RBS 2006 Annual Report Download - page 217
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RBS Group • Annual Report and Accounts 2006
216
Notes on the accounts continued
IFRS
Foreign exchange gains and losses on monetary available-for-
sale financial assets
For the purposes of recognising foreign exchange gains and
losses, a monetary available-for-sale debt security is treated as
if it were carried at amortised cost in the foreign currency.
Accordingly, for such financial assets, exchange differences
resulting from retranslating amortised cost are recognised in
profit or loss.
Financial liabilities
All financial liabilities held-for-trading are classified as such
and carried at fair value with changes in fair value recognised
in net income. A financial liability may be designated as at fair
value through profit or loss.
(j) Derivatives and hedging
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.
(k) Liabilities and equity
Certain preference shares issued by the company where
distributions are not discretionary are classified as debt.
(l) Consolidation
All entities controlled by the Group are consolidated including
those special purpose entities (SPEs) where the substance of
the relationship between the reporting entity and the SPE
indicates that it is controlled by the Group.
(m) 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 Group 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 agreements do not
generally provide a basis for offsetting.
US GAAP
Exchange differences are included with other unrealised gains
and losses on available-for-sale securities and reported in a
separate component of equity.
Only financial liabilities that are derivatives and short positions
are carried at fair value with changes in fair value recognised
in net income.
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 overseas 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 company
are classified as equity, as they are perpetual and redeemable
only at the option of the company.
US GAAP requires consolidation by the primary beneficiary of
a variable interest entity (VIE). An enterprise is the primary
beneficiary of a VIE if it will absorb the majority of the VIE’s
expected losses, receive a majority of expected residual
returns, or both.
This GAAP difference has no effect on net income or
shareholders’ equity.
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.
47 Significant differences between IFRS and US GAAP (continued)