RBS 2008 Annual Report Download - page 186

185RBS Group Annual Report and Accounts 2008
the gain or loss on the hedging instrument is recognised directly in
equity. The ineffective portion is recognised in profit or loss. When the
forecast transaction results in the recognition of a financial asset or
financial liability, the cumulative gain or loss is reclassified from equity in
the same periods in which the asset or liability affects profit or loss.
Otherwise the cumulative gain or loss is removed from equity and
recognised in profit or loss at the same time as the hedged transaction.
Hedge accounting is discontinued if the hedge no longer meets the
criteria for hedge accounting; if the hedging instrument expires or is
sold, terminated or exercised; if the forecast transaction is no longer
expected to occur; or if hedge designation is revoked. On the
discontinuance of hedge accounting (except where a forecast
transaction is no longer expected to occur), the cumulative unrealised
gain or loss recognised in equity is recognised in profit or loss when the
hedged cash flow occurs or, if the forecast transaction results in the
recognition of a financial asset or financial liability, in the same periods
during which the asset or liability affects profit or loss. Where a forecast
transaction is no longer expected to occur, the cumulative unrealised
gain or loss is recognised in profit or loss immediately.
Hedge of net investment in a foreign operation – in the hedge of a net
investment in a foreign operation, the portion of foreign exchange
differences arising on the hedging instrument determined to be an
effective hedge is recognised directly in equity. Any ineffective portion is
recognised in profit or loss. Non-derivative financial liabilities as well as
derivatives may be the hedging instrument in a net investment hedge.
24. Share-based payments
The Group grants options over shares in The Royal Bank of Scotland
Group plc to its employees under various share option schemes. The
Group has applied IFRS 2 ‘Share-based Payment’ to grants under these
schemes after 7 November 2002 that had not vested on 1 January 2005.
The expense for these transactions is measured based on the fair value
on the date the options are granted. The fair value is estimated using
valuation techniques which take into account the option’s exercise price,
its term, the risk-free interest rate and the expected volatility of the
market price of The Royal Bank of Scotland Group plc’s shares. Vesting
conditions are not taken into account when measuring fair value, but are
reflected by adjusting the number of options included in the
measurement of the transaction such that the amount recognised
reflects the number that actually vest. The fair value is expensed on a
straight-line basis over the vesting period.
25. Cash and cash equivalents
Cash and cash equivalents comprises cash and demand deposits with
banks together with short-term highly liquid investments that are readily
convertible to known amounts of cash and subject to insignificant risk of
change in value.
26. Shares in Group entities
The company’s investments in its subsidiaries are stated at cost less
any impairment.
Critical accounting policies and key sources of estimation
uncertainty
The reported results of the Group are sensitive to the accounting
policies, assumptions and estimates that underlie the preparation of its
financial statements. UK company law and IFRS require the directors, in
preparing the Group’s financial statements, to select suitable
accounting policies, apply them consistently and make judgements and
estimates that are reasonable and prudent. In the absence of an
applicable standard or interpretation, IAS 8 ‘Accounting Policies,
Changes in Accounting Estimates and Errors’, requires management to
develop and apply an accounting policy that results in relevant and
reliable information in the light of the requirements and guidance in
IFRS dealing with similar and related issues and the IASB’s Framework
for the Preparation and Presentation of Financial Statements. The
judgements and assumptions involved in the Group’s accounting
policies that are considered by the Board to be the most important to
the portrayal of its financial condition are discussed below. The use of
estimates, assumptions or models that differ from those adopted by the
Group would affect its reported results.
Loan impairment provisions
The Group’s loan impairment provisions are established to recognise
incurred impairment losses in its portfolio of loans classified as loans
and receivables and carried at amortised cost. A loan is impaired when
there is objective evidence that events since the loan was granted have
affected expected cash flows from the loan. The impairment loss is the
difference between the carrying value of the loan and the present value
of estimated future cash flows at the loan’s original effective interest rate.
At 31 December 2008, gross loans and advances to customers totalled
£885,611 million (2007 – £834,987 million) and customer loan
impairment provisions amounted to £10,889 million (2007 – £6,449
million).
There are two components to the Group’s loan impairment provisions:
individual and collective.
Individual component – all impaired loans that exceed specific
thresholds are individually assessed for impairment. Individually
assessed loans principally comprise the Group’s portfolio of
commercial loans to medium and large businesses. Impairment losses
are recognised as the difference between the carrying value of the loan
and the discounted value of management’s best estimate of future cash
repayments and proceeds from any security held. These estimates take
into account the customer’s debt capacity and financial flexibility; the
level and quality of its earnings; the amount and sources of cash flows;
the industry in which the counterparty operates; and the realisable
value of any security held. Estimating the quantum and timing of future
recoveries involves significant judgement. The size of receipts will
depend on the future performance of the borrower and the value of
security, both of which will be affected by future economic conditions;
additionally, collateral may not be readily marketable. The actual amount
of future cash flows and the date they are received may differ from
these estimates and consequently actual losses incurred may differ
from those recognised in these financial statements.