hedged on time bucket level. For the fi rst two years, the monitoring of the fair value interest rate risk is done using monthly buckets.
After the second year, future cash flows are assigned to year buckets. The hedge relations are designated and documented at least on a monthly basis. Assessment of the effectiveness of the hedge relationship is measured on total portfolio level, instead of bucket level. Any changes in the (clean) market value of the swap portfolio and changes of the market value of the hedged item (with respect to the hedged risk) are recognised in the income statement as part of effective interest, as NIBC’s fair value hedge relationships relate to interest rate risk only. When a fair value hedge relationship is terminated, the cumulative changes in fair value are amortised in the income statement.
Macro cash flow hedging is applied to hedge the interest rate risk of the fl oating corporate loans, which are classified as Available for Sale and measured at fair value. This way NIBC manages its cash flow interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Using cash flow hedge accounting, the cash flows of the fl oating corporate loan book are matched to the cash flows of the hedging instruments, included in the mismatch swap portfolio. The effective part of any gain or loss on remeasurement of the hedging instrument is deferred to the hedging reserve in equity. The ineffective part of any gain or loss is recognised in the income statement. By amortising the cumulative gain or loss recognised in equity into the income statement, the deferred remeasurement of the derivative is matched with the hedged floating interest income in the income statement. When a cash flow hedge accounting relationship is terminated, but the hedged transaction is still expected to occur (i.e. the floating corporate loan continues to generate the forecasted interest income), the cumulative gain or loss recognised in equity remains in equity and is recognised in accordance with the above policy. If the hedged transaction is no longer expected to occur, the cumulative gain or loss recognised in equity is recognised in the income statement immediately.
Derivatives used in other portfolios including structured funding, are not included in hedge accounting relationships. These derivatives are accounted for at fair value, with changes in fair value recognised in the income statement. Certain derivatives embedded in other financial instruments are treated as separate derivatives, when their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at Fair Value through Profi t or Loss. These embedded derivatives are seperately accounted for and measured at fair value with changes recognised in income statement.
At each balance sheet date NIBC assesses whether there is an indication for impairment of assets that are not carried at fair value with changes recognised in the profit and loss account. If any such indication exists, the asset’s recoverable amount is estimated, based upon the present value of expected future cash flows (taking into account any collateral values) discounted at current market rates.
Cash flows expected to occur within one year (related to impaired assets with a maturity shorter than one year) are not discounted. A financial asset is impaired if its carrying amount is greater than its estimated recoverable amount.
Indicators of impairment
For financial assets individually assessed for impairment, NIBC applies indicators, specific for each class of financial assets, goodwill and property. In general those include (high) probability of bankruptcy, an actual breach of contract, a signifi cant negative change in fair value as well as historical patterns.
Available for sale financial assets
For available for sale assets, the amount of the cumulative loss that is removed from equity and recognised in profit or loss is the difference between the acquisition amount (net of any principal repayment and amortisation) and current fair value, minus any impairment loss on that financial asset previously recognised in profi t or loss.
On transition date and annually thereafter NIBC performs an impairment test of goodwill to assess whether the carrying amount of goodwill is fully recoverable. Goodwill is impaired if its carrying amount is greater than its estimated recoverable amount.
Reversals of impairments
An impairment loss is reversed if the subsequent increase in recoverable amount can be related objectively to an event occuring after the impairment loss was recognised. Reversals of impairments, where the impairment was originally charged to the income statement are credited to the income statement. Other reversals are credited to equity (revaluation reserve). Reversals cannot exceed the written down value of the asset which would have been recorded had the impairment never occurred.
Available for sale financial assets
The reversal of an impairment of corporate loans and other assets is recognised in the income statement. If the impairment of an equity investment can be (partially) released, the reversal of this impairment is brought to the revaluation reserve in equity.
An impairment loss in respect of goodwill is not reversed.
IFRS PRINCIPLES OF ITEMS OF THE INCOME STATEMENT
Interest income and expense
Interest income and expense is recognised in the income statement as it accrues, taking into account the effective interest rate of the asset or the liability or an applicable floating rate. Interest income and expense includes the amortisation of any discount or premium, transactions costs and credit related fees between the initial carrying amount of a debt instrument and its amount at maturity calculated on an effective interest rate basis.
Fees such as upfront fees related to loans, which form part of the effective interest, are amortised in interest income. Also the change in fair value related to hedged risk of hedged items in a fair value interest rate hedge (including the relevant amortisation) and the change in the fair value of hedging instruments are included in interest income.
Fee and commission income and expense
Fee and commission income and expense arises on financial services provided, including brokerage services, investment banking services, project and structured finance transactions, and asset management services. Fees and commissions are recognised when the services are rendered or in the period, over which the services are rendered, if it is probable that future economic benefits will flow to NIBC and these benefits can be measured reliably.
Dividend income from equity investments and other non-fixed income investments is recognised in the income statement on the date that the right to receive payment has been established.
Net trading income
Gains and losses arising from disposals and changes in the fair value of fi nancial assets and liabilities classified as Fair Value through Profit or Loss are recognised in the income statement.
Gains less losses from equity investments
Gains and losses arising from disposals of fi nancial assets classified as Available for Sale are recognised in the income statement.
IFRS PRINCIPLES OF ITEMS OF THE BALANCE SHEET
Cash and banks balances
Cash and banks balances comprise cash balances on hand, cash deposited with central banks and short-term highly liquid investments and other bills eligible for rediscounting with the central bank. Cash balances are measured at face value while bank balances are measured at cost.
Loans and Advances to customers
NIBC classifies corporate loans as Available for Sale, measured at fair value. Changes in fair value are recognised directly in the revaluation reserve in equity; except for foreign exchange gains and losses, which are recognised in the income statement. When the loans are derecognised, the cumulative gain or loss previously recognised in equity is recognised in the income statement.
Corporate loans are reported net of allowances to reflect the estimated recoverable amounts. For Available for Sale assets, the amount of the cumulative loss that is removed from equity and recognised in profit or loss is the difference between the acquisition amount (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that financial asset previously recognised in profi t or loss.
Interest earned on corporate loans is recognised as interest income using the eff ective interest method.
Debt securities are managed and its performance is evaluated on a fair value basis in accordance with NIBC’s risk management policies and NIBC’s aim to provide as much insight as possible into the market value of the individual assets. Debt securities, included in the investment portfolio, are designated by initial recognition as Fair Value through Profit or Loss. Following this classification, the debt securities are initially recognised at fair value, and subsequently measured at fair value, based on bid quoted prices. Changes in fair value are recognised directly in equity until the debt security is derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in the income statement. Interest earned is recognised as interest income using the effective interest method.
