RBS 2009 Annual Report Download - page 256

RBS Group Annual Report and Accounts 2009254
19. Derecognition
A financial asset is derecognised when it has been transferred and the
transfer qualifies for derecognition. A transfer requires that the Group
either: (a) transfers the contractual rights to receive the asset’s cash
flows; or (b) retains the right to the asset’s cash flows but assumes a
contractual obligation to pay those cash flows to a third party. After a
transfer, the Group assesses the extent to which it has retained the risks
and rewards of ownership of the transferred asset. If substantially all
the risks and rewards have been retained, the asset remains on the
balance sheet. If substantially all the risks and rewards have been
transferred, the asset is derecognised. If substantially all the risks and
rewards have been neither retained nor transferred, the Group assesses
whether or not it has retained control of the asset. If it has not retained
control, the asset is derecognised. Where the Group has retained
control of the asset, it continues to recognise the asset to the extent of
its continuing involvement.
A financial liability is removed from the balance sheet when the
obligation is discharged, or cancelled, or expires. On the redemption or
settlement of debt securities (including subordinated liabilities) issued
by the Group, the Group derecognises the debt instrument and records
a gain or loss being the difference between the debt’s carrying amount
and the cost of redemption or settlement. The same treatment applies
where the debt is exchanged for a new debt issue that has terms
substantially different from those of the existing debt. The assessment
of whether the terms of the new debt instrument are substantially
different takes into account qualitative and quantitative characteristics
including a comparison of the discounted present value of the cash
flows under the new terms with the discounted present value of the
remaining cash flows of the original debt issue.
20. Sale and repurchase transactions
Securities subject to a sale and repurchase agreement under which
substantially all the risks and rewards of ownership are retained by the
Group continue to be shown on the balance sheet and the sale
proceeds recorded as a financial liability. Securities acquired in a
reverse sale and repurchase transaction under which the Group is not
exposed to substantially all the risks and rewards of ownership are not
recognised on the balance sheet and the consideration paid is
recorded as a financial asset.
Securities borrowing and lending transactions are usually secured by
cash or securities advanced by the borrower. Borrowed securities are
not recognised on the balance sheet or lent securities derecognised.
Cash collateral received or given is treated as a loan or deposit;
collateral in the form of securities is not recognised. However, where
securities borrowed are transferred to third parties, a liability for the
obligation to return the securities to the stock lending counterparty is
recorded.
21. Netting
Financial assets and financial liabilities are offset and the net amount
presented in the balance sheet when, and only when, the Group
currently has a legally enforceable right to set off the recognised
amounts; and it intends either to settle on a net basis, or to realise the
asset and settle the liability simultaneously. The Group is party to a
number of arrangements, including master netting agreements, that
give it the right to offset financial assets and financial liabilities but
where it does not intend to settle the amounts net or simultaneously and
therefore the assets and liabilities concerned are presented gross.
22. Capital instruments
The Group classifies a financial instrument that it issues as a financial
asset, financial liability or an equity instrument in accordance with the
substance of the contractual arrangement. An instrument is classified
as a liability if it is a contractual obligation to deliver cash or another
financial asset, or to exchange financial assets or financial liabilities on
potentially unfavourable terms. An instrument is classified as equity if it
evidences a residual interest in the assets of the Group after the
deduction of liabilities. The components of a compound financial
instrument issued by the Group are classified and accounted for
separately as financial assets, financial liabilities or equity as
appropriate.
23. Derivatives and hedging
Derivative financial instruments are initially recognised, and
subsequently measured, at fair value. Derivative fair values are
determined from quoted prices in active markets where available.
Where there is no active market for an instrument, fair value is derived
from prices for the derivative’s components using appropriate pricing
or valuation models.
A derivative embedded in a contract is accounted for as a stand-alone
derivative if its economic characteristics are not closely related to the
economic characteristics of the host contract; unless the entire contract
is measured at fair value with changes in fair value recognised in profit
or loss.
Gains and losses arising from changes in the 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 highly probable forecast transaction (cash flow hedges);
and hedges of the net investment in a foreign operation.
Hedge relationships are formally documented at inception. The
documentation identifies the hedged item and the hedging instrument
and details the risk that is being hedged and the way in which
effectiveness will be assessed at inception and during the period of the
hedge. If the hedge is not highly effective in offsetting changes in fair
values or cash flows attributable to the hedged risk, consistent with the
documented risk management strategy, hedge accounting is
discontinued.
Fair value hedge – in a fair value hedge, the gain or loss on the hedging
instrument is recognised in profit or loss. The gain or loss on the
hedged item attributable to the hedged risk is recognised in profit or
loss and adjusts the carrying amount of the hedged item. Hedge
accounting is discontinued if the hedge no longer meets the criteria for
hedge accounting; or if the hedging instrument expires or is sold,
terminated or exercised; or if hedge designation is revoked. If the
hedged item is one for which the effective interest rate method is used,
any cumulative adjustment is amortised to profit or loss over the life of
the hedged item using a recalculated effective interest rate.
Accounting policies continued