RBS 2011 Annual Report Download - page 321

RBS Group 2011 319
Designated as at fair value through profit or loss - financial assets may be
designated as at fair value through profit or loss only if such designation
(a) eliminates or significantly reduces a measurement or recognition
inconsistency; or (b) applies to a group of financial assets, financial
liabilities or both, that the Group manages and evaluates on a fair value
basis; or (c) relates to an instrument that contains an embedded
derivative which is not evidently closely related to the host contract.
Financial assets that the Group designates on initial recognition as being
at fair value through profit or loss are recognised at fair value, with
transaction costs being recognised in profit or loss, and are subsequently
measured at fair value. Gains and losses on financial assets that are
designated as at fair value through profit or loss are recognised in profit
or loss as they arise.
In 2009, financial assets designated as at fair value through profit or loss
included policyholders' assets underpinning insurance and investment
contracts issued by the Group's life assurance businesses. Fair value
designation significantly reduces the measurement inconsistency that
would arise if these assets were classified as available-for-sale.
Loans and receivables - non-derivative financial assets with fixed or
determinable repayments that are not quoted in an active market are
classified as loans and receivables, except those that are classified as
available-for-sale or as held-for-trading, or designated as at fair value
through profit or loss. Loans and receivables 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.
Available-for-sale financial assets - financial assets that are not classified
as held-to-maturity; held-for-trading; designated as at fair value through
profit or loss; or loans and receivables are classified as available-for-sale.
Financial assets can be designated as available-for-sale on initial
recognition. Available-for-sale financial assets are initially recognised at
fair value plus directly related transaction costs. They are subsequently
measured at fair value. Unquoted equity investments whose fair value
cannot be measured reliably are carried at cost and classified as
available-for-sale financial assets. Impairment losses and exchange
differences resulting from retranslating the amortised cost of foreign
currency monetary available-for-sale financial assets are recognised in
profit or loss together with interest calculated using the effective interest
method (see Accounting policy 3) as are gains and losses attributable to
the hedged risk on available-for-sale financial assets that are hedged
items in fair value hedges (see Accounting policy 24). Other changes in
the fair value of available-for-sale financial assets and any related tax are
reported in other comprehensive income until disposal, when the
cumulative gain or loss is reclassified from equity to profit or loss.
Reclassifications - held-for-trading and available-for-sale financial assets
that meet the definition of loans and receivables (non-derivative financial
assets with fixed or determinable payments that are not quoted in an
active market) may be reclassified to loans and receivables if the Group
has the intention and ability to hold the financial asset for the foreseeable
future or until maturity. The Group typically regards the foreseeable future
as twelve months from the date of reclassification. Additionally, held-for-
trading financial assets that do not meet the definition of loans and
receivables may, in rare circumstances, be transferred to available-for-
sale financial assets or to held-to-maturity investments. Reclassifications
are made at fair value. This fair value becomes the asset's new cost or
amortised cost as appropriate. Gains and losses recognised up to the
date of reclassification are not reversed.
Fair value for a net open position in a financial asset that is quoted in an
active market is the current bid price times the number of units of the
instrument held. Fair values for financial assets not quoted in an active
market are determined using appropriate valuation techniques including
discounting future cash flows, option pricing models and other methods
that are consistent with accepted economic methodologies for pricing
financial assets.
16. Impairment of financial assets
The Group assesses at each balance sheet date whether there is any
objective evidence that a financial asset or group of financial assets
classified as held-to-maturity, available-for-sale or loans and receivables
is impaired. A financial asset or portfolio of financial assets is impaired
and an impairment loss incurred if there is objective evidence that an
event or events since initial recognition of the asset have adversely
affected the amount or timing of future cash flows from the asset.
Financial assets carried at amortised cost - if there is objective evidence
that an impairment loss on a financial asset or group of financial assets
classified as loans and receivables or as held-to-maturity investments
has been incurred, the Group measures the amount of the loss as the
difference between the carrying amount of the asset or group of assets
and the present value of estimated future cash flows from the asset or
group of assets discounted at the effective interest rate of the instrument
at initial recognition. For collateralised loans and receivables, estimated
future cash flows include cash flows that may result from foreclosure less
the costs of obtaining and selling the collateral, whether or not
foreclosure is probable.
Where, in the course of the orderly realisation of a loan, it is exchanged
for equity shares or property, the exchange is accounted for as the sale
of the loan and the acquisition of equity securities or investment property.
Where the Group’s interest in equity shares following the exchange is
such that the Group controls an entity, that entity is consolidated.