Equity investments, included in the investment portfolio are classified as Available for Sale, and are initially measured at fair value, subsequent measurement is also at fair value. The fair value is based upon quoted market prices in an active market. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques. In these circumstances the valuation principles set by the European Private Equity and Venture Capital Association (EVCA) are applied by NIBC with the exception that no allowance for formal restrictions or restricted marketability of the shares can be used for quoted equity investments, because this is not in line with the fair value principle as defined by IFRS.
The EVCA Guidelines make a distinction according to:
- Unquoted venture equity investments (venture capital for start-ups) for which cost is taken as the basis for fair value. A higher carrying amount than cost is possible if:
- refinancing has taken place involving a third party,
- if the net asset value differs substantially from the cost or
- if the equity investment reports signifi cant profits and the application of a growth/ earnings ratio is possible, subject to a discount to reflect restricted marketability and uncertainty in view of the relatively short period over which profits have been made.
- Unquoted development investments (mature equity investments). The fair value amount for this category of equity investments can be achieved by applying price/ earnings ratios, subject to a discount to reflect restricted marketability and any other relevant factors.
- Quoted equity investments (investments in listed companies). In this case the fair value is derived from the quoted price.
Unrealised and realised gains and losses
Changes in fair value of the equity investments are recognised directly in the revaluation reserve in equity until the equity investment is derecognised. At derecognition the cumulative gain or loss previously recognised in equity is recognised in the income statement.
An equity investment is impaired if its carrying amount is greater than its estimated recoverable amount. The impairment loss that has been recognised directly in equity is removed from equity and recognised in the income statement. Impairment loss recognised in the income statement on equity instruments is not reversed through the income statement.
Dividend is recognised in dividend income on the date that the right to receive payment has been established.
Residential mortgages (own book) and securitised residential mortgages
Mortgages are managed on a fair value basis in accordance with NIBC’s risk management policies and NIBC’s aim to provide as much insight as possible into the market value of the individual assets. All residential mortgages, including securitised residential mortgages, are designated at initial recognition as Fair Value through Profit or Loss. Following this classification, the (securitised) mortgages are initially recognised at fair value, and subsequently measured at fair value. All related net realised and unrealised gains and losses are included in net trading income. Interest earned and amortisations of any premium/discount are recognised as interest income using the effective interest method.
Equity securities are initially recognised at fair value, and subsequently measured at fair value, based on bid quoted prices for financial assets and offer quoted prices for financial liabilities. Transaction costs are expensed as incurred. All related net realised and unrealised gains and losses are included in net trading income. Interest earned is calculated using the effective interest method and reported as interest income. Dividends received on equity securities held for trading are included in net trading income.
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets of the acquired subsidiaries, joint ventures or associates. Goodwill is stated at cost less impairment losses. On transition date and annually thereaft er NIBC performs an impairment test of goodwill to assess whether the carrying amount of goodwill is fully recoverable. Goodwill is impaired if its carrying amount is greater than its estimated recoverable amount. A reversal of this impairment is not allowed.
Property and Equipment
Property for own use
Land and buildings are measured at fair value. This fair value is based on the most recent appraisals by independent registered values, less straight-line depreciation over the estimated economic life taking into account any residual value, with a maximum of 50 years.
The market value of property in use by NIBC is based on their value for sale by private treaty. The unrealised gains and losses arising from the changes in fair value of the property for own use are recognised in the revaluation reserve in equity.
Property for own use is impaired if its carrying amount is greater than its estimated recoverable amount. The impairment loss of property for own use that has been recognised directly in equity shall be removed from equity and recognised in profi t or loss. The reversal of an impairment loss is treated as a revaluation increase and brought to the revaluation reserve.
For buildings that are held as investments and let, the market value is based on the highest price for which they could be sold, less associated selling costs. Investments made since the most recent professional appraisal are carried at cost minus depreciation. 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.
Property related to foreclosures
Property acquired as a result of foreclosures or in settlement of debt is measured at the lower of cost and net realisable value.
Other fixed assets, including computer equipment and software developed by third parties, are measured at cost minus straight-line depreciation and impairment. Depreciation is based on expected useful life, with a maximum of five years. In general, a three-year depreciation period is used and smaller investments are directly expensed in the year of purchase. Equipment is impaired if its carrying amount is greater than its estimated recoverable amount. The impairment loss of the equipment is directly recognised in the income statement. Any reversal of impairments is recognised in the income statement.
The leases entered into by NIBC are primarily operating leases. The total payments made under an operating lease are recognised as an expense on a straight-line basis over the lease term.
Dividends on ordinary shares are recognised in equity in the period in which they are on the date that the obligation for payment has been established. Proposed dividends after the balance sheet date are separately disclosed in the subsequent events note.
The effective part of any gain or loss on the remeasurement of the fair value of derivative fi nancial instruments, used for hedging the exposure to variability in the cash flow of recognised assets and liabilities or forecasted transactions, is included in a hedging reserve. The amounts are included net of deferred taxation.
The revaluation reserve represents unrealised differences, net of deferred taxation, on the revaluation of Available for Sale assets and property for own use as at balance sheet date.
Minority interest is that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by NIBC. The minority interest is included in equity, but separate from (parent) shareholders’ equity. The minority interest of profit or loss is included in net result for the year but separate from net result for the year attributable to the (parent) shareholders.
NIBC classifies its debt securities issued as debt securities in issue under liabilities. Subordinated loans are classified as a separate item under liabilities. Following this classification, measurement is at amortised cost, amortisation of transaction costs and premium or discount using the effective interest method.
Structured funding contracts contain one or more embedded derivatives which are hybrid combined contracts. Upon initial recognition these structured funding contracts are designated and classified as Fair Value through Profit or Loss. The measurement of these specific funding portfolios is fair value and the changes in fair value are recognised in net trading income in the income statement. Where a derivative financial instrument hedges the exposure to changes in the fair value of a recognised liability, these are classified as Fair Value through Profit or Loss as well.
Employee benefit obligations
NIBC and its subsidiaries have various pension schemes in accordance with the local conditions and practices in the countries in which they operate. These various pension schemes 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 fi xed contributions, which are recognised as an expense in the income statement as incurred.
A defined benefit plan is a plan that defines an amount of pension benefit to be provided. The liability is the present value of the defined benefit obligation at the balance sheet date minus the fair value of plan assets, together with adjustments for unrecognised actuarial gains and losses and past service cost. 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 the estimated future cash outflows using interest rates of government securities, which have terms to maturity approximating the terms of the related liability. Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions and amendments to pension plans are charged or credited to income over the service lives of the related employees.
