RBS 2009 Annual Report Download - page 257

255RBS Group Annual Report and Accounts 2009
Cash flow hedge – in a cash flow hedge, the effective portion of the
gain or loss on the hedging instrument is recognised directly in equity
and the ineffective portion 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 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 in equity 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 awards shares and options over shares in The Royal Bank of
Scotland Group plc to its employees under various share option
schemes. The expense for these transactions is measured based on the
fair value on the date the awards are granted. The fair value of an
option is estimated using valuation techniques which take into account
its 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 proportion of awards that
actually vest. The fair value is expensed on a straight-line basis over the
vesting period. Following an amendment to IFRS 2 for accounting
periods starting after 1 January 2009, the cancellation of an award with
non-vesting conditions triggers immediate recognition of an expense in
respect of any unrecognised element of the fair value of the award.
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 2009, gross loans and advances to customers totalled
£745,519 million (2008 – £885,611 million; 2007 – £834,987 million) and
customer loan impairment provisions amounted to £17,126 million (2008
– £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.
Financial statements