RBS 2006 Annual Report Download - page 133
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132
Accounting policies continued
Financial statements
On implementation of IFRS, the Group did not restate business
combinations that occurred before January 2004. Under previous
GAAP, goodwill arising on acquisitions after 1 October 1998 was
capitalised and amortised over its estimated useful economic life.
Goodwill arising on acquisitions before 1 October 1998 was
deducted from equity. The carrying amount of goodwill in the
Group’s opening IFRS balance sheet (1 January 2004) was
£13,131 million, its carrying value under previous GAAP.
6. Property, plant and equipment
Items of property, plant and equipment are stated at cost less
accumulated depreciation (see below) and impairment losses.
Where an item of property, plant and equipment comprises
major components having different useful lives, they are
accounted for separately. Property that is being constructed or
developed for future use as investment property is classified as
property, plant and equipment and stated at cost until
construction or development is complete, at which time it is
reclassified as investment property.
Depreciation is charged to profit or loss on a straight-line basis
so as to write-off the depreciable amount of property, plant
and equipment (including assets owned and let on operating
leases (except investment property – see accounting policy 19
below)) over their estimated useful lives. The depreciable
amount is the cost of an asset less its residual value. Land is
not depreciated. Estimated useful lives are as follows:
Freehold and long leasehold buildings 50 years
Short leaseholds unexpired period
of the lease
Property adaptation costs 10 to 15 years
Computer equipment up to 5 years
Other equipment 4 to 15 years
Under previous GAAP, the Group’s freehold and long leasehold
property occupied for its own use was recorded at valuation on
the basis of existing use value. The Group elected to use this
valuation as at 31 December 2003 (£2,391 million) as deemed
cost for its opening IFRS balance sheet (1 January 2004).
7. Impairment of intangible assets and property,
plant and equipment
At each reporting date, the Group assesses whether there is any
indication that its intangible assets, or property, plant and
equipment are impaired. If any such indication exists, the Group
estimates the recoverable amount of the asset and the impairment
loss if any. Goodwill is tested for impairment annually or more
frequently if events or changes in circumstances indicate that it
might be impaired. If an asset does not generate cash flows that
are independent from those of other assets or groups of assets,
recoverable amount is determined for the cash-generating unit to
which the asset belongs. The recoverable amount of an asset is
the higher of its fair value less cost to sell and its value in use.
Value in use is the present value of future cash flows from the
asset or cash-generating unit discounted at a rate that reflects
market interest rates adjusted for risks specific to the asset or
cash generating unit that have not been reflected in the estimation
of future cash flows. If the recoverable amount of an intangible or
tangible asset is less than its carrying value, an impairment loss is
recognised immediately in profit or loss and the carrying value of
the asset reduced by the amount of the loss. A reversal of an
impairment loss on intangible assets (excluding goodwill) or
property, plant and equipment is recognised as it arises provided
the increased carrying value does not exceed that which it would
have been had no impairment loss been recognised. Impairment
losses on goodwill are not reversed.
8. Foreign currencies
The Group’s consolidated financial statements are presented in
sterling which is the functional currency of the company.
Transactions in foreign currencies are translated into sterling at
the foreign exchange rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign
currencies are translated into sterling at the rates of exchange
ruling at the balance sheet date. Foreign exchange differences
arising on translation are reported in income from trading
activities except for differences arising on cash flow hedges
and hedges of net investments in foreign operations. Non-
monetary items denominated in foreign currencies that are
stated at fair value are translated into sterling at foreign
exchange rates ruling at the dates the values were determined.
Translation differences arising on non-monetary items measured
at fair value are recognised in profit or loss except for
differences arising on available-for-sale non-monetary financial
assets, for example equity shares, which are included in the
available-for-sale reserve in equity unless the asset is the
hedged item in a fair value hedge.
The assets and liabilities of foreign operations, including
goodwill and fair value adjustments arising on acquisition, are
translated into sterling at foreign exchange rates ruling at the
balance sheet date. The revenues and expenses of foreign
operations are translated into sterling at average exchange
rates unless these do not approximate to the foreign exchange
rates ruling at the dates of the transactions. Foreign exchange
differences arising on the translation of a foreign operation is
recognised directly in equity and included in profit or loss on
its disposal.
9. Leases
Contracts to lease assets are classified as finance leases if
they transfer substantially all the risks and rewards of
ownership of the asset to the customer. Other contracts to
lease assets are classified as operating leases.
Finance lease receivables are stated in the balance sheet at
the amount of the net investment in the lease being the
minimum lease payments and any unguaranteed residual value
discounted at the interest rate implicit in the lease. Finance
lease income is allocated to accounting periods so as to give a
constant periodic rate of return before tax on the net investment.
Unguaranteed residual values are subject to regular review to
identify potential impairment. If there has been a reduction in
the estimated unguaranteed residual value, the income
allocation is revised and any reduction in respect of amounts
accrued is recognised immediately.
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
accounting policy 6 above).