Other post retirement obligations
Some group companies provide post-retirement healthcare benefits to their retirees. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefits pension plans. Actuarial gains and losses arising from experience adjustments, and changes in actuarial assumptions, are charged or credited to the income statement over the expected average remaining working lives of the related employees.
Share based compensation
NIBC operates two different share based compensation plans one-equity settled and one-cash settled:
Stock Option Plan (SOP)
The SOP is an equity settled share based compensation plan consisting of options and restricted stock. The fair value of the employee services received in exchange for the grant of the options and restricted stock is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options and restricted stock granted. At each balance sheet date, the entity revises its estimates of the number of options that are expected to become excercisable and the number of restricted stock that will convert into common stock. It recognises the impact of the original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period to the extent it is related to options. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are excercised and for the restricted stock when granted.
Stock Appreciation Rights (SAR)
NIBC N.V. has granted SAR to the employees of NIBC Bank N.V. and its subsidiaries. A SAR entitles the holder to a share in the value growth of NIBC in cash. The premium is calculated on the basis of the appreciation in value expected during the term of the right and assuming a projected return on equity, which is then reduced to its present value using a risk free rate of interest. The expenses related to the SAR granted, taking into account the vesting periods and expected resignment, are included in the income statement under personnel expenses.
Furthermore a legacy Staff Option Plan is operated which ended in 2005. The plan is valued in line with the SAR and also cash settled, however the expected return is also based on Stock Exchange developments.
Deferred cash bonus
This long term incentive plan is valued at net present value of the amounts granted discounted at the risk free rate of return taking into account the vesting period.
Provisions are recognised when NIBC has a legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Given the short term nature these provisions are not discounted.
Deferred and current income taxes
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the annual accounts. Deferred tax assets are only recognised to the extent that future taxable profi t will be available against which the temporary differences can be utilised.
Deferred tax related to fair value re-measurement of Available for Sale assets and cash flow hedges, which are charged directly to equity, is also recognised directly in equity. With the disposal or realisation of the hedge the related deferred tax is recognised in the income statement together with the deferred gain or loss.
NIBC enters into purchases (sales) of investments under agreements to resell (repurchase) substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at fi xed price future dates are not recognised. The amounts paid are recognised in loans to either banks or customers. The receivables collateralised by these investments are separately disclosed under the respective balance sheet items. Investments sold under repurchase agreements continue to be recognised in the balance sheet and are measured in accordance with the accounting policy for either assets Held for Trading or Available for Sale as appropriate. The proceeds from the sale of the investments are reported as liabilities to either banks or customers.
The difference between the sale and repurchase considerations is recognised at a fair value basis over the period of the transaction and is included in Interest Income.
Contingent assets and liabilities
Contingent assets and liabilities are only disclosed in the annual accounts. Any resulting assets are recognised as such when they materialise. Contingent liabilities are only recognised when they are probable to result in an obligation to an outfl ow of resources that can be reliably measured.
Critical Accounting Estimates And Judgements
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
Estimated impairment of goodwill
On transition date and annually thereafter NIBC performs an impairment test of goodwill to assess whether the carrying amount of goodwill is fully recoverable. Goodwill is impaired if its carrying amount is greater than its estimated recoverable amount.
Fair Value measurement principles
The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. The fair value of financial assets is based on bid quotes, while the fair value of financial liabilities is based on offer quotes. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques. The fair value does not include adjustments for liquidity, future hedging or administration expenses or other provisions for possible future events.
Where discounted cash flow techniques are used, estimated future cash fl ows are based on management’s best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date.
The fair value of derivatives that are not exchange-traded is estimated at the amount that NIBC would receive or pay to terminate the contract at the balance sheet date taking into account current market conditions and the current creditworthiness of the counterparties.
The fair value of mortgages (own book and securitised) is determined by a mark-tomodel method. Cash flows of mortgages, after expected prepayments adjustments, are discounted by the interbank zero curve plus additional discount spread.
This discount spread takes into account the credit risk of mortgages, servicing and hedging costs, prepayment costs and other costs and risks related to warehousing the mortgages for securitisation. The add-on for credit risk is based on observable spreads of RMBSs in the market. Key parameters affecting the fair value are the credit spread movement and the Constant Prepayment Rate (CPR). 1 basispoint parallel shift in the credit spreads across the mortgage portfolio has an impact of approximately €
2.1 million on the fair value of mortgages as at December 31, 2005. 100 basispoint difference in the CPR has an impact of approximately € 11.1 million on the fair market value of mortgages at December 31, 2005. Negative changes in the fair market value of mortgages as result of prepayment rate changes are to a large part mitigated by penalties paid by the mortgagor.
In line with the valuation of mortgages, the fair value of corporate loans is determined by discounting the cash flows by the interbank zero curve plus additional spread. The spread is determined by calculating the credit risk based upon a CLO model and credit spreads of CLO’s observed in the market. Tightening of credit spreads of CLO’s by 1 basispoint would have a positive impact on the fair value of the corporate loans of approximately € 2 million.
Equity investments, included in the investment portfolio are classified as Available for Sale, and are initially measured at fair value, subsequent measurement is also at fair value. The fair value is based upon quoted market prices in an active market. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques. In these circumstances the valuation principles set by the European Private Equity and Venture Capital Association (EVCA) are applied by NIBC with the exception that no allowance for formal restrictions or restricted marketability of the shares can be used for quoted equity investments, because this is not in line with the fair value principle as defined by IFRS. A 10% positive/negative movement in market multiples would lead to a change in fair value of the equity/warrant investments of € 8 million and € 5 million respectively.
Impairment losses on loans and advances
NIBC reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, NIBC makes judgements as to whether there are any observable data indicating that there is a measurable decrease in the estimated future cash fl ows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash fl ows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash fl ows differs by +/-5 percent, the impairment amount in the balance sheet would increase with 48 basispoints of the outstanding loans and advances to customers in case of 5% lower cash fl ows and decrease with 14 basispoints in case of 5% higher cash fl ows.
Impairment available for sale equity investments
NIBC determines that Available for Sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. Th is determination of what is significant or prolonged requires judgement. In making this judgement, NIBC evaluates among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of a deterioration in the financial health of the investor, industry and sector performance, changes in technology, and operational and fi nancing cash fl ows. Had all the declines in fair value below cost been considered significant or prolonged, the effect would have been € 6 million loss in its 2005 annual accounts.
