REG - Arbuthnot BankingSecure Trust Bank - Final Results for the year to 31 December 2015 <Origin Href="QuoteRef">ARBB.L</Origin> <Origin Href="QuoteRef">STBS.L</Origin> - Part 3
17/03/2016 07:07
- Part 3: For the preceding part double click ID:nRSQ3559Sb
- - - 41 41
Final dividend relating to 2013 - - - - (2,233) (2,233)
Interim dividend relating to 2014 - - - - (1,638) (1,638)
Total contributions by and distributions to owners - - - - (3,830) (3,830)
Balance at 1 January 2015 153 20 - (1,131) 50,755 49,797
Total comprehensive income for the period
Profit for 2015 - - - - (87) (87)
Other comprehensive income, net of income tax
Total comprehensive income for the period - - - - (87) (87)
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Equity settled share based payment transactions - - - - 38 38
Final dividend relating to 2014 - - - - (2,382) (2,382)
Interim dividend relating to 2015 - - - - (1,787) (1,787)
Total contributions by and distributions to owners - - - - (4,131) (4,131)
Balance at 31 December 2015 153 20 - (1,131) 46,537 45,579
Consolidated statement of cash flows
Year ended 31 December Year ended 31 December
2015 2014
Note £000 £000
Cash flows from operating activities
Interest received 171,956 116,675
Interest paid (35,040) (18,260)
Fees and commissions received 15,615 27,692
Cash payments to employees and suppliers (115,463) (91,874)
Taxation paid (7,409) (3,047)
Cash flows from operating profits before changes in operating assets and liabilities 29,659 31,186
Changes in operating assets and liabilities:
- net decrease/(increase) in derivative financial instruments 285 (1,503)
- net increase in loans and advances to customers (417,814) (434,352)
- net (increase)/decrease in other assets (118,484) 401
- net increase in amounts due to customers 735,553 236,494
- net increase in other liabilities 5,693 3,967
Net cash inflow/(outflow) from operating activities 234,892 (163,807)
Cash flows from investing activities
Disposal of financial investments 44 243
Purchase of computer software 26 (3,532) (1,214)
Purchase of property, plant and equipment 27 (3,395) (7,803)
Proceeds from sale of property, plant and equipment 27 - 42
Proceeds from sale of Secure Trust Bank shares - 24,327
Purchases of debt securities (145,880) (85,243)
Proceeds from redemption of debt securities 149,835 13,026
Net cash from investing activities (2,928) (56,622)
Cash flows from financing activities
Increase in borrowings 27,648 25,654
Dividends paid (10,205) (7,623)
Proceeds from share placing by Secure Trust Bank - 48,758
Proceeds from exercise of Secure Trust Bank share options - 3,315
Net cash used in financing activities 17,443 70,104
Net increase/(decrease) in cash and cash equivalents 249,407 (150,325)
Cash and cash equivalents at 1 January 147,782 298,107
Cash and cash equivalents at 31 December 37 397,189 147,782
Company statement of cash flows
Year ended 31 December Year ended 31 December
2015 2014
Note £000 £000
Cash flows from operating activities
Dividends received from subsidiaries 6,648 6,440
Interest received 120 149
Interest paid (599) (661)
Net trading and other income 1,833 1,629
Cash payments to employees and suppliers (8,718) (7,866)
Cash flows from operating losses before changes in operating assets and liabilities (715) (309)
Changes in operating assets and liabilities:
- net increase in group company balances (66) (4,950)
- net decrease/(increase) in other assets 7 (3)
- net increase/(decrease) in other liabilities 143 (1)
Net cash outflow from operating activities (631) (5,263)
Cash flows from investing activities
Repayment of loans to subsidiary companies 4,500 -
Increase investment in subsidiary 39 (6,500) (10,500)
Disposal of share in subsidiaries 39 - 24,327
Net cash from investing activities (2,000) 13,827
Cash flows from financing activities
Dividends paid (4,169) (3,871)
(Decrease)/Increase in borrowings - (2,000)
Net cash used in financing activities (4,169) (5,871)
Net (decrease)/increase in cash and cash equivalents (6,800) 2,693
Cash and cash equivalents at 1 January 19,244 16,551
Cash and cash equivalents at 31 December 37 12,444 19,244
Notes to the Consolidated Financial Statements
1. Reporting entity
Arbuthnot Banking Group PLC is a company domiciled in the United Kingdom. The registered address of the Arbuthnot Banking
Group PLC is 7 Wilson Street, London, EC2M 2SN. The consolidated financial statements of the Arbuthnot Banking Group PLC as
at and for the year ended 31 December 2015 comprise the Arbuthnot Banking Group PLC and its subsidiaries (together referred
to as the "Group" and individually as "subsidiaries"). The Company is primarily involved in banking and financial
services.
