RBS 2010 Annual Report Download - page 284

21. 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 given or received 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.
22. 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.
23. 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
aliability 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.
24. 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.
Aderivative 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.
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.
RBS Group 2010282
Accounting policies continued