Securitisations and special purpose entities
NIBC sponsors the formation of special purpose entities (SPEs) primarily for the purpose of allowing clients to hold investments, for asset securitisation transactions and for buying or selling credit protection. NIBC does not consolidate SPEs that it does not control. As it can sometimes be difficult to determine whether NIBC does control a SPE, it makes judgements about its exposure to the risks and rewards, as well as about its ability to make operational decisions for the SPE in question. In many instances, elements are present that, considered in isolation, indicate control or lack of control over an SPE, but when considered together make it diffi cult to reach a clear conclusion. In such cases, the SPE is consolidated. Were NIBC not to consolidate the assets, liabilities and the results of these consolidated SPEs, the net effect on the balance sheet would be a decrease of € 8.4 billion (2004: € 3.8 billion) and results of nil (2004: nil).
NIBC is subject to income taxes in numerous jurisdictions. Signifi cant estimates are required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. NIBC recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Were the actual final outcome to differ by 10% from management’s estimates, NIBC would need to:
- increase the income tax liability by € 3 million and the deferred tax liability by €14 million and decrease the deferred tax assets by € 9 million, if unfavourable;
- or decrease the income tax liability by € 3 million and the deferred tax liability by € 14 million and increase the deferred tax assets by € 9 million, if favourable.
IFRS First Time Adoption
Below the main differences of the IFRS FTA as at 1 January 2004 and the IFRS FTA on IAS 32/39 as at 1 January 2005 are set out.
First Time Adoption Impact of IFRS (excluding IAS 32 and 39) as at 1 January 2004
- The Fund for General Banking Risks (€ 136 million) has been reclassifi ed to Retained Earnings;
- The first time adoption effect on the retained earnings related to pension scheme obligations and the Stock Appreciation Rights programme (SARs) has been respectively € 13 million (negative) and € 16 million (positive). The latter follows from the IFRS rule that only vested SARs should be provided for;
- The balance sheet total increased by approximately € 4 billion as a result of the consolidation of the Dutch Mortgage Backed Securities transactions originated and arranged by NIBC.
The net impact of these items on the profit and loss account is limited.
First Time Adoption impact on Financial Instruments (IAS 32 and 39) as at 1 January 2005
NIBC aims to provide as much insight as possible into the market value of the individual assets. As a result NIBC has opted under IFRS to value its assets based on “fair value”. The First Time Adoption (“FTA”) includes mainly:
- Corporate loans and equity investments are classified as Available for Sale portfolios showing the movements in fair value in the revaluation reserve within shareholders’ equity;
- Upfront fees on existing corporate loans are required to be amortised over the expected maturity of the corporate loans, hence the historical upfront fees are reversed in the FTA;
- The IFRS impairment rules for commercial loans are applied;
- The Financial Market portfolios including residential mortgages will all be classified as either Fair Value through Profit or Loss or Held for Trading. Both classifications result in booking all fair value adjustments directly into the income statement;
- NIBC manages its interest rate risk in terms of fair value on the basis of sensitivity of its fixed rate assets (corporate loans, mortgages and investments) and liabilities (funding). Subsequent to these sensitivity based hedge activities, in order to lock in the interest rate margin of the banking book, certain floating assets are swapped
- into fixed rate positions, using (cross currency) interest rate swaps. Under IFRS derivatives are booked at fair value, with changes in the income statement, while the hedged assets are valued at fair value, with changes in the revaluation reserve and hedged liabilities valued at amortised costs. In order to mitigate the volatility in the income statement hedge accounting (fair value hedge accounting respectively cash flow hedge accounting) is applied;
- The balance sheet total increased by approximately € 2 billion as a result of the mark-to-market valuation of derivatives.
The total first time adoption impact of IAS 32 and 39 on Shareholders’ Equity net of tax amounts € 111 million (positive) which can be split as follows:
|Corporate loans||€ 16 million|
|Mortgages||€ 25 million|
|Investment portfolios financial markets||€ 10 million|
|Macro cash flow hedging||€ 64 million|
|Other||€ 4 million (negative)|
After this section you find the remapped and restated figures regarding the IFRS First Time Adoption:
- “Remapped Dutch GAAP balance sheet as at 31 December 2003”
- “Restated IFRS balance sheet as at 1 January 2004, excluding IAS 32/39”
- “Remapped Dutch GAAP balance sheet as at 31 December 2004”
- “Restated IFRS balance sheet as at 1 January 2005”
- “Restated IFRS income statement 2004, excluding IAS 32/39”
- “Restated IFRS statement of changes in shareholders’ equity”
Financial Risk Management
In addition to the information set out below we refer to the comprehensive risk management paragraph.
The principal ratios for reviewing the capital adequacy of NIBC Bank N.V. are the Tier-1 ratio and the BIS ratio. These ratios, which were implemented by the Bank for International Settlements (BIS), are intended to promote comparability between financial institutions. They are still based on the 1988 Basel Capital I Accord. A comprehensive revision of this Basel Capital Accord, which is currently underway, will bring it closer into line with the concept of economic capital.
The bank monitors developments in the ratios on a monthly basis, including comparison between the expected ratios and the actual ratios. These ratios indicate capital adequacy to hedge on-balance risks including off-balance sheet commitments and market risks and other risk positions expressed as risk-weighted items in order to reflect their relative risk. During the year ended December 31, 2005, NIBC complied amply with the capital requirements imposed by the Dutch Central Bank, which require a minimum Tier-1 ratio of 4% and a minimum BIS ratio of 8%. In 2005 the Tier-1 ratio increased from
Below is the summary of the risk positions comparing the notional amount and the risk-weighted amount. Tier-1 capital consists of share capital, reserves (excluding the hedging reserve and the revaluation reserve), retained earnings and hybrid Tier-1 capital, net of intangible fixed assets and proposed dividend. Total capital (BIS) consists of Tier-1 capital plus the revaluation reserve and subordinated loans adjusted for deductible items.
All assets and liabilities are valued at fair value or nominal value is considered as fair value, except for own debt securities in issue and subordinated liabilities, which are valued at amortised costs. The carrying value of own debt securities in issue amounts to € 9,244 million (2004: € 9,257 million), the fair market value amounts to € 9,192 million (2004: € 9,240 million). The carrying value of subordinated liabilities amounts to € 677 million (2004: € 424 million), the fair market value amounts to € 674 million (2004: € 425 million). The fair values for these items are calculated by applying a benchmark curve combining current levels for repurchasing debt securities and current levels for issuing new debt securities. The swap curve is used to arrive at the fair value of cash flows.
Notes to the Consolidated Annual Accounts
1. SEGMENT REPORTING
Segment information is presented in respect of NIBC’s business and geographical segments. The primary format, business segments, is based on NIBC’s management and internal reporting structure.
Measurement of segment assets and liabilities and segment revenues and results is based on the accounting policies set out in the accounting policy notes.
Transactions between segments are conducted on normal commercial terms and conditions. Segment revenues, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Items which cannot be allocated and which comprise certain strategic investments, some debt securities, shared service assets/liabilities and related income/expenses are included in Corporate Center.
