RBS 2006 Annual Report Download - page 139
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Please find page 139 of the 2006 RBS annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.RBS Group • Annual Report and Accounts 2006
138
Accounting policies continued
Financial statements
which is based on historical trends and, therefore, allows for
some increase due to changes in common law and statute.
Costs for both direct and indirect claims handling expenses are
also included. Outward reinsurance recoveries are accounted for
in the same accounting period as the direct claims to which they
relate. The outstanding claims provision is based on information
available to management and the eventual outcome may vary
from the original assessment. Actual claims experience may differ
from the historical pattern on which the estimate is based and
the cost of settling individual claims may exceed that assumed.
Goodwill
The Group capitalises goodwill arising on the acquisition of
businesses, as discussed in accounting policy 5. The carrying
value of goodwill as at 31 December 2006 was £17,889 million
(2005 – £18,823 million).
Goodwill is the excess of the cost of an acquisition over the fair
value of its net assets. The determination of the fair value of
assets and liabilities of businesses acquired requires the exercise
of management judgement; for example those financial assets
and liabilities for which there are no quoted prices, and those
non-financial assets where valuations reflect estimates of
market conditions such as property. Different fair values would
result in changes to the goodwill arising and to the post-acquisition
performance of the acquisition. Goodwill is not amortised but
is tested for impairment annually or more frequently if events or
changes in circumstances indicate that it might be impaired.
For the purposes of impairment testing, goodwill acquired in a
business combination is allocated to each of the Group’s cash-
generating units or groups of cash-generating units expected to
benefit from the combination. Goodwill impairment testing
involves the comparison of the carrying value of a cash-
generating unit or group of cash generating units with its
recoverable amount. The recoverable amount is the higher of the
unit’s fair value and its value in use. Value in use is the present
value of expected future cash flows from the cash-generating
unit or group of cash-generating units. Fair value is the amount
obtainable for the sale of the cash-generating unit in an arm’s
length transaction between knowledgeable, willing parties.
Impairment testing inherently involves a number of judgmental
areas: the preparation of cash flow forecasts for periods that
are beyond the normal requirements of management reporting;
the assessment of the discount rate appropriate to the
business; estimation of the fair value of cash-generating units;
and the valuation of the separable assets of each business
whose goodwill is being reviewed.
Accounting developments
International Financial Reporting Standards
The IASB issued IFRS 7 ‘Financial Instruments: Disclosures’ in
August 2005. The standard replaces IAS 30 ‘Disclosures in the
Financial Statements of Banks and Similar Financial
Institutions’ and the disclosure provisions in IAS 32. IFRS 7
requires disclosure of the significance of financial instruments
for an entity’s financial position and performance and of
qualitative and quantitative information about exposure to risks
arising from financial instruments. The standard is effective for
annual periods beginning on or after 1 January 2007.
In August 2005, the IASB issued an amendment, ‘Capital
Disclosures’, to IAS 1 ‘Presentation of Financial Statements’.
It requires disclosures about an entity’s capital and the way
it is managed. This amendment is also effective for annual
periods beginning on or after 1 January 2007.
The Group is reviewing IFRS 7 and the amendment to IAS 1 to
determine their effect on its financial reporting.
The International Financial Reporting Interpretations Committee
(‘IFRIC’) issued interpretation IFRIC 9 ‘Reassessment of
Embedded Derivatives’ in March 2006. Entities are required to
assess financial instruments for the existence of embedded
derivatives; this interpretation prohibits subsequent
reassessment unless there is a change of terms that
significantly changes the terms of the financial instrument. The
interpretation is effective for accounting periods starting on or
after 1 June 2006 and is not expected to have a material effect
on the Group or company.
The IFRIC issued interpretation IFRIC 10 ‘Interim Financial
Reporting and Impairment’ in July 2006. Entities recognising an
impairment of an intangible asset, goodwill or a financial asset
in their interim financial statements are not allowed to reverse
that impairment if the asset had recovered its value at the next
reporting date. The interpretation is effective for accounting
periods beginning on or after 1 November 2006 and is not
expected to have a material effect on the Group or company.
The IFRIC issued interpretation IFRIC 11 ‘Group and Treasury
Share Transactions’ in November 2006. Entities which buy their
own shares, or whose shareholders buy shares in the reporting
entity, in order to provide incentives to employees shall account
for those incentives on an equity-settled basis. This principle
applies also to the accounting by subsidiaries. The
interpretation is effective for annual accounting periods
beginning on or after 1 March 2007 and is not expected to
have a material effect on the Group or company.
The IFRIC issued interpretation IFRIC 12 ‘Service Concession
Arrangements’ in December 2006. Entities providing
infrastructure and services to governments under concession
arrangements shall account for each component of the
arrangement separately. Infrastructure provided under these
arrangements may be recognised as either a financial asset
or an intangible asset. The interpretation is effective for
accounting periods beginning on or after 1 January 2008 and is
not expected to have a material effect on the Group or company.
The IASB issued IFRS 8 ‘Operating Segments’ in December
2006. This will replace IAS 14 ‘Segment Reporting’ for
accounting periods beginning on or after 1 January 2009. IFRS
8 is very similar to US Statement of Financial Accounting
Standards No. 131 ‘Disclosures about Segments of an
Enterprise and Related Information’ and requires entities to
report segment information as reported to management and
reconcile it to the financial statements. Disclosures required by
SFAS 131 are included on pages 203 to 207.
US GAAP
For a discussion of recent developments in US GAAP relevant
to the Group, see Note 47 on the accounts.