RBS 2012 Annual Report Download - page 368

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Accounting policies continued
Designated as at fair value through profit or loss - financial liabilities 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 liabilities 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 liabilities that are
designated as at fair value through profit or loss are recognised in profit
or loss as they arise.
Financial liabilities designated as at fair value through profit or loss
principally comprise structured liabilities issued by the Group: designation
significantly reduces the measurement inconsistency between these
liabilities and the related derivatives carried at fair value.
Amortised cost - all other financial liabilities are measured at amortised
cost using the effective interest method (see Accounting policy 3).
Fair value - fair value for a net open position in a financial liability that is
quoted in an active market is the current offer price times the number of
units of the instrument issued. Fair values for financial liabilities 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 liabilities (see Note 11 Financial
instruments - valuation).
18. Financial guarantee contracts
Under a financial guarantee contract, the Group, in return for a fee,
undertakes to meet a customer’s obligations under the terms of a debt
instrument if the customer fails to do so. A financial guarantee is
recognised as a liability; initially at fair value and, if not designated as at
fair value through profit or loss, subsequently at the higher of its initial
value less cumulative amortisation and any provision under the contract
measured in accordance with Accounting policy 13. Amortisation is
calculated so as to recognise fees receivable in profit or loss over the
period of the guarantee.
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
A financial 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
a contractual 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 the Group has retained control of the
asset, it continues to recognise the asset to the extent of its continuing
involvement; if the Group has not retained control of the asset, it is
derecognised.
A financial 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 the 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.