RBS 2008 Annual Report Download - page 184

183RBS Group Annual Report and Accounts 2008
16. Impairment of financial assets
The Group assesses at each balance sheet date whether there is any
objective evidence that a financial asset or group of financial assets
classified as held-to-maturity, available-for-sale or loans and receivables
is impaired. A financial asset or portfolio of financial assets is impaired
and an impairment loss incurred if there is objective evidence that an
event or events since initial recognition of the asset have adversely
affected the amount or timing of future cash flows from the asset.
Financial assets carried at amortised cost – if there is objective
evidence that an impairment loss on a financial asset or group of
financial assets classified as loans and receivables or as held-to-
maturity investments has been incurred, the Group measures the
amount of the loss as the difference between the carrying amount of
the asset or group of assets and the present value of estimated future
cash flows from the asset or group of assets discounted at the effective
interest rate of the instrument at initial recognition.
Impairment losses are assessed individually for financial assets that are
individually significant and individually or collectively for assets that are
not individually significant. In making collective assessment of
impairment, financial assets are grouped into portfolios on the basis of
similar risk characteristics. Future cash flows from these portfolios are
estimated on the basis of the contractual cash flows and historical loss
experience for assets with similar credit risk characteristics. Historical
loss experience is adjusted, on the basis of current observable data, to
reflect the effects of current conditions not affecting the period of
historical experience.
Impairment losses are recognised in profit or loss and the carrying
amount of the financial asset or group of financial assets reduced by
establishing an allowance for impairment losses. If, in a subsequent
period, the amount of the impairment loss reduces and the reduction
can be ascribed to an event after the impairment was recognised, the
previously recognised loss is reversed by adjusting the allowance. Once
an impairment loss has been recognised on a financial asset or group
of financial assets, interest income is recognised on the carrying
amount using the rate of interest at which estimated future cash flows
were discounted in measuring impairment.
Financial assets carried at fair value – when a decline in the fair value
of a financial asset classified as available-for-sale has been recognised
directly in equity and there is objective evidence that the asset is
impaired, the cumulative loss is removed from equity and recognised in
profit or loss. The loss is measured as the difference between the
amortised cost of the financial asset and its current fair value.
Impairment losses on available-for-sale equity instruments are not
reversed through profit or loss, but those on available-for-sale debt
instruments are reversed, if there is an increase in fair value that is
objectively related to a subsequent event.
17. Financial liabilities
On initial recognition financial liabilities are classified into held-for-
trading; designated as at fair value through profit or loss; or amortised
cost.
A financial liability is classified as held-for-trading if it is incurred
principally for repurchase in the near term, or forms part of a portfolio of
financial instruments that are managed together and for which there is
evidence of short-term profit taking, or it is a derivative (not in a
qualifying hedge relationship). Held-for-trading financial liabilities are
recognised at fair value with transaction costs being recognised in profit
or loss. Subsequently they are measured at fair value. Gains and losses
are recognised in profit or loss as they arise.
Financial liabilities that the Group designates on initial recognition as
being at fair value through profit or loss are recognised at fair value,
with transaction costs being recognised in profit or loss, and are
subsequently measured at fair value. Gains and losses on financial
liabilities that are designated as at fair value through profit or loss are
recognised in profit or loss as they arise.
Financial liabilities may be designated as at fair value through profit or
loss only if such designation (a) eliminates or significantly reduces a
measurement or recognition inconsistency; or (b) applies to a group of
financial assets, financial liabilities or both that the Group manages and
evaluates on a fair value basis; or (c) relates to an instrument that
contains an embedded derivative which is not evidently closely related
to the host contract.
The principal categories of financial liabilities designated as at fair value
through profit or loss are (a) structured liabilities issued by the Group:
designation significantly reduces the measurement inconsistency
between these liabilities and the related derivatives carried at fair value;
and (b) investment contracts issued by the Group's life assurance
businesses: fair value designation significantly reduces the
measurement inconsistency that would arise if these liabilities were
measured at amortised cost.
All other financial liabilities are measured at amortised cost using the
effective interest method (see accounting policy 3).
Fair value for a net open position in a financial liability that is quoted in
an active market is the current offer price times the number of units of
the instrument held or issued. Fair values for financial liabilities not
quoted in an active market are determined using appropriate valuation
techniques including discounting future cash flows, option pricing
models and other methods that are consistent with accepted economic
methodologies for pricing financial liabilities.