It is important to note that the 2005 segment information is based on IFRS including IAS 32 and IAS 39 and the 2004 segment information is based on IFRS excluding IAS 23 and IAS 39. With respect to the business segments, the tables in the relevant paragraphs on the SBUs earlier in this report display 2005 and 2004 information based on IFRS including IAS 32 and IAS 39.
NIBC comprises the following main business segments:
- Corporate Finance
- Financial Markets
- Real Estate Markets
- Investment Management
- Principal Investments
- Corporate Center
The SBU Corporate Finance focuses on originating and executing fi nancing, risk management and M&A advisory services for clients. Client-sector teams, together with product specialists operating in multidisciplinary teams, deliver a wide range of customised products and solutions.
The SBU Financial Markets focuses on the financial markets and worldwide distribution of NIBC’s assets. The SBUs main activities involve the credit-related arbitrage activities, risk management for clients and corporate treasury.
The SBU Real Estate Markets (REM) was created as a seperate SBU at the end of 2005. REM focuses on the origination, structuring and securitisation of residential mortgages and commercial real estate. The SBU develops and offers securitisation and fund solutions for other classes as well.
The SBU Investment Management includes the credit fixed income and the investment management activities of NIBC Credit Management. The results also include the majority interest in NIBC Wealth Management and Harcourt Investment Consulting.
The SBU Principal Investments comprises NIBC’s intermediate capital and private equity activities. These activities represent services for corporate finance clients in the form of innovative solutions to complex fi nancing problems.
The SBU Corporate Center supports all activities of NIBC. This support consists of shared services relating to human resources, group fi nance, corporate communications, information data management group, legal, corporate tax, internal audit group, compliance, and facilities & services. The Working Capital Management Sector (WCMS) also forms part of the Corporate Center. The WCMS manages the bank’s shareholders’ equity and the other assets and liabilities not allocated to the individual SBUs.
NIBC operates principally in Europe, but also has operations in North America and South-East Asia. In Europe operations are conducted in the Netherlands, Belgium, and the United Kingdom.
The presented information on the basis of geographical segments is based on the location of the NIBC enterprise that generated the revenue.
For the year ended December 31, 2005 net interest income includes interest accrued on impaired financial assets € 2 million (2004: € 0 million).
Income from debt and other fixed income instruments held for trading is recognised in interest and similar income.
For the net interest income the amount of change in fair value regarding hedged risk of the hedged items is € 69 million. The amount of amortisation of gains and losses of hedged items previously taken to interest income after a hedge has become ineff ective is € 39 million.
Income from equity investments and other non-fixed income instruments is recognised in dividend income. Dividend receipts of equity securities, classifi ed as Held for Trading, are recognised in the income statement under the net trading income item.
Interest income from debt and other fixed income instruments Held for Trading or designated as Fair Value through Profit or Loss is recognised in interest and similar income. Foreign exchange rate results are included in the relevant categories.
Under this item both realised and unrealised gains/losses from debt securities Held for Trading and debt securities classified as Fair Value through Profit or Loss are included.
Information about the pension charge is included in the employee benefit obligations section (note 37). Information about Stock Appreciation Rights scheme can be found in note 37. On a full-time equivalent basis, the average number of employees was 665 (2004: 650). In the variable compensation 2005 an amount of € 22 million is included in respect of the introduction of a Stock Option Plan (see note 37) as a result in change of ownership.
REMUNERATION OF THE STATUTORY BOARD MEMBERS
In the year under review, the average number of members of the Statutory Board appointed under the articles of association was 4,1 (2004: 4). The total remuneration (including pension costs) paid to the Statutory Board Members appointed under the articles of association amounted to € 5.3 million in 2005 (2004: € 5.1 million). The allocation of this amount (in euros) per member of the Statutory Board Members is as follows:
REMUNERATION OF THE SUPERVISORY BOARD MEMBERS
The remuneration of the Supervisory Board Members also relates to their position within NIBC N.V. and NIBC Bank N.V..
The members of the new Supervisory Board, appointed as of December 14, 2005, did not receive any remuneration in respect of the fi nancial year 2005.
Available tax relief facilities have been taken into account when determining the amount of tax. The difference between the effective tax rate and the average nominal tax rate is due in particular to losses that come within the scope of substantial holding exemption.
The amounts included in this item are available on demand.
Subordinated loans included in this item amount to € 4.8 million (2004: € 4.5 million). The fair value of the item due from other banks does not materially deviate from the face value, due to the short-term nature of the related assets.
The maximum credit risk exposure (including unused credit facilities) amounts to € 9,260 million.
Income from equity investments and other non-fixed-income instruments is recognised in dividend income. The fair value of the equity investments is based on the EVCA- methodology.
At December 31, 2005 there are no residential mortgages own book pledged as collateral for the NIBC’s own liabilities (we refer to note 42).
Interest income from residential mortgages own book is recognised in interest and similar income. Fair value movements (clean) are recognised in net trading income.
The maximum credit exposure is € 5,040 million (including unused credit facilities). We refer to the risk management paragraph for interest rate risk.
At December 31, 2005 securitised residential mortgages in the amount of € 8,449 million (2004: € 3,800 million) were pledged as collateral for the NIBC’s own liabilities (we refer to note 42).
Interest income from securitised residential mortgages is recognised in interest and similar income. Fair value movements (clean) are recognised in net trading income.The maximum credit exposure is € 8,449 million (including unused credit facilities).We refer to the risk management paragraph for interest rate risk.
The movement of the debt securities Fair Value Th rough Profit or Loss (initial recognition) may be summarised as follows:
NIBC can not freely dispose of a portfolio of debt securities amounting to € 116 million owing to the Latitude synthetic securitisation transaction.
We refer to the risk management paragraph for interest rate risk characteristics as well as eff ective interest rates.
Interest income from debt securities and other fixed-income instruments is recognised in interest and similar income. Fair value movements (clean) are recognised in net trading income.
DERIVATIVE FINANCIAL INSTRUMENTS – HEDGE ACCOUNTING
NIBC’s risk management policy is to hedge its exposure to interest rates and foreign currencies. Hedge accounting is only applied to hedges of interest rate risk. The Financial Risk Management paragraph describes the hedge accounting strategies applied in more detail.
Fair value hedges of interest rate risk
The fair value interest rate risk of financial assets with a fixed interest rate classifi ed as Available for Sale assets are hedged with interest rate swaps under which NIBC pays a fixed rate and receives floating rates. Fair Value hedge accounting is applied to these so-called hedge relationships.
Interest rate swaps under which NIBC pays a floating rate and receives a fixed rate, are used in fair value hedges of fixed interest rate liabilities (as far as not Held for Trading purposes or designated as Fair Value through Profit or Loss).
