RBS 2011 Annual Report Download - page 363

RBS Group 2011 361
Fair value of financial instruments not carried at fair value
The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
2011
Carrying value
2011
Fair value
2010
Carrying value
2010
Fair value
2009
Carrying value
2009
Fair value
£bn £bn £bn £bn £bn £bn
Financial assets
Cash and balances at central banks 79.3 79.3 57.0 57.0 52.3 52.3
Loans and advances to banks 28.3 28.2 36.2 36.1 46.3 46.0
Loans and advances to customers 436.2 406.3 493.1 468.8 684.1 650.9
Debt securities 6.1 5.5 7.1 6.4 9.9 9.0
Settlement balances 7.8 7.8 11.6 11.6 12.0 12.0
Financial liabilities
Deposits by banks 51.3 50.7 50.0 50.4 88.5 88.3
Customer accounts 417.5 417.6 438.5 438.6 552.8 552.1
Debt securities in issue 115.4 112.7 167.2 163.8 222.1 218.5
Settlement balances 7.5 7.5 11.0 11.0 10.4 10.4
Subordinated liabilities 25.4 19.2 25.9 21.9 36.4 31.6
The fair value is the amount an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm's length
transaction. Quoted market values are used where available; otherwise,
fair values have been estimated based on discounted expected future
cash flows and other valuation techniques. These techniques involve
uncertainties and require assumptions and judgments covering
prepayments, credit risk and discount rates. Changes in these
assumptions would significantly affect estimated fair values. The fair
values reported would not necessarily be realised in an immediate sale or
settlement. As a wide range of valuation techniques is available, it may
be inappropriate to compare the Group's fair value information to
independent markets or other financial institutions.
The fair values of intangible assets, such as core deposits, credit card
and other customer relationships are not included in the calculation of
these fair values as they are not financial instruments.
The assumptions and methodologies underlying the calculation of fair
values of financial instruments at the balance sheet date are as follows:
The fair value of financial instruments which are of short maturity (three
months or less) approximates their carrying value. This mainly applies to
cash and balances at central banks, items in the course of collection from
other banks, settlement balances, items in the course of transmission to
other banks and demand deposits.
Loans and advances to banks and customers
In estimating the fair value of loans and advances to banks and
customers measured at amortised cost, the Group’s loans are
segregated into appropriate portfolios reflecting the characteristics of the
constituent loans. Two principal methods are used to estimate fair value:
(a) contractual cash flows are discounted using a market discount rate
that incorporates the current spread for the borrower or where this is
not observable, the spread for borrowers of a similar credit standing.
This method is used for the majority of GBM’s lending portfolios
where most counterparties have external ratings.
(b) expected cash flows (unadjusted for credit losses) are discounted at
the current offer rate for the same or similar products. This approach
is adopted for lending portfolios in UK Retail, UK Corporate and
Ulster Bank reflecting the more homogeneous nature of these
portfolios.
For certain portfolios where there are very few or no recent transactions,
for example Ulster Bank’s corporate property lending portfolio, a bespoke
approach is used based on available market data.
The discount to amortised cost reflects current stressed markets for Non-
Core loans, real estate lending in Ireland and other commercial real
estate loans, and in GBM, corporate downgrades.
Debt securities
Fair values are determined using quoted prices where available or by
reference to quoted prices of similar instruments.
Deposits by banks and customer accounts
Fair values of deposits are estimated using discounted cash flow
valuation techniques.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted prices where available or by
reference to valuation techniques, adjusting for own credit spreads where
appropriate.