RBS 2009 Annual Report Download - page 255

253RBS Group Annual Report and Accounts 2009
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 observable data, to reflect
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.
Impaired loans and receivables are written off, i.e. the impairment
provision is applied in writing down the loan's carrying value partially or
in full, when the Group concludes that there is no longer any realistic
prospect of recovery of part or all of the loan. For portfolios that are
collectively assessed for impairment, the timing of write off principally
reflects historic recovery experience for each portfolio. For loans that are
individually assessed for impairment, the timing of write off is
determined on a case-by-case basis. Such loans are reviewed regularly
and write offs will be prompted by bankruptcy, insolvency, restructuring
and similar events. Amounts recovered after a loan has been written off
are credited to the loan impairment charge for the period in which they
are received.
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.
Held for trading – 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.
Designated as at fair value through profit or loss – 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.
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.
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.
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.
18. Loan commitments
Provision is made for loan commitments, other than those classified as
held-for-trading, if it is probable that the facility will be drawn and the
resulting loan will be recognised at a value less than the cash
advanced. Syndicated loan commitments in excess of the level of
lending under the commitment approved for retention by the Group are
classified as held-for-trading and measured at fair value.
Financial statements