RBS 2005 Annual Report Download - page 141

section
03
Financial
statements
139
Accounting policies
Annual Report and Accounts 2005
Rental income from operating leases is credited to the income
statement on a receivable basis over the term of the lease.
Operating lease assets are included within Property, plant
and equipment and depreciated over their useful lives (see
note 7 above).
11. Insurance
General insurance
General insurance comprises short-duration contracts
principally property and liability insurance contracts. Due to
the nature of the products sold – retail-based property and
casualty, motor, home and personal health insurance contracts
– the insurance protection is provided on an even basis
throughout the term of the policy.
Premiums from general insurance contracts are recognised in
the accounting period in which they begin. Unearned premiums
represent the proportion of the net premiums that relate to
periods of insurance after the balance sheet date and are
calculated over the period of exposure under the policy, on a
daily basis, 24th’s basis or allowing for the estimated incidence
of exposure under policies which are longer than twelve
months. Provision is made where necessary for the estimated
amount of claims over and above unearned premiums including
that in respect of future written business on discontinued lines
under the run-off of delegated underwriting authority
arrangements. It is designed to meet future claims and related
expenses and is calculated across related classes of business
on the basis of a separate carry forward of deferred acquisition
expenses after making allowance for investment income.
Acquisition expenses relating to new and renewed business
for all classes are expensed over the period during which the
premiums are earned. The principal acquisition costs so
deferred are commissions payable, costs associated with the
telesales and underwriting staff and prepaid claims handling
costs in respect of delegated claims handling arrangements for
claims which are expected to occur after the balance sheet
date. Claims and the related reinsurance are recognised in the
accounting period in which the loss occurs. Provision is made
for the full cost of settling outstanding claims at the balance
sheet date, including claims estimated to have been incurred but
not yet reported at that date, and claims handling expenses. The
related reinsurance receivable is recognised at the same time.
Life assurance
The Group’s long-term assurance contracts include whole-life
term assurance, endowment assurance, flexible whole-life,
pension and annuity contracts that are expected to remain in
force for an extended period of time. Long-term assurance
contracts under which the Group does not accept significant
insurance risk are classified as financial instruments.
The Group recognises the value of in-force long-term
assurance contracts as an asset. Cash flows associated with
in-force contracts and related assets, including reinsurance
cash flows, are projected, using appropriate assumptions as to
future mortality, persistency and levels of expenses and
excluding the value of future investment margins, to estimate
future surpluses attributable to the Group. These surpluses,
discounted at a risk-adjusted rate, are recognised as a
separate asset. Changes in the value of this asset, which is
determined on a post-tax basis, are included in operating profit.
The Group has reinsurance treaties that transfer significant
insurance risk. Liabilities for reinsured contracts are calculated
gross of reinsurance and a separate reinsurance asset recorded.
Premiums on long-term insurance contracts are recognised as
income when receivable. Claims on long term insurance
contracts reflect the cost of all claims arising during the year,
including claims handling costs. Claims are recognised when
the Group becomes aware of the claim.
12. Taxation
Provision is made for taxation at current enacted rates on
taxable profits, arising in income or in equity, taking into
account relief for overseas taxation where appropriate.
Deferred taxation is accounted for in full for all temporary
differences between the carrying amount of an asset or liability
for accounting purposes and its carrying amount for tax
purposes, except in relation to overseas earnings where
remittance is controlled by the Group, and goodwill.
Deferred tax assets are only recognised to the extent that it is
probable that they will be recovered.
13. Financial assets
Financial assets are classified into held-to-maturity investments;
available-for-sale financial assets; held-for-trading; designated
as at fair value through profit or loss; or loans and receivables.
Held-to-maturity investments – a financial asset is classified as
a held-to-maturity investment only if it has fixed or determinable
payments, a fixed maturity and the Group has the positive
intention and ability to hold to maturity. Held-to-maturity
investments are initially recognised at fair value plus directly
related transaction costs. They are subsequently measured at
amortised cost using the effective interest method (see note 4
above) less any impairment losses.
Held-for-trading – a financial asset is classified as held-for-
trading if it is acquired principally for the purpose of selling in
the near term, or forms part of a portfolio of financial
instruments that are managed together and for which there is
evidence of short-term profit taking, or it is a derivative (not in
a qualifying hedge relationship). Held-for-trading financial
assets are recognised at fair value with transaction costs being
recognised in profit or loss. Subsequently they are measured
at fair value. Gains and losses on held-for-trading financial
assets are recognised in profit or loss as they arise.
Designated as at fair value through profit or loss – financial
assets that the Group designates on initial recognition as being
at fair value through profit or loss are recognised at fair value,
with transaction costs being recognised in profit or loss and
are subsequently measured at fair value. Gains and losses on
financial assets that are designated as at fair value through
profit or loss are recognised in profit or loss as they arise.
Financial assets may be designated as at fair value through
profit or loss only if such designation (a) eliminates or
significantly reduces a measurement or recognition
inconsistency; or (b) applies to a group of financial assets,
financial liabilities or both that the Group manages and