RBS 2006 Annual Report Download - page 132
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RBS Group • Annual Report and Accounts 2006
Financial statements
Financial assets and financial liabilities held-for-trading or
designated as at fair value through profit or loss are recorded
at fair value. Changes in fair value are recognised in profit or loss
together with dividends and interest receivable and payable.
Commitment and utilisation fees are determined as a percentage
of the outstanding facility. If it is unlikely that a specific lending
arrangement will be entered into, such fees are taken to profit
or loss over the life of the facility otherwise they are deferred
and included in the effective interest rate on the advance.
Fees in respect of services are recognised as the right to
consideration accrues through the provision of the service to the
customer. The arrangements are generally contractual and the
cost of providing the service is incurred as the service is
rendered. The price is usually fixed and always determinable. The
application of this policy to significant fee types is outlined below.
Payment services: this comprises income received for payment
services including cheques cashed, direct debits, Clearing
House Automated Payments (the UK electronic settlement
system) and BACS payments (the automated clearing house
that processes direct debits and direct credits). These are
generally charged on a per transaction basis. The income is
earned when the payment or transaction occurs. Charges for
payment services are usually debited to the customer’s
account, monthly or quarterly in arrears. Accruals are raised
for services provided but not charged at period end.
Card related services: fees from credit card business include:
Commission received from retailers for processing credit
and debit card transactions: income is accrued to the
income statement as the service is performed.
Interchange received: as issuer, the Group receives a fee
(interchange) each time a cardholder purchases goods and
services. The Group also receives interchange fees from
other card issuers for providing cash advances through its
branch and Automated Teller Machine networks. These fees
are accrued once the transaction has taken place.
An annual fee payable by a credit card holder is deferred
and taken to profit or loss over the period of the service i.e.
12 months.
Insurance brokerage: this is made up of fees and commissions
received from the agency sale of insurance. Commission on the
sale of an insurance contract is earned at the inception of the
policy as the insurance has been arranged and placed. However,
provision is made where commission is refundable in the event of
policy cancellation in line with estimated cancellations.
Investment management fees: fees charged for managing
investments are recognised as revenue as the services are
provided. Incremental costs that are directly attributable to
securing an investment management contract are deferred and
charged as expense as the related revenue is recognised.
Insurance premiums – see accounting policy 10 below.
4. Pensions and other post-retirement benefits
The Group provides post-retirement benefits in the form of
pensions and healthcare plans to eligible employees.
For defined benefit schemes, scheme liabilities are measured on
an actuarial basis using the projected unit credit method and
discounted at a rate that reflects the current rate of return on a
high quality corporate bond of equivalent term and currency to
the scheme liabilities. Scheme assets are measured at their fair
value. Any surplus or deficit of scheme assets over liabilities is
recognised in the balance sheet as an asset (surplus) or liability
(deficit). The current service cost and any past service costs
together with the expected return on scheme assets less the
unwinding of the discount on the scheme liabilities is charged to
operating expenses. Actuarial gains and losses are recognised
in full in the period in which they occur outside profit or loss and
presented in the statement of recognised income and expense.
Contributions to defined contribution pension schemes are
recognised in the income statement when payable.
5. Intangible assets and goodwill
Intangible assets that are acquired by the Group are stated at
cost less accumulated amortisation and impairment losses.
Amortisation is charged to profit or loss using methods that
best reflect the economic benefits over their estimated useful
economic lives and is included in depreciation and amortisation.
The estimated useful economic lives are as follows:
Core deposit intangibles 6 to 10 years
Other acquired intangibles 5 to 10 years
Computer software 3 to 5 years
Expenditure on internally generated goodwill and brands is
written-off as incurred. Direct costs relating to the development
of internal-use computer software are capitalised once
technical feasibility and economic viability have been
established. These costs include payroll, the costs of materials
and services, and directly attributable overhead. Capitalisation
of costs ceases when the software is capable of operating as
intended. During and after development, accumulated costs
are reviewed for impairment against the projected benefits that
the software is expected to generate. Costs incurred prior to
the establishment of technical feasibility and economic viability
are expensed as incurred as are all training costs and general
overhead. The costs of licences to use computer software that
are expected to generate economic benefits beyond one year
are also capitalised.
Acquired goodwill being the excess of the cost of an
acquisition over the Group’s interest in the net fair value of the
identifiable assets, liabilities and contingent liabilities of the
subsidiary, associate or joint venture acquired is initially
recognised at cost and subsequently at cost less any
accumulated impairment losses. Goodwill arising on the
acquisition of subsidiaries and joint ventures is included in the
balance sheet caption ‘Intangible fixed assets’ and that on
associates within their carrying amounts. The gain or loss on
the disposal of a subsidiary, associate or joint venture includes
the carrying value of any related goodwill.