The following table discloses the fair value of the swaps held as fair value hedges.
Cash flow hedges of interest rate risk
Interest rate swaps are used to hedge exposures on floating rate loans and advances. The following table discloses the fair value of the swaps used as cash fl ow hedges.
At December 31, 2005 interest rate risk attributable to anticipated loans and advances or interest amounts with a floating character has not been hedged (as at 1 January 2005: € 1,353 million). The amount hedged represents 0 percent of total anticipated advances in that period (as at 1 January 2005: 71 percent).
In applying cash flow hedge accounting these assets generate uncertain (fl oating) interest rate cash flows, which are assumed to occur over a period of 10 years. The underlying assumption follows the risk management – balance sheet forecasting process in place.
The total amount of derivatives financial instruments recognised directly in equity is € 6 million. The total amount of derivatives financial instruments removed from equity to the income statement is € 3 million.
In 2005 all investments in associates are unlisted. In 2004 the fair value of investments in associates for which there are published price quotations is € 77 million.
There are no significant restrictions on the ability of associates to transfer funds to the investor in the form of cash dividends, or repayment of loans or advances.
There are no unrecognised share of losses of an associate, both for the period and cumulatively. We refer to note 47 for further details on the investments in associates.
The intangible assets fully relate to capitalised goodwill.
The impairment in 2004 relates to the disposal of NIB Capital Private Equity N.V.
Land and buildings in use by the company are insured for € 55.2 million. Furniture and equipment are insured for € 29.4 million.
There are no property and equipment pledged as security for liabilities.
There are no expenditures recognised in the carrying amount of property and equipment in the course of its construction at December 31, 2005 and December 31, 2004.
There are no contractual commitments for the acquisition of property and equipment at December 31, 2005 and December 31, 2004.
Investment property is stated at fair value. The fair value as at December 31, 2005 is based upon external appraisal done in 2003, 2004 and 2005.
Investment property is insured for €11 million.
The average effective tax rate at which the deferred tax assets have been recognised is
30%. The deferred tax assets are fully recognised in 2005 and 2004.
All temporary differences are includes in the deferred tax assets.
The recovery period for the deferred tax assets cannot be estimated, because a
substantial part relates to unrealised mark-to-market adjustments on assets.
Interest is recognised in interest expense and similar charges.
Interest is recognised in interest expense and similar charges.
Interest is recognised in interest expense and similar charges.
The amortisation of any discount or premium and interest related to the funding classified as other liabilities is recognised in interest expense and similar charges using the effective interest method.
In the aggregate current tax there are no items charged or credited to equity (2004: € 0 million). It is expected that the total tax provision will be settled within 12 months.
Deferred income tax assets and liabilities are attributable to the following items:
The average effective tax rate at which the deferred tax liabilities have been recognised
is 31%. The deferred tax liabilities are fully recognised in 2005 and 2004.
All temporary differences are included in the deferred tax liabilities.
The recovery period for the deferred tax liabilities cannot be estimated, because a
substantial part relates to unrealised mark-to-market adjustments on liabilities.
Pension benefit obligations
NIBC has established a number of pension schemes covering substantially all employees. Most of the pension schemes are defined benefit plans based on a maximised final pay salary and are funded. The assets of the funded plans are held independently of NIBC's assets in separate trustee administered funds. These schemes are valued annually by independent actuaries using the projected unit method. The latest actuarial valuation was caried out as at December 31, 2005.
Other post retirement obligations
Apart from the pension schemes NIBC operates a post retirement medical care scheme. The method of accounting and the frequency of the valuations are similar to those used for defined benefit pension schemes.
In addition to the assumptions used for pension schemes, the main actuarial assumption is long term increase in health costs of 5% (2004: 5%)
As at year-end 2005, there are no staff options on NIBC N.V. shares outstanding, all
options have been exercised during 2005 and ultimately settled in cash (see note 44).
Stock Appreciation Rights
A Stock Appreciation Right (SAR) scheme was introduced in 2001. A SAR entitles the holder to a share in the growth of the Net Asset Value (NAV) of NIBC N.V. The exercise value of part of the SARs awarded to Managing Directors (whether or not appointed under the Articles of Association) has been capped at € 126.37. As at December 31, 2005 all capped SARs have been converted in the Stock Option Plan (SOP). The expected costs of the outstanding of SARs are provided for. The provision is calculated based on the difference between the exercise price as at December 31, 2005 and the exercise price at the grant date plus a future expected annual return of 12% until maturity. Furthermore 15% annual staff turnover and a discount rate of 3.45% have been applied. The actual exercise price as per December 2005 was € 102.95. No new SARs has been awarded in respect of the financial year 2004. The SARs have been replaced by a Deferred Cash Plan for 2004. As from 2005 the plan has been replaced by the SOP. The movement schedule with the number of outstanding SARs is included in note 37.
Deferred Cash Plan
The deferred cash plan vest in 3-years starting January 1, 2006.
All deferred cash by the managing directors was converted in the Stock Option Plan.
Other employee benefit obligations are related to payments to be made to in-active staff and the staff time account which can be converted into cash or free time any time. These obligations are short term in nature and therefore valued at nominal value. € 9 million is payable within 12 months.
Stock Option Plan
The new shareholders of NIBC N.V. have opened up an opportunity for Managing Board members – and all other employees of the group – to invest in NIBC. For that reason a new Stock Option Plan (SOP) was designed in close co-operation with the new shareholders. This plan allowed Managing Board members and all other employees to convert the after tax proceeds of their accumulated rights under the Bank’s various deferred compensation arrangements into certificates of shares. All accumulated vested and unvested rights under the Stock Appreciation Rights Plan, the Deferred Cash Plan and the Liquidity Event Plan qualified for this conversion.
The opportunity to invest was offered in the firm belief that management and employee ownership which aligns personal financial interests with those of the other shareholders is instrumental in creating long term value for Bank. As an additional incentive for all those who chose to participate in the SOP, the shareholders off ered Matching Options for Common or Restricted Shares acquired. Additionally, the new shareholders have exercised their discretion to grant additional Management Options to the members of the Managing Board and selected executives. As at December 31, 2005 none of the restricted stock and options are vested, hence no liability is included in the balance sheet. We refer to note 41 for further details.
38. SUBORDINATED LIABILITIES
We refer to the risk management paragraph for fair value information, interest rate risk characteristics as well as eff ective interest rates.
All the above loans are subordinated to the other liabilities of the company. € 263 million qualifying as Tier-I capital for NIBC Bank N.V. is subordinated to other subordinated loans that rank pari passu. These securities are perpetual securities and may be redeemed by the Bank at its option after 10 years with the prior approval by the Dutch Central bank. Interest of € 25.7 million was paid on subordinated liabilities during the year.
