RBS 2003 Annual Report Download - page 142

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15 Derivatives
The Group enters into derivative transactions including futures,
forwards, swaps and options principally in the interest rate,
foreign exchange and equity markets. The accounting
treatment for these instruments is dependent upon whether
they are entered into for trading or non-trading (hedging)
purposes.
Trading
Derivatives held for trading purposes are recognised in the
accounts at fair value. Gains or losses arising from changes in
fair value are included in dealing profits in the consolidated
profit and loss account. Fair value is based on quoted market
prices. Where representative market prices are not available,
the fair value is determined from current market information
using appropriate pricing or valuation models. Adjustments are
made to quoted market prices where appropriate to cover
credit risk, liquidity risk and future operational costs. In the
consolidated balance sheet, positive fair values (assets) of
trading derivatives are included in Other assets and negative
fair values (liabilities) in Other liabilities. Positive and negative
fair values of trading derivatives are offset where the contracts
have been entered into under master netting agreements or other
arrangements that give a legally enforceable right of set-off.
Non-trading
Non-trading derivatives are entered into by the Group to hedge
exposures arising from transactions entered into in the normal
course of banking activities. They are recognised in the
accounts in accordance with the accounting treatment of the
underlying transaction or transactions being hedged. To be
classified as non-trading, a derivative must match or eliminate
the risk inherent in the hedged item from potential movements
in interest rates, exchange rates or market values. In addition,
there must be a demonstrable link to an underlying transaction,
pool of transactions or specified future transaction or
transactions. Specified future transactions must be reasonably
certain to arise for the derivative to be accounted for as a
hedge. In the event that a non-trading derivative transaction is
terminated or ceases to be an effective hedge, the derivative is
re-measured at fair value and any resulting profit or loss
amortised over the remaining life of the underlying transaction
or transactions being hedged. If a hedged item is
derecognised, or a specified future transaction is no longer
likely to occur, the related non-trading derivative is remeasured
at fair value and the resulting profit or loss taken to the profit
and loss account.
16 Sale and repurchase transactions
Securities which have been sold with an agreement to
repurchase continue to be shown on the balance sheet and
the sale proceeds recorded as a deposit. Securities acquired
in reverse sale and repurchase transactions are not
recognised in the balance sheet and the purchase price is
treated as a loan. The difference between the sale price and
repurchase price is accrued evenly over the life of the
transaction and charged or credited to the profit and loss
account as interest payable or receivable.
Accounting policies continued
Accounting policies