RBS 2010 Annual Report Download - page 280

10. Foreign currencies
The Group's consolidated financial statements are presented in sterling
which is the functional currency of the company.
Transactions in foreign currencies are translated into sterling at the
foreign exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies are translated into
sterling at the rates of exchange ruling at the balance sheet date.
Foreign exchange differences arising on translation are reported in
income from trading activities except for differences arising on cash flow
hedges and hedges of net investments in foreign operations. Non-
monetary items denominated in foreign currencies that are stated at fair
value are translated into sterling at foreign exchange rates ruling at the
dates the values were determined. Translation differences arising on non-
monetary items measured at fair value are recognised in profit or loss
except for differences arising on available-for-sale non-monetary financial
assets, for example equity shares, which are included in the available-for-
sale reserve in equity unless the asset is the hedged item in a fair value
hedge.
The assets and liabilities of foreign operations, including goodwill and fair
value adjustments arising on acquisition, are translated into sterling at
foreign exchange rates ruling at the balance sheet date. The revenues
and expenses of foreign operations are translated into sterling at average
exchange rates unless these do not approximate to the foreign exchange
rates ruling at the dates of the transactions. Foreign exchange
differences arising on the translation of a foreign operation are
recognised directly in equity and included in profit or loss on its disposal.
11. Leases
Contracts to lease assets are classified as finance leases if they transfer
substantially all the risks and rewards of ownership of the asset to the
customer. Other contracts to lease assets are classified as operating
leases.
Finance lease receivables are stated in the balance sheet at the amount
of the net investment in the lease being the minimum lease payments
and any unguaranteed residual value discounted at the interest rate
implicit in the lease. Finance lease income is allocated to accounting
periods so as to give a constant periodic rate of return before tax on the
net investment. Unguaranteed residual values are subject to regular
review to identify potential impairment. If there has been a reduction in
the estimated unguaranteed residual value, the income allocation is
revised and any reduction in respect of amounts accrued is recognised
immediately.
Rental income from operating leases is credited to the income statement
on a receivable basis over the term of the lease. Operating lease assets
are included within Property, plant and equipment and depreciated over
their useful lives (see Accounting policy 7).
12. Insurance
General insurance
General insurance comprises short-duration contracts. Due to the nature
of the products sold - predominantly property, and motor - the insurance
protection is provided on an even basis throughout the term of the policy.
Consequently, written premiums are recognised on a straight-line basis
over the period of the policy. Insurance premiums exclude insurance
premium tax. Unearned premiums represent the proportion of the net
premiums that relate to periods of insurance after the balance sheet date
and are calculated over the period of exposure under the policy, on a
daily basis, 24th's basis or allowing for the estimated incidence of
exposure under policies which are longer than twelve months. Provision
is made where necessary for the estimated amount of claims over and
above unearned premiums including that in respect of future written
business on discontinued lines under the run-off of delegated
underwriting authority arrangements. The provision is designed to meet
future claims and related expenses and is calculated across related
classes of business on the basis of a separate carry forward of deferred
acquisition expenses after making allowance for investment income.
Acquisition expenses relating to new and renewed business for all
classes are expensed over the period during which the premiums are
earned. The principal acquisition costs so deferred are commissions
payable, and costs associated with the telesales and underwriting staff.
Claims and the related reinsurance are recognised in the accounting
period in which the loss occurs. Provision is made for the cost of settling
outstanding claims at the balance sheet date, including claims estimated
to have been incurred but not yet reported at that date, and claims
handling expenses. Provisions are only discounted where claims,
principally motor, either have been or are expected to be settled by
periodical payments. Related reinsurance receivables are recognised on
the same basis and at the same time.
Life assurance
The Group's long-term assurance contracts include whole-life term
assurance, endowment assurance, flexible whole-life, pension and
annuity contracts that are expected to remain in force for an extended
period of time. Long-term assurance contracts under which the Group
does not accept significant insurance risk are classified as financial
instruments.
The Group recognises the value of in-force long-term assurance
contracts as an asset. Cash flows associated with in-force contracts and
related assets, including reinsurance cash flows, are projected, using
appropriate assumptions as to future mortality, persistency and levels of
expenses and excluding the value of future investment margins, to
estimate future surpluses attributable to the Group. These surpluses,
discounted at a risk-adjusted rate, are recognised as a separate asset.
Changes in the value of this asset are included in profit or loss.
Premiums on long-term insurance contracts are recognised as income
when receivable. Claims on long-term insurance contracts reflect the cost
of all claims arising during the year, including claims handling costs.
Claims are recognised when the Group becomes aware of the claim.
Reinsurance
The Group has reinsurance treaties that transfer significant insurance risk.
Liabilities for reinsured contracts are calculated gross of reinsurance and
aseparate reinsurance asset recorded.
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Accounting policies continued