2. Basis of presentation
(a) Statement of compliance
The Group's consolidated financial statements and the Company's financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs as adopted and endorsed by the EU) and the Companies Act 2006 applicable
to companies reporting under IFRS.
The consolidated financial statements were authorised for issue by the Board of Directors on 16 March 2016.
(b) Basis of measurement
The consolidated and company financial statements have been prepared under the historical cost convention, as modified by
the revaluation of land and buildings, available-for-sale financial assets, financial assets and financial liabilities at
fair value through profit or loss, and derivatives assets and liabilities.
(c) Functional and presentational currency
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary
economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are
presented in Pound Sterling, which is the Company's functional and the Group's presentational currency.
(d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates.
It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas
involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the
consolidated financial statements are disclosed in Note 4.
(e) Accounting developments
The accounting policies adopted are consistent with those of the previous financial year. There were no new or amended
standards or interpretations that resulted in a change in accounting policy.
(f) Going concern
The financial statements have been prepared on the 'going concern' basis as disclosed in the Directors' Report.
3. Significant accounting policies
The accounting policies applied in the preparation of these consolidated financial statements are set out below. These
policies have been consistently applied to all the years presented, unless otherwise stated.
3.1. Consolidation
(a) Subsidiaries
Subsidiaries are all investees (including special purpose entities) controlled by the Group. The Group controls an investee
when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is
transferred to the Group. They are de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired,
liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the
acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over
the fair value of the Group's shares of the identifiable net assets acquired is recorded as goodwill. If the cost of
acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly
in the Statement of Comprehensive Income as a gain on bargain purchase.
The Parent's investments in subsidiaries are recorded at cost less, where appropriate, provisions for impairment in value.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated.
Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure
consistency with the policies adopted by the Group.
(b) Changes in ownership and non-controlling interests
Changes in ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity
transactions and no gain or loss is recognised. Adjustments to non-controlling interests are based on a proportionate
amount of the net assets of the subsidiary.
When control of a subsidiary is lost, the Group derecognises the assets, liabilities, non-controlling interest and all
other components of equity relating to the former subsidiary from the consolidated statement of financial position. Any
resulting gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is recognised at
its fair value when control is lost.
(c) Special purpose entities
Special purpose entities ("SPEs") are entities that are created to accomplish a narrow and well-defined objective such as
the securitisation of particular assets or the execution of a specific borrowing or lending transaction. SPEs are
consolidated when the investor controls the investee. The investor would only control the investee if it had all of the
following:
• power over the investee;
• exposure, or rights, to variable returns from its involvement with the investee; and
• the ability to use its power over the investee to affect the amount of the investor's returns.
The assessment of whether the Group has control over an SPE is carried out at inception and the initial assessment is only
reconsidered at a later date if there were any changes to the structure or terms of the SPE, or there were additional
transactions between the Group and the SPE.
(d) Associates
Associates are those entities in which the Group has significant influence, but not control, over the financial and
operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting
power of another entity. Associates are accounted for using the equity method and are initially recognised at cost. The
Group's investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated
financial statements include the Group's share of the total comprehensive income and equity movements of equity accounted
investees, from the date that significant influence commences until the date that significant influence ceases. When the
Group's share of losses exceeds its interest in an equity accounted investee, the Group's carrying amount is reduced to nil
and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive
obligations or made payments on behalf of the investee.
3.2. Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Group Board. The Group
Board, which is responsible for allocating resources and assessing performance of the operating segments, has been
identified as the chief operating decision maker. All transactions between segments are conducted on an arm's length basis.
Income and expenses directly associated with each segment are included in determining segment performance. There are three
main operating segments:
• Retail Banking
• Private Banking
• Group Centre
3.3. Foreign currency translation
Foreign currency transactions are translated into the functional currency using the spot exchange rates prevailing at the
dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the Statement of Comprehensive Income. Foreign exchange differences
arising from translation of available-for-sale equity instruments are recognised in the Statement of Comprehensive Income.
3.4. Interest income and expense
Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at
amortised cost using the effective interest method.
The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life
of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or
financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of
the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received
between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other
premiums or discounts. The carrying amount of the financial asset or financial liability is adjusted if the Group revises
its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest
rate and the change in carrying amount is recorded as interest income or expense.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss,
interest income continues to be recognised using the original effective interest rate applied to the impaired carrying
amount.
3.5. Fee and commission income
Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an
accrual basis when the service has been provided.
Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party -
such as the issue or the acquisition of shares or other securities or the purchase or sale of businesses - are recognised
on completion of the underlying transaction. Asset and other management, advisory and service fees are recognised on an
accruals basis as the related services are performed. The same principle is applied for financial planning and insurance
services that are continuously provided over an extended period of time.
3.6. Discontinued operations
A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly
distinguished from the rest of the Group and which:
• represents a separate major line of business or geographical area of operations;
• is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations;
or
• is a subsidiary acquired exclusively with a view to re-sale.
Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as
held for sale (see note 3.12), if earlier. When an operation is classified as a discontinued operation, the comparative
Statement of Comprehensive Income is re-presented as if the operation had been discontinued from the start of the
comparative year.
3.7. Financial assets and financial liabilities
The Group classifies financial assets and financial liabilities in the following categories: financial assets and financial
liabilities at fair value through profit or loss; loans and receivables; held-to-maturity investments; available-for-sale
financial assets and other financial liabilities. Management determines the classification of its investments at
acquisition. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair
value through profit or loss, transaction costs that are directly attributable to its acquisition or issue.
(a) Financial assets and financial liabilities at fair value through profit or loss
This category comprises listed securities and derivative financial instruments. Derivative financial instruments utilised
by the Group include embedded derivatives and derivatives used for hedging purposes. Financial assets and liabilities at
fair value through profit or loss are initially recognised on the date from which the Group becomes a party to the
contractual provisions of the instrument. Subsequent measurement of financial assets and financial liabilities held in this
category are carried at fair value through profit or loss.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of
trading the receivable. Loans are recognised when cash is advanced to the borrowers. Loans and receivables are carried at
amortised cost using the effective interest method.
(c) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities
that the Group has the positive intent and ability to hold to maturity and that has not been designated at fair value
through profit or loss or as available-for-sale investments. Held-to-maturity investments are carried at amortised cost
using the effective interest method, less any impairment loss.
(d) Available-for-sale
Available-for-sale ('AFS') investments are those not classified as another category of financial assets. These include
investments in special purpose vehicles and equity investments in unquoted vehicles. They may be sold in response to
liquidity requirements, interest rate, exchange rate or equity price movements. AFS investments are initially recognised at
cost, which is considered as the fair value of the investment including any acquisition costs. AFS securities are
subsequently measured at fair value in the statement of financial position. Fair value changes on the AFS securities are
recognised directly in equity (AFS reserve) until the investment is sold or impaired. Once sold or impaired, the cumulative
gains or losses previously recognised in the AFS reserve are recycled to the profit or loss.
(e) Other financial liabilities
Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial
liabilities are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised
cost using the effective interest method. The fair value of other liabilities repayable on demand is assumed to be the
amount payable on demand at the Statement of Financial Position date.
Amortised cost measurement
The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial
liability is measured at initial recognition, minus principal payments, plus or minus the cumulative amortisation using the
effective interest method of any difference between the initial amount recognised and the maturity amount, less any
reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
When available, the Group measures the fair value of an instrument using quoted prices in an active market for that
instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and
regularly occurring market transactions on an arm's length basis.
If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These
include the use of recent arm's length transactions, reference to other instruments that are substantially the same for
which market observable prices exist, net present value and discounted cash flow analysis. In the instance that fair values
of assets and liabilities cannot be reliably measured, they are carried at cost.
For measuring derivatives that might change classification from being an asset to a liability or vice versa such as
interest rate swaps, fair values take into account both credit valuation adjustment (CVA) and debit valuation adjustment
(DVA) when market participants take this into consideration in pricing the derivatives.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the
Group has transferred substantially all risks and rewards of ownership. Any interest in transferred financial assets that
qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the
Statement of Financial Position. In transactions which the Group neither retains nor transfers substantially all the risks
and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the
asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value
of the transferred asset. There have not been any instances where assets have only been partially derecognised.
The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, expire, are
modified or exchanged.
3.8. Derivative financial instruments and hedge accounting
All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets,
including recent arm's length transactions or using valuation techniques such as discounted cash flow models. Derivatives
are shown in the Statement of Financial Position as assets when their fair value is positive and as liabilities when their
fair value is negative.
(a) Cash flow hedges
These cash flow hedges are used to hedge against fluctuations in future cash flows from interest rate movements on variable
rate customer deposits. On initial purchase the derivative is valued at fair value and then the effective portion of the
change in the fair value of the hedging instrument is recognised in equity (cash flow hedging reserve) until the gain or
loss on the hedged item is realised, when it is amortised; the ineffective portion of the hedging instrument is recognised
in the immediately in the profit or loss.
