The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. 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. As management judgement involves an estimate of the likelihood of future events, actual results could differ from those estimates, which could affect the future reported amounts of assets and liabilities.

Management believes that the underlying assumptions used are appropriate and that the Group’s financial statements therefore present the financial position and results fairly. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are described as follows:

3.1 Impairment of loans and receivables and related derivatives acquired

The Group’s policy is to review its portfolio of loans and receivables for impairment semi-annually. In determining whether an impairment loss should be recorded in the consolidated income statement at the reporting date, the Group makes judgements as to whether any observable data exists indicating evidence of impairment which would be likely to result in a measurable delay in timings or decrease in amounts of the estimated future cash flows. The Group’s policy on impairment of financial assets is set out in accounting policy 2.12.

Loans and receivables are either individually assessed or grouped together and collectively assessed for impairment.

During 2014 the majority of the debtor connections, both NAMA and PI/SP managed were individually assessed for impairment. This differs to 2013, where the majority of the individually assessed debtors related to NAMA managed connections only and PI/SP managed connections were grouped together and collectively assessed for impairment.

In 2013 NAMA commenced a process for preparing cash flow information for all PI managed debtors. By 30 June 2014, full cash flow information was available to NAMA for the PI/SP managed portfolio and the impairment provisions for this portfolio were recognised at a debtor connection level rather than applying a loss rate to the group of debtor connections managed by the PI/SP. The availability of detailed cash flow information on assets managed by PI’s increased the loss rate on the PI/SP managed portfolio. Debtor connections where detailed cash flows were not prepared, representing €0.08bn of the loan portfolio are grouped together and collectively assessed for impairment in the year-end assessment.

The impairment charge for 2014 is €137m (2013: €914m). The total cumulative impairment provision is €3,521m (2013: €4,125m), representing a coverage of 21% of the total loans and receivables balance at 31 December 2014 (2013: 17.5%).

Individually assessed debtors

Loans and receivables and associated derivatives individually assessed for impairment at the reporting date were €16.2bn (2013: €19.6bn).

The impairment assessment of individually assessed debtors is based on cash flow projections which were prepared by individual case managers and reviewed by management for each individually assessed debtor connection.

The cash flows reflect NAMA’s best estimate of expected future cash flows for each individually assessed debtor and include the future estimated cash flows from the disposal of property collateral and other non-disposal income (such as rental income).

The projection of cash flows involves the exercise of considerable judgement and estimation by management (taking into account the actual underlying cash flows) involving assumptions in respect of local economic conditions, the performance of the debtor and the value of the underlying property collateral. As a result the actual cash flows, and their timing, may differ from the projected cash flows prepared by management for the purposes of determining the amount of impairment provision for individually significant debtors. Cash flow projections are prepared generally based on the most recently agreed strategy for each debtor. Cash flow estimates may change if there is a change in a strategy for example from an asset disposal strategy to a loan sale strategy.

The assumptions used for projecting both the amount and timing of future cash flows for individual debtors are reviewed regularly by management and cash flow projections are updated.

Following the completion of all individual debtor cash flows these are grouped together and the cash flows are subject to sensitivity analysis to assess the likely impact on the impairment provision of a change in the timing and amount of cash flows.

Sensitivity analysis

The 2014 impairment provision is determined after the following inputs are assessed:

• Estimated cash flows generated from underlying security as collateral to a loan


• Expected disposal value of the underlying security


• Expected timing of the realisation of cash flows including the timing of the expected future disposal of the security.

Following the completion of a detailed cash flow assessment of debtors with a combined outstanding loan value of €16.2bn (2013: €19.6bn) the consolidated results of this cash flow assessment allow NAMA to apply certain sensitivities to its portfolio and assess the impact of these sensitivities on the impairment provision.

Individual cash flows are projected for each individual property (collateral) asset. These are then consolidated into a single cash flow for each debtor connection for the purposes of the impairment assessment exercise.

NAMA performs its sensitivity analysis at a property (collateral) asset level. In practice, this means the projected disposal value for each individual property asset by location is reduced by 1%. The debtor connection cash flows are then updated with the revised projected disposal values and a revised impairment provision is calculated for each debtor connection. The overall revised provision is then compared to the actual impairment provision to demonstrate the impact of a 1% reduction in projected disposal values.

