RBS 2012 Annual Report Download - page 372

370
Accounting policies continued
Provisions for litigation - the Group and members of the Group are party
to legal proceedings in the United Kingdom, the United States and other
jurisdictions, arising out of their normal business operations. The
measurement and recognition of liabilities in respect of litigation involves
a high degree of management judgement. Before the existence of a
present obligation as the result of a past event can be confirmed,
numerous facts may need to be established, involving extensive and
time-consuming discovery, and novel or unsettled legal questions
addressed. Once it is determined there is an obligation, assessing the
probability of economic outflows and estimating the amount of any liability
can be very difficult. In many proceedings, it is not possible to determine
whether any loss is probable or to estimate the amount of any loss.
Furthermore, for an individual matter, there can be a wide range of
possible outcomes and often it is not practicable to quantify a range of
such outcomes. The Group’s outstanding litigation is periodically
assessed in consultation with external professional advisers, where
appropriate, to determine the likelihood of the Group incurring a liability. A
detailed description of the Group’s material legal proceedings and a
discussion of the nature of the associated uncertainties are given in Note
32.
Tax contingencies - determining the Group’s income tax charge and its
provisions for income taxes necessarily involves a significant degree of
estimation and judgement. The tax treatment of some transactions is
uncertain and tax computations are yet to be agreed with the tax
authorities in a number of jurisdictions. The Group recognises anticipated
tax liabilities based on all available evidence and, where appropriate, in
the light of external advice. Any difference between the final outcome and
the amounts provided will affect current and deferred income tax assets
and liabilities in the period when the matter is resolved.
Deferred tax
The Group makes provision for deferred tax on temporary differences
where tax recognition occurs at a different time from accounting
recognition. Deferred tax assets of £3,443 million were recognised as at
31 December 2012 (2011 - £3,878 million; 2010 - £6,373 million).
The Group has recognised deferred tax assets in respect of losses,
principally in the UK, and temporary differences. Deferred tax assets are
recognised in respect of unused tax losses to the extent that it is probable
that there will be future UK taxable profits against which the losses can
be utilised. Business projections indicate that sufficient future taxable
income will be available against which to offset these recognised deferred
tax assets within six years (2011 - six years). The Group's cumulative
losses are principally attributable to the recent unparalleled market
conditions. Deferred tax assets of £3,827 million (2011 - £3,246 million;
2010 - £2,008 million) have not been recognised in respect of tax losses
carried forward in jurisdictions where doubt exists over the availability of
future taxable profits. Further details about the Group’s deferred tax
assets are given in Note 23.
Loan impairment provisions
The Group's loan impairment provisions are established to recognise
incurred impairment losses in its portfolio of loans classified as loans and
receivables and carried at amortised cost. A loan is impaired when there
is objective evidence that events since the loan was granted have
affected expected cash flows from the loan. Such objective evidence,
indicative that a borrower’s financial condition has deteriorated, can
include for loans that are individually assessed: the non-payment of
interest or principal; debt renegotiation; probable bankruptcy or
liquidation; significant reduction in the value of any security; breach of
limits or covenants; and deteriorating trading performance and, for
collectively assessed portfolios: the borrowers’ payment status and
observable data about relevant macroeconomic measures.
The impairment loss is the difference between the carrying value of the
loan and the present value of estimated future cash flows at the loan's
original effective interest rate.
At 31 December 2012, loans and advances to customers classified as
loans and receivables totalled £397,846 million (2011 - £427,805 million;
2010 - £482,710 million) and customer loan impairment provisions
amounted to £21,136 million (2011 - £19,760 million; 2010 - £18,055
million).
There are two components to the Group's loan impairment provisions:
individual and collective.
Individual component - all impaired loans that exceed specific thresholds
are individually assessed for impairment. Individually assessed loans
principally comprise the Group's portfolio of commercial loans to medium
and large businesses. Impairment losses are recognised as the
difference between the carrying value of the loan and the discounted
value of management's best estimate of future cash repayments and
proceeds from any security held. These estimates take into account the
customer's debt capacity and financial flexibility; the level and quality of
its earnings; the amount and sources of cash flows; the industry in which
the counterparty operates; and the realisable value of any security held.
Estimating the quantum and timing of future recoveries involves
significant judgement. The size of receipts will depend on the future
performance of the borrower and the value of security, both of which will
be affected by future economic conditions; additionally, collateral may not
be readily marketable. The actual amount of future cash flows and the
date they are received may differ from these estimates and consequently
actual losses incurred may differ from those recognised in these financial
statements.