RBS 2011 Annual Report Download - page 320

318 RBS Group 2011
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 a separate reinsurance asset recorded.
13. Provisions
The Group recognises a provision for a present obligation resulting from
apast event when it is more likely than not that it will be required to
transfer economic benefits to settle the obligation and the amount of the
obligation can be estimated reliably.
Provision is made for restructuring costs, including the costs of
redundancy, when the Group has a constructive obligation to restructure.
An obligation exists when the Group has a detailed formal plan for the
restructuring and has raised a valid expectation in those affected by
starting to implement the plan or announcing its main features.
If the Group has a contract that is onerous, it recognises the present
obligation under the contract as a provision. An onerous contract is one
where the unavoidable costs of meeting the Group’s contractual
obligations exceed the expected economic benefits. When the Group
vacates a leasehold property, a provision is recognised for the costs
under the lease less any expected economic benefits (such as rental
income).
Contingent liabilities are possible obligations arising from past events,
whose existence will be confirmed only by uncertain future events, or
present obligations arising from past events that are not recognised
because either an outflow of economic benefits is not probable or the
amount of the obligation cannot be reliably measured. Contingent
liabilities are not recognised but information about them is disclosed
unless the possibility of any outflow of economic benefits in settlement is
remote.
14. Tax
Income tax expense or income, comprising current tax and deferred tax,
is recorded in the income statement except income tax on items
recognised outside profit or loss which is credited or charged to other
comprehensive income or to equity as appropriate.
Current tax is income tax payable or recoverable in respect of the taxable
profit or loss for the year arising in income or in equity. Provision is made
for current tax at rates enacted or substantively enacted at the balance
sheet date.
Deferred tax is the tax expected to be payable or recoverable in respect
of temporary differences between the carrying amount of an asset or
liability for accounting purposes and its carrying amount for tax purposes.
Deferred tax liabilities are generally recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is
probable that they will be recovered. Deferred tax is not recognised on
temporary differences that arise from initial recognition of an asset or a
liability in a transaction (other than a business combination) that at the
time of the transaction affects neither accounting nor taxable profit or
loss. Deferred tax is calculated using tax rates expected to apply in the
periods when the assets will be realised or the liabilities settled, based on
tax rates and laws enacted, or substantively enacted, at the balance
sheet date.
Deferred tax assets and liabilities are offset where the Group has a
legally enforceable right to offset and where they relate to income taxes
levied by the same taxation authority either on an individual Group
companyor on Group companies in the same tax group that intend, in
future periods, to settle current tax liabilities and assets on a net basis or
on a gross basis simultaneously.
15. Financial assets
On initial recognition, financial assets are classified into held-to-maturity
investments; held-for-trading; designated as at fair value through profit or
loss; loans and receivables; or available-for-sale financial assets.
Regular way purchases of financial assets classified as loans and
receivables are recognised on settlement date; all other regular way
transactions in financial assets are recognised on trade date.
Held-to-maturity investments - afinancial asset may be classified as a
held-to-maturity investment only if it has fixed or determinable payments,
afixed maturity and the Group has the positive intention and ability to
hold to maturity. Held-to-maturity investments are initially recognised at
fair value plus directly related transaction costs. They are subsequently
measured at amortised cost using the effective interest method (see
Accounting policy 3) less any impairment losses.
Held-for-trading - a financial asset is classified as held-for-trading if it is
acquired principally for sale 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 assets are recognised at
fair value with transaction costs being recognised in profit or loss.
Subsequently they are measured at fair value. Gains and losses on held-
for-trading financial assets are recognised in profit or loss as they arise.
Accounting policies continued