RBS 2003 Annual Report Download - page 61

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Operating and financial review
Annual Report and Accounts 2003
Accounting developments
UK GAAP
The Accounting Standards Board published FRS 5 Application
Note G Revenue recognition that is applicable to the Group for
the year ended 31 December 2003. No changes to the Group’s
revenue recognition policies were required.
UITF Abstract 37 ‘Purchases and sales of own shares’ had no
impact on the Group because no own shares are deemed to
be under the control of Group companies.
UITF Abstract 38 ‘Accounting for ESOP trusts’ and the
consequential amendment to UITF Abstract 17 ‘Employee
shares schemes’ which are mandatory for accounting periods
ending on or after 23 June 2004 are not expected to have a
material effect on the Group.
International Financial Reporting Standards
In June 2002, the European Union adopted a regulation that
requires, from 1 January 2005, listed companies to prepare
their financial statements in accordance with international
accounting standards. The Group’s 2005 financial statements
will therefore be prepared in accordance with International
Financial Reporting Standards (“IFRS”). These comprise not
only IFRS but also International Accounting Standards (“IAS”).
In the light of the European Union decision, the International
Accounting Standards Board (“IASB”) announced its
commitment to have a platform of high quality, improved
standards in place by the end of March 2004 and its intention
to avoid mandatory accounting changes between 2004 and
2006. Adoption of new standards issued in that period would
be discretionary. A number of new or revised standards that
will be effective for 2004 have only recently, or not yet, been
finalised. These include standards of major significance for
the Group, in particular IAS 32 ‘Financial Instruments:
Disclosure and Presentation’ and IAS 39 ‘Financial Instruments:
Recognition and Measurement’. Revised versions of IAS 32
and IAS 39 were published on 18 December 2003 and the
IASB’s proposals on macro-hedging are expected to be
completed by the end of March 2004.
During 2003, the Group initiated a programme to change its
accounting policies and practices to be IFRS compliant by
2005. A dedicated project team has been assembled and
separate work streams established for each difference in
accounting that will require significant effort to implement.
Activities during 2003 included documenting differences between
the Group’s current accounting policies and IFRS, detailed
planning for the move to IFRS, identification of implementation
methodologies, the specification of IT requirements and raising
awareness of IFRS throughout the Group.
IFRS differ in certain significant respects from the Group’s
accounting policies under UK GAAP. The summary below
outlines the important differences for the Group in respect of
recognition and measurement on the basis of extant IFRS that
will be effective for 2005, including revised IAS 32 and IAS 39:
Dividends – IFRS require dividends payable to be recorded in
the period in which they are declared whereas under UK GAAP
dividends are recorded in the period to which they relate.
Computer software – under UK GAAP, most software
development costs are written off as incurred. Under IFRS,
such costs are capitalised if certain conditions are met and
amortised over the estimated useful life of the software.
Pensions – under UK GAAP, the cost of defined benefit pension
schemes and healthcare plans is determined by independent
professionally qualified actuaries using the projected unit
method and recognised on a systematic basis over employees’
service lives. Scheme liabilities are discounted at a long-term
stable rate. Under IFRS, scheme liabilities are discounted at
the market rate on high quality corporate bonds. Actuarial
gains and losses must be amortised, on a straight-line basis
over the expected average remaining working lives of
employees, to income or expense if they amount cumulatively
to more than 10% of the present value of scheme liabilities or
10% of the fair value of scheme assets.
Financial instruments: financial assets – under UK GAAP, loans
are measured at cost less provisions for bad and doubtful
debts, derivatives held for trading are carried at fair value and
hedging derivatives are accounted for in accordance with the
treatment of the item being hedged (see ‘Derivatives and
hedging’ below), and securities are classified as being held as
investment securities, or held for dealing purposes. Investment
debt securities are stated at cost less provision for any
permanent diminution in value. Premiums and discounts on
dated securities are amortised to interest income over the
period to maturity. Other securities are carried at fair value.
Under IFRS, financial assets are classified into held-to-maturity;
available-for-sale; held for trading; designated as fair value
through profit or loss; and loans and receivables. Financial
assets classified as held-to-maturity or as loans and
receivables are carried at amortised cost. Other financial
assets are measured at fair value. Changes in the fair value of
available-for-sale financial assets are reported in a separate
component of shareholders’ equity. Changes in the fair value of
financial assets held for trading or designated as fair value are
taken to the profit and loss account. Financial assets can be
classified as held-to-maturity only if they have a fixed maturity
and the reporting entity has the positive intention