39. SHAREHOLDERS’ EQUITY
The ultimate parent company is New NIB Limited, a company incorporated in Ireland. Copies of the annual report and consolidated annual accounts can be obtained from NIBC.
Other reserves comprise amounts appropriated for the purposes of adding to the statutory reserves.
Retained earnings comprise amounts which are available for distribution to the shareholders. As part of changes in the Netherlands Civil Code, a revaluation reserve is required in the statutory financial statements if the fair value of assets is not based on frequent market quotations. Currently there is an industry wide discussion in the Netherlands on the interpretation of these capital protection rules. This is among others focused on the unrealised fair value changes of OTC derivatives held for trading or used for hedging purposes. This might affect the level of the distributable reserves of NIBC. Based on legal advice of The Dutch Banker's Association (known as NVB) and The Confederation of Netherlands Industry and Employers (known as VNO-NCW) NIBC's view is that no such revaluation reserve is required. The dividend proposal for 2005 is based on this assumption.
40. REPURCHASE AND RESALE AGREEMENTS
As at December 31, 2005 and 2004 there were no repurchase and resale agreements.
41. COMMITMENTS AND CONTINGENT ASSETS & LIABILITIES
At any time NIBC has outstanding commitments to extend credit. Outstanding loan commitments have a commitment period that does not extend beyond the normal underwriting and settlement period of one to three months. Commitments extended to customers related to mortgages at fixed interest rates or fixed spreads are hedged with interest rate swaps recorded at fair value. These commitments are designated upon initial recognition as Fair Value Th rough Profit or Loss.
NIBC provides financial guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to five years. Expirations are not concentrated in any period.
The contractual amounts of commitments (excluding mortgages commitments which are measured at Fair Value through Profit or Loss) and contingent liabilities are set out in the following table by category. In the table it is assumed that amounts are fully advanced. The amounts for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the balance sheet date if counterparties failed completely to perform as contracted.
These commitments and contingent liabilities have off balance-sheet credit risk because only commitment/ origination fees and accruals for probable losses are recognised in the balance sheet until the commitments are fulfilled or expire. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part. Therefore, the amounts do not represent expected future cash fl ows. Details of concentrations of credit risk including concentrations of credit risk arising from commitments and contingent liabilities as well as NIBC’s policies for collateral for loans are set out in the financial risk management paragraph.
42. ASSETS PLEDGED AS SECURITY
Assets have been pledged as security in respect of the following liabilities and contingent liabilities:
Details of the carrying amounts the assets pledged as collateral are as follows:
43. ASSETS UNDER MANAGEMENT
NIBC provides collateral management services, whereby it holds and manages assets or invests funds received in various financial instruments on behalf of the customer. NIBC receives fee income for providing these services. Assets under management are not assets of NIBC and are not recognised in the consolidated balance sheet. NIBC is not exposed to any credit risk relating to such placements, as it does not guarantee these investments.
At December 31, 2005 the total assets held by NIBC on behalf of customers were € 6,887 million (2004: € 4,865 million).
44. RELATED PARTY TRANSACTIONS
In the tables below the related parties transactions wiThemployees are shown. Further disclosures are included in notes 8 and 37.
OPTIONS 2000 / 2001
As at year-end 2005 all options on NIBC N.V. shares were exercised.
As at the year-end 2005 1,886,199 common shares NIBC Holding N.V. were in issue. Although commonly referred to as Restricted Shares these are, in fact, Depository Receipts with restrictions.
As at the year-end 2005 498,448 restricted shares NIBC Holding N.V. were in issue. Although commonly referred to as Restricted Shares these are, in fact, Depository Receipts with restrictions.
SHARE OPTIONS 2005/2006
As at the year-end 2005 4,571,596 share options on NIBC Holding N.V. were in issue (4).
45. DISCONTINUED OPERATIONS
On 20 December 2005, the Group discontinued NIBC Petercam Derivatives N.V. The entity was liquidated on December 20, 2005.
NIBC Petercam Derivatives was a joint venture specialized in equity linked derivative structures.
Parent companies were NIBC Bank N.V. and Petercam N.V. Belgium.
NIBC Petercam Derivatives was part of the BU Client Marketing & Trading.
We refer to note 46 for the cash flow statement of NIBC Petercam Derivatives N.V.
The balance sheet and income statement follow below:
In view of the control exercised by the government over the policy of the Group’s wholly owned associate De Nederlandse Participatie Maatschappij voor de Nederlandse Antillen N.V. (NPMNA), this company has not been treated as a subsidiary.
48. SUBSEQUENT EVENTS
On December 14, 2005 a Share Purchase Agreement with the Vontobel Group has been signed to sell NIBC's 55.81% share in Harcourt Investment Consulting A.G. The transaction has been closed on February 2, 2006.
In the consolidated financial statements 2005 Harcourt Investment Consulting A.G. is included as follows:
Company Annual Accounts
Company Accounting Policies
BASIS OF PREPARATION
The principal accounting policies applied in the preparation of the company annual accouns are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
The annual accounts have been prepared in accordance with the legal requirements for annual accounts contained in Title 9, Book 2, of the Netherlands Civil Code. NIBC applies the provisions in Section 362, paragraph 8, Book 2, of the Netherlands Civil Code, that make it possible to prepare the company annual accounts in accordance with the accounting policies (including those for the presentation of financial instruments as equity or liability) used in its consolidated annual accounts.
The annual accounts are presented in euro, rounded to the nearest million. The euro is the functional and presentation currency of NIBC N.V.
CHANGES IN ACCOUNTING POLICIES
Selection and application of accounting policies
As from financial year 2005 NIBC prepares its consolidated annual accounts in accordance with IFRS. The first time adoption of IFRS has lead to changes in the applied accounting policies for assets, provisions and liabilities (‘FTA adjustments’). Except for the adjustments relating to financial instruments, these FTA adjustments are to a large extent applied retrospectively in the comparative information for 2004. The adjustments relating to financial instruments are carried through as per 1 January 2005.
NIBC has decided to prepare the company annual accounts for 2005 in accordance with the accounting policies (including those for the presentation of financial instruments as equity or liability) used in its consolidated annual accounts. Th is change improves the information provided by the company annual accounts. In principle, the reported figures for equity and net income in the consolidated annual accounts are equal to the concerned figures reported in the company annual accounts, which is generally accepted in The Netherlands. Moreover, the application of one set of accounting policies for associates simplifi es reporting.
As compared to the annual accounts 2004 this has lead to:
- a change in equity as per 1 January 2004 and 31 December 2004 as a result of FTA adjustments;
- a change in net income for 2004 as a result of FTA adjustments; and
- a change in equity as per 1 January 2005 as a result of the adjustments relating to financial instruments.
