RBS 2005 Annual Report Download - page 142

140
Accounting policies
evaluates on a fair value basis; or (c) relates to an instrument
that contains an embedded derivative which is not evidently
closely related to the host contract.
The principal category of financial assets designated as at fair
value through profit or loss is policyholders’ assets
underpinning insurance and investment contracts issued by
the Group's life assurance businesses. Fair value designation
significantly reduces the measurement inconsistency that
would arise if these assets were classified as available-for-sale.
Loans and receivables – non-derivative financial assets with
fixed or determinable repayments that are not quoted in an
active market are classified as loans and receivables except
those that are classified as available-for-sale or as held-for-
trading, or designated as at fair value through profit or loss.
Loans and receivables are initially recognised at fair value plus
directly related transaction costs. They are subsequently
measured at adjusted cost using the effective interest method
(see note 4 above) less any impairment losses.
Available-for-sale – financial assets that are not classified as
held-to-maturity; held-for-trading; designated at fair value
through profit or loss; or loans and receivables are classified as
available-for-sale. Financial assets can be designated as
available-for-sale on initial recognition. Available-for-sale
financial assets are initially recognised at fair value plus directly
related transaction costs. They are subsequently measured at
fair value. Impairment losses and exchange differences
resulting from retranslating the amortised cost of currency
monetary available-for-sale financial assets are recognised in
profit or loss together with interest calculated using the effective
interest rate (see note 4 above). Other changes in the fair value
of available-for-sale financial assets are reported in a separate
component of shareholders’ equity until disposal, when the
cumulative gain or loss is recognised in profit or loss.
Regular way purchases of financial assets classified as loans
and receivables are recognised on settlement date; all other
regular way purchases are recognised on trade date.
Fair value for a net open position in a financial asset that is
quoted in an active market is the current bid price times the
number of units of the instrument held. Fair values for financial
assets not quoted in an active market are determined using
appropriate valuation techniques including discounting future
cash flows, option pricing models and other methods that are
consistent with accepted economic methodologies for pricing
financial assets.
14. Impairment of financial assets
The Group assesses at each balance sheet date whether there
is any objective evidence that a financial asset or group of
financial assets classified as held-to-maturity, available-for-sale
or loans and receivables is impaired. A financial asset or
portfolio of financial assets is impaired and an impairment loss
incurred if there is objective evidence that an event or events
since initial recognition of the asset have adversely affected
the amount or timing of future cash flows from the asset.
Financial assets carried at amortised cost – if there is objective
evidence that an impairment loss on a financial asset or group of
financial assets classified as loans and receivables or as held-
to-maturity investments has been incurred, the Group measures
the amount of the loss as the difference between the carrying
amount of the asset or group of assets and the present value of
estimated future cash flows from the asset or group of assets
discounted at the effective interest rate of the instrument at initial
recognition. Impairment losses are assessed individually for
financial assets that are individually significant and individually
or collectively for assets that are not individually significant. In
making collective assessment of impairment, financial assets
are grouped into portfolios on the basis of similar risk
characteristics. Future cash flows from these portfolios are
estimated on the basis of the contractual cash flows and
historical loss experience for assets with similar credit risk
characteristics. Historical loss experience is adjusted, on the
basis of current observable data, to reflect the effects of current
conditions not affecting the period of historical experience.
Impairment losses are recognised in profit or loss and the
carrying amount of the financial asset or group of financial
assets reduced by establishing an allowance for impairment
losses. If in a subsequent period the amount of the impairment
loss reduces and the reduction can be ascribed to an event
after the impairment was recognised, the previously recognised
loss is reversed by adjusting the allowance. Once an
impairment loss has been recognised on a financial asset or
group of financial assets, interest income is recognised on the
carrying amount using the rate of interest at which estimated
future cash flows were discounted in measuring impairment.
Financial assets carried at fair value – when a decline in the
fair value of a financial asset classified as available-for-sale
has been recognised directly in equity and there is objective
evidence that the asset is impaired, the cumulative loss is
removed from equity and recognised in profit or loss. The loss
is measured as the difference between the amortised cost of
the financial asset and its current fair value. Impairment losses
on available-for-sale equity instruments are not reversed
through profit or loss, but those on available-for-sale debt
instruments are reversed, if there is an increase in fair value
that is objectively related to a subsequent event.
15. Financial liabilities
A financial liability is classified as held-for-trading if it is
incurred 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 liabilities are recognised
at fair value with transaction costs being recognised in profit or
loss. Subsequently they are measured at fair value. Gains and
losses are recognised in profit or loss as they arise. Financial
liabilities 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 liabilities that are designated as at fair value through
profit or loss are recognised in profit or loss as they arise.
Accounting policies continued