RBS 2005 Annual Report Download - page 225

section
03
Financial
statements
223
Notes on the accounts
Annual Report and Accounts 2005
IFRS
(h) Derivatives and hedging activities
Gains and losses arising from changes in fair value of a
derivative are recognised as they arise in profit or loss unless
the derivative is the hedging instrument in a qualifying hedge.
The Group enters into three types of hedge relationship:
hedges of changes in the fair value of a recognised asset or
liability or firm commitment (fair value hedges); hedges of the
variability in cash flows from a recognised asset or liability or a
forecast transaction (cash flow hedges); and hedges of the net
investment in a foreign entity.
(i) Liabilities and equity
The Group classifies a financial instrument that it issues
as a financial asset, financial liability or an equity instrument
in accordance with the substance of the contractual
arrangement. An instrument is classified as a liability if there
is a contractual obligation to deliver cash or another financial
asset, or to exchange financial assets or financial liabilities on
potentially unfavourable terms. An instrument is classified as
equity if it evidences a residual interest in the assets of the
Group after the deduction of liabilities.
(j) Offset arrangements
A financial asset and a financial liability are offset and the net
amount reported in the balance sheet when, and only when,
the reporting entity currently has a legally enforceable right to
set off the recognised amounts; and intends either to settle on
a net basis, or to realise the asset and settle the liability
simultaneously.
Arrangements such as master netting arrangements do not
generally provide a basis for offsetting.
US GAAP
US GAAP principles are similar to IFRS. There are however
differences in their detailed application. The Group has not
recognised any hedge relationships for US GAAP purposes
except hedges of net investments in foreign operations. All
derivatives are measured at fair value with changes in fair
value recognised in net income.
Under US GAAP, preference shares issued by the Group are
classified as equity as they are perpetual and redeemable only
at the option of the Group.
Certain trusts and partnerships that are subsidiaries under
IFRS are not consolidated under US GAAP because the
Group is not their primary beneficiary. As a result securities
issued by them are reclassified from minority interests to
subordinated liabilities.
Under US GAAP, debit and credit balances with the same
counterparty may be offset only where there is a legally
enforceable right of set-off and the intention to settle on a net
basis. However, fair value amounts for forward, interest rate
swap, currency swap, option, and other conditional or
exchange contracts executed with the same counterparty
under a master netting agreement may be offset as may
repurchase and reverse repurchase agreements that are
executed under a master netting agreement with the same
counterparty and have the same settlement date.
This GAAP difference has no effect on net income or
shareholders’ equity.