RBS 2012 Annual Report Download - page 367

RBS GROUP 2012
365
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.
Impairment losses are assessed individually for financial assets that are
individually significant and individually or collectively for assets that are
not individually significant. In making collective impairment assessments,
financial assets are grouped into portfolios on the basis of similar risk
characteristics. Future cash flows from these portfolios are estimated on
the basis of the contractual cash flows and historical loss experience for
assets with similar credit risk characteristics. Historical loss experience is
adjusted, on the basis of observable data, to reflect current conditions not
affecting the period of historical experience. Impairment losses are
recognised in profit or loss and the carrying amount of the financial asset
or group of financial assets reduced by establishing an allowance for
impairment losses. If, in a subsequent period, the amount of the
impairment loss reduces and the reduction can be ascribed to an event
after the impairment was recognised, the previously recognised loss is
reversed by adjusting the allowance. Once an impairment loss has been
recognised on a financial asset or group of financial assets, interest
income is recognised on the carrying amount using the rate of interest at
which estimated future cash flows were discounted in measuring
impairment.
Impaired loans and receivables are written off, i.e. the impairment
provision is applied in writing down the loan's carrying value partially or in
full, when the Group concludes that there is no longer any realistic
prospect of recovery of part or all of the loan. For loans that are
individually assessed for impairment, the timing of write off is determined
on a case-by-case basis. Such loans are reviewed regularly and write
offs will be prompted by bankruptcy, insolvency, renegotiation and similar
events.
Except for US retail portfolios, where write off of the irrecoverable amount
takes place within 60 - 180 days, the typical time frames from initial
impairment to write off for the Group’s collectively-assessed portfolios
are:
x Retail mortgages: write off occurs within 5 years, and is accelerated
where accounts are closed earlier.
x Credit cards: write off of the irrecoverable amount takes place at 12
months; the rest is expected to be recovered over a further 3 years
following which any remaining amounts outstanding are written off.
x Overdrafts and other unsecured loans: write offs occur within 6
years.
x Business and commercial loans: write offs of commercial loans are
determined in the light of individual circumstances; the period does
not exceed 5 years. Business loans are generally written off within 5
years.
Amounts recovered after a loan has been written off are credited to the
loan impairment charge for the period in which they are received.
Financial assets carried at fair value - when a decline in the fair value of a
financial asset classified as available-for-sale has been recognised
directly in other comprehensive income and there is objective evidence
that it is impaired, the cumulative loss is reclassified from equity to profit
or loss. The loss is measured as the difference between the amortised
cost of the financial asset and its current fair value. Impairment losses on
available-for-sale equity instruments are not reversed through profit or
loss, but those on available-for-sale debt instruments are reversed, if
there is an increase in fair value that is objectively related to a
subsequent event.
17. Financial liabilities
On initial recognition, financial liabilities are classified into held-for-
trading; designated as at fair value through profit or loss; or amortised
cost. Issues of financial liabilities measured at amortised cost are
recognised on settlement date; all other regular way transactions in
financial liabilities are recognised on trade date.
Held-for-trading - a financial liability is classified as held-for-trading if it is
incurred principally for repurchase 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 liabilities are
recognised at fair value with transaction costs being recognised in profit
or loss. Subsequently they are measured at fair value. Gains and losses
are recognised in profit or loss as they arise.