RBS 2011 Annual Report Download - page 324

322 RBS Group 2011
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 designated and 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. Hedge accounting is also discontinued if the Group
revokes the designation of a hedge relationship.
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,
where the hedged item is measured at amortised cost, 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 in other comprehensive
income 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 to profit or
loss in the same periods in which the hedged forecast cash flows affect
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 flows occur
or, if the forecast transaction results in the recognition of a financial asset
or financial liability, when the hedged forecast cash flows affect 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 in other comprehensive income. 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. On disposal or partial disposal of a foreign operation,
the amount accumulated in equity is reclassified from equity to profit or
loss.
25. Share-based compensation
The Group operates a number of share-based compensation schemes
under which it awards RBSG shares and share options to its employees.
Such awards are generally subject to vesting conditions: conditions that
vary the amount of cash or shares to which an employee is entitled.
Vesting conditions include service conditions (requiring the employee to
complete a specified period of service) and performance conditions
(requiring the employee to complete a specified period of service and
specified performance targets to be met). Other conditions to which an
award is subject are non-vesting conditions (such as a requirement to
save throughout the vesting period).
The cost of employee services received in exchange for an award of
shares or share options granted is measured by reference to the fair
value of the shares or share options on the date the award is granted and
takes into account non-vesting conditions and market performance
conditions (conditions related to the market price of RBSG shares): an
award is treated as vesting irrespective of whether any market
performance condition or non-vesting condition is met. The fair value of
options granted is estimated using valuation techniques which
incorporate exercise price, term, risk-free interest rates, the current share
price and its expected volatility. The cost is expensed on a straight-line
basis over the vesting period (the period during which all the specified
vesting conditions must be satisfied) with a corresponding increase in
equity in an equity-settled award, or a corresponding liability in a cash-
settled award. The cost is adjusted for vesting conditions (other than
market performance conditions) so as to reflect the number of shares or
share options that actually vest.
If an award is modified, the original cost continues to be recognised as if
there had been no modification. Where modification increases the fair
value of the award, this increase is recognised as an expense over the
modified vesting period. A new award of shares or share options is
treated as the modification of a cancelled award if, on the date the new
award is granted, the Group identifies them as replacing the cancelled
award. The cancellation of an award through failure to meet non-vesting
conditions triggers an immediate expense for any unrecognised element
of the cost of an award.
Accounting policies continued