RBS 2011 Annual Report Download - page 323

RBS Group 2011 321
19. Loan commitments
Provision is made for loan commitments, other than those classified as
held-for-trading, if it is probable that the facility will be drawn and the
resulting loan will be recognised at a value less than the cash advanced.
Syndicated loan commitments in excess of the level of lending under the
commitment approved for retention by the Group are classified as held-
for-trading and measured at fair value.
20. Derecognition
Afinancial asset is derecognised when the contractual right to receive
cash flows from the asset has expired or when it has been transferred
and the transfer qualifies for derecognition. A transfer requires that the
Group either (a) transfers the contractual rights to receive the asset's
cash flows; or (b) retains the right to the asset's cash flows but assumes
acontractual obligation to pay those cash flows to a third party. After a
transfer, the Group assesses the extent to which it has retained the risks
and rewards of ownership of the transferred asset. The asset remains on
the balance sheet if substantially all the risks and rewards have been
retained. It is derecognised if substantially all the risks and rewards have
been transferred. If substantially all the risks and rewards have been
neither retained nor transferred, the Group assesses whether or not it has
retained control of the asset. If it has not retained control, the asset is
derecognised. Where the Group has retained control of the asset, it
continues to recognise the asset to the extent of its continuing
involvement.
Afinancial liability is removed from the balance sheet when the obligation
is discharged, or cancelled, or expires. On the redemption or settlement
of debt securities (including subordinated liabilities) issued by the Group,
the Group derecognises the debt instrument and records a gain or loss
being the difference between the debt's carrying amount and the cost of
redemption or settlement. The same treatment applies where the debt is
exchanged for a new debt issue that has terms substantially different
from those of the existing debt. The assessment of whether the terms of
the new debt instrument are substantially different takes into account
qualitative and quantitative characteristics including a comparison of the
present value of the cash flows under the new terms with present value of
the remaining cash flows of the original debt issue discounted at the
effective interest rate of the original debt issue.
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 liability 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 and 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.
Incremental costs that are directly attributable to an equity transaction are
deducted from equity net of any related tax.
The consideration for any ordinary shares of the company purchased by
the Group (treasury shares) is deducted from equity. On the cancellation
of treasury shares their nominal value is removed from equity and any
excess of consideration over nominal value is treated in accordance with
the capital maintenance provisions of the Companies Act. On the sale or
reissue of treasury shares the consideration received is credited to
equity, net of any directly attributable incremental costs and related tax.
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 derivatives that
are not the hedging instrument in a qualifying hedge are recognised as
they arise in profit or loss. Gains and losses are recorded in Income
from trading activities except for gains and losses on those derivatives
that are managed together with financial instruments designated at fair
value; these gains and losses are included in Other operating income.