The table below sets out the impact (in €m) on the 2014 impairment provision of a 1% change in the amount of disposal cash flows over certain geographies and asset types.

	Ireland €m	UK (including Northern Ireland) €m	ROW €m	2014 Total €m	Ireland €m	UK (including Northern Ireland) €m	ROW €m	2013 Total €m
Land and development	23	2	1	26	25	4	2	31
Residential	16	1	1	18	15	3	1	19
Commercial	10	3	2	15	18	4	2	24
Retail	12	1	-	13	21	8	1	30
Hotel and leisure	4	-	2	6	6	3	3	12
Total effect of 1% change	65	7	6	78	85	22	9	116

The net present value of cash flows is also affected by the timing of their realisation arising from the sale of assets. Therefore sensitivity analysis was also undertaken on the timing of the realisation of projected cash flows to assess the potential maximum impact on the impairment charge. This exercise, which was conducted without taking account of whether the underlying collateral assets relate to impaired connections, indicates that for each €1 billion in projected disposal cash flows which are moved from 2015 to 2016, an additional impairment charge of the order of €50m would arise. This amount was estimated without taking account of potential additional non-disposal income and without factoring in potential future upside to the cash flows. The maximum potential additional impairment charge estimated under this exercise amounts to around €160m.

Collectively assessed debtors

Debtors that are not individually assessed are considered collectively for the purposes of performing an impairment assessment (‘collective assessment’). The total value of loans and receivables subject to collective assessment is €78m (2013: €3,576m). This relates predominantly to debtor connections where there are no assets remaining in the connection and therefore no cash flow forecasts were prepared. The collective portfolio impairment provision is €75m (2013: €822m), which represents coverage of 95% (2013: 23%) of the collectively assessed portfolio.

An independent review is carried out by NAMA’s internal auditors of the impairment process annually. The scope of this review includes assessing the impairment review process and the accuracy and completeness of inputs to the individual and collective assessments.

3.2 Income recognition on loans and receivables

EIR income recognition

The accounting policy for the recognition of interest income for loans and receivables is set out in accounting policy 2.9. The original loan portfolio acquired by the Group was acquired at a significant discount to the Par value of the loans, reflecting loan losses already incurred on the loans pre acquisition by NAMA. The EIR of this portfolio is set as the discount rate that equates the present value of the cash flows assumed in the loan acquisition valuation model to the acquisition value. This rate is set at valuation date and becomes the original EIR of the loan.

Actual cash flows over the life of a debtor may differ positively or negatively from the expected cash flows assumed in the acquisition valuation model. The Group reviews expected cash flows semi-annually as part of its impairment review (see Note 3.1). Any changes to assumptions would have an impact on interest income on loans and receivables carried at amortised cost as disclosed in Note 5. Interest income will not be recognised on any impaired portion of an asset, thus reducing interest income where revised estimated cash flows are less than the original expected cash flows in the loan acquisition model.

3.3 Surplus income

The Group’s policy is to review its portfolio of debtors for surplus income semi-annually. The Group recognises surplus income in two instances:

1. Debtors who have made debt repayments in excess of their NAMA debt. These repayments resulted in the recognition of €243m in 2014 (2013: €306m).


2. Debtors with positive net present values and who have passed stringent stressed conditions. The Group realised €330m (2013: €225m) from these debtors in 2014.

The net present value (NPV) for each individually assessed debtor involves the projection of their future cash flows (including the future estimated cash flows from the disposal of property collateral and other non-disposal income). The estimated discounted future cash flows are then compared to their carrying value in order to calculate the NPV surplus for each debtor.

In the case of debtors that result in a NPV positive value, stringent stressed conditions are then applied which may result in the recognition of surplus income for a very limited number of debtors with significant positive NPVs. These stressed conditions which include an assessment of the level of workout of the debtor and the application of a NPV sensitivity buffer are assessed semi-annually.

The projection of cash flows involves the exercise of judgement and estimation by management, as a result the actual cash flows, and their timing, may differ from the projected cash flows. Assumptions used for the cash flow projections are reviewed and updated regularly by management.