The impact of the changes in accounting policies on equity and net income is equal to the information provided in respect of the FTA adjustments (See section “IFRS First Time Adoption” in the consolidated annual accounts) and the change in accounting policies for financial instruments (See section “Summary of significant accounting policies” ).
Composition of equity
As from 1 January 2005 the applicable legal provisions with respect to the creation and maintenance of statutory and revaluation reserves have changed. As a result of these legal provisions and the changes in accounting policies, the composition of equity has changed. We refer to the note 5 on shareholder’s equity in the company annual accounts.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies applied for the company annual accounts are the same as those for the consolidated annual accounts. Reference is made to the accounting policies as stated in the consolidated annual accounts when no further accounting policies are stated.
Goodwill is measured in accordance with the accounting policies used in the consolidated annual accounts. The goodwill reflected in the company balance sheet is related to direct interests in group companies. Goodwill paid for direct investments in associates is a component of the acquisition cost and therefore included in the value of these associates. Goodwill acquired through indirect investments in group companies is recognised at the acquiring group company level and included in the net asset value of that group company.
Investments in subsidiaries
Subsidiaries, as defined in section “Summary of significant accounting policies” in the basis of consolidation of subsidiaries (in the notes to the consolidated annual accounts), are measured at net asset value. Net asset value is determined by measuring the assets, provisions, liabilities and income based on the accounting policies used in the consolidated annual accounts.
In determining the net asset value the transitional provisions for recognition and measurement and the accounting policies for first time adoption of IFRS in the consolidated annual accounts have been applied.
If losses of group companies that are attributable to the company exceed the carrying value of the interest in the group company (including separately presented goodwill, if any, and including other non-secured receivables), further losses are not recognised unless the company has incurred obligations or made payments on behalf of the group company to satisfy obligations of the group company. In such a situation, the company recognises a provision up to the extent of its obligation.
NOTES TO THE COMPANY ANNUAL ACCOUNTS
For details of the shareholders’ equity we also refer to note 39 of the consolidated annual accounts.
The total amount included on December 31, 2005 in the items retained earnings and net result attributable to parent shareholders with respect to fair value changes of residential mortgages (own book and securitised) and changes in fair value of derivatives related to the residential mortgages (own book and securitised) is € 56 million.
As part of changes in the Netherlands Civil Code, a legal reserve is required in the statutory financial statements if the fair value of assets is not based on frequent market quotations. Currently there is an industry wide discussion in the Netherlands on the interpretation of these capital protection rules. This is among others focused on the unrealised fair value changes of OTC derivatives held for trading or used for hedging purposes. This might affect the level of the distributable reserves of NIBC. Based on legal advice of The Dutch Banker's Association (known as NVB) and the Confederation of Netherlands Industry and Employers (known as VNO-NCW) NIBC's view is that no such legal reserve is required. The dividend proposal for 2005 is based on this assumption.
For the remuneration of the managing board and supervisory board reference is made to notes 8 and 44 of the consolidated annual accounts.
COMMITMENTS NOT SHOWN IN THE BALANCE SHEET
Guarantees within the meaning of Section 403, Book 2, of the Netherlands Civil Code have been given on behalf of NIBC Investments N.V. and NIBC Investment Management N.V. Declarations of joint and several liability have also been made to respective supervisory monetary authorities of DNI Inter Asset Bank N.V., NIBC Bank (NA) N.V. and NIBC Bank Ltd.
The Hague, March 2, 2006
|Managing Board||Supervisory Board|
|Michael Enthoven,Chairman||J. H. M. Lindenbergh,Chairman|
|Jurgen B.J. Stegmann,Vice-Chairman, Chief Risk Officer||J. C. Flowers,Vice-Chairman|
|Kees van Dijkhuizen, Chief Financial Officer||C.H. van Dalen|
|Jan L. van Nieuwenhuizen||W.M. van den Goorbergh|
|J. Rodriguez Inciarte|
|A. de Jong|
|D. B. Marron|
To the shareholders of NIBC N.V.
In accordance with your assignment we have audited the annual accounts of NIBC N.V., The Hague, for the year 2005 as set out on pages 102 to 199 and pages 42 to 71 (paragraphs 1 to 4 of the chapter Risk Management). These annual accounts consist of the consolidated annual accounts and the company annual accounts. These annual accounts are the responsibility of the company’s management. Our responsibility is to express an opinion on these annual accounts based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the annual accounts. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the annual accounts. We believe that our audit provides a reasonable basis for our opinion.
Opinion with respect to the consolidated annual accounts
In our opinion, the consolidated annual accounts give a true and fair view of the financial position of the company as at December 31, 2005 and of the result and the cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU and also comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code as far as applicable.
Furthermore, we have to the extent of our competence, established that the annual report is consistent with the consolidated annual accounts.
Opinion with respect to the company annual accounts
In our opinion, the company annual accounts give a true and fair view of the financial position of the company as at December 31, 2005 and of the result for the year then ended in accordance with accounting principles as generally accepted in the Netherlands and also comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands Civil Code.
Furthermore, we have to the extent of our competence, established that the annual report is consistent with the company annual accounts.
Amsterdam, March 2, 2006
PricewaterhouseCoopers Accountants N.V.
J. van Hees RA
See note 48 of the consolidated annual accounts.
The annual general meeting of shareholders will be invited to approve a proposal to distribute a cash dividend of € 102 million in respect of the year under review.
PROVISIONS OF THE ARTICLES OF ASSOCIATION CONCERNING PROFIT APPROPRIATION
ARTICLE 16 OF THE ARTICLES OF ASSOCIATION READS AS FOLLOWS:
- The distributable profits shall be at the disposal of the General Meeting for distribution of dividend or allocation to the reserves or for such other purposes within the company’s objects as the General Meeting shall decide.
- The company may make distributions to shareholders and other persons entitled to distributable profits only to the extent that the shareholders’ equity exceeds the sum of the paid and called-up part of the share capital and the reserves to be maintained by law. In calculating the appropriation of profits, the shares held by the company in its own share capital shall not be taken into account.
- Distribution of profits shall take place after the adoption of the annual accounts evidencing that the distribution is permitted.
- Subject to the provisions of the second paragraph and Article 105, paragraph 4, Book 2, Dutch Civil Code, the General Meeting may resolve to distribute one or more interim dividends and/or any other interim distributions. No distributions shall be made without the approval of the General Meeting.
- Dividends shall be payable immediately after they have been declared, unless the General Meeting stipulates otherwise.
- Any claim for payment of dividends shall lapse on the expiry of a period of fi ve years.