If a hedging derivative expires or is sold, terminated, or exchanged, or the hedge no longer meets the criteria for cash
flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. In a
discontinued hedge of a forecast transaction the cumulative amount recognised in other comprehensive income from the period
when the hedge was effective is reclassified from equity to profit or loss as a reclassification adjustment when the
forecast transaction occurs and affects profit or loss. If the forecast transaction is no longer expected to occur, then
the balance in other comprehensive income is reclassified immediately to profit or loss as a reclassification adjustment.
Hedge effectiveness testing
On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and the
hedged items, including the risk management objective and strategy in undertaking the hedge, together with the method that
will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception
of the hedge relationship as well as on an ongoing basis, as to whether the hedging instruments are expected to be highly
effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for
which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125%. The Group makes
an assessment for a cash flow hedge of a forecast transaction, as to whether the forecast transaction is highly probable to
occur and presents an exposure to variations in cash flows that could ultimately affect profit or loss.
(b) Embedded derivatives
Embedded derivatives arise from contracts ('hybrid contracts') containing both a derivative (the 'embedded derivative') and
a non-derivative (the 'host contract'). Where the economic characteristics and risks of the embedded derivatives are not
closely related to those of the host contract, and the host contract is not at fair value through profit or loss, the
embedded derivative is bifurcated and reported at fair value and gains or losses are recognised in the Statement of
Comprehensive Income.
3.9. Impairment of financial assets
(a) Assets carried at amortised cost
On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial
assets is impaired. Objective evidence is the occurrence of a loss event, after the initial recognition of the asset, that
impact on the estimated contractual future cash flows of the financial asset or group of financial assets, and can be
reliably estimated.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not
limited to, the following:
• Delinquency in contractual payments of principal or interest;
• Cash flow difficulties experienced by the borrower;
• Initiation of bankruptcy proceedings;
• Deterioration in the value of collateral;
• Deterioration of the borrower's competitive position;
If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at
amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount
and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate.
The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is
recognised in the Statement of Comprehensive Income. If a loan or held-to-maturity investment has a variable interest rate,
the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
The Group considers evidence of impairment for loans and advances at both a specific asset and collective level. All
individually significant loans and advances are assessed for specific impairment. Those found not to be specifically
impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing
collective impairment the Group uses historical trends of the probability of default, emergence period, the timing of
recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit
conditions are such that the actual losses are likely to be significantly different to historic trends.
When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written
off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent
recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the Statement of
Comprehensive Income.
A customer's account may be modified to assist customers who are in or have recently overcome financial difficulties and
have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Loans that
have renegotiated or deferred terms, resulting in a substantial modification to the cash flows, are no longer considered to
be past due but are treated as new loans recognised at fair value, provided the customers comply with the renegotiated or
deferred terms.
(b) Assets classified as available-for-sale
The Group assesses at each Statement of Financial Position date whether there is objective evidence that a financial asset
or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a
significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the
securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss -
measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that
financial asset previously recognised in profit or loss - is removed from equity and recognised in the profit or loss.
Impairment losses recognised in the profit or loss on equity instruments are reversed through other comprehensive income.
(c) Renegotiated loans
Loans that are neither subject to collective impairment assessment or individually significant and whose terms have been
renegotiated are no longer considered to be past due but are treated as new loans.
(d) Forbearance
Under certain circumstances, the Group may use forbearance measures to assist borrowers who are experiencing significant
financial hardship. Any forbearance support is assessed on a case by case basis in line with best practice and subject to
regular monitoring and review. The Group seeks to ensure that any forbearance results in a fair outcome for both the
customer and the Group.
3.10. Impairment of non-financial assets
The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets, are reviewed at
each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the
asset's recoverable amount is estimated. Impairment for goodwill is discussed in more detail under note 3.14.
3.11. Funding for Lending Scheme
Under the applicable International Accounting Standard, IAS 39, if a security is lent under an agreement to return it to
the transferor, as is the case for eligible securities lent by institutions to the Bank of England under the FLS, then the
security is not derecognised because the transferor retains all the risks and rewards of ownership. The UK Treasury Bills
borrowed from the Bank of England under the FLS are not recognised on the Statement of Financial Position of the
institution until such time as they are subject to a repurchase agreement with a third party, as they will not meet the
criteria for derecognition by the Bank of England. When the UK Treasury Bills are pledged as part of a sale and repurchase
agreement with a third party, amounts borrowed from the third party are recognised on the Statement of Financial Position.
3.12. Inventory
Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view
to develop and sell is accounted for as inventory.
Inventory is measured at the lower of cost or net realisable value. The cost of inventories comprises all costs of
purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
3.13. Assets classified as held for sale
Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily
through sale rather than through continuing use, are classified as held for sale. These assets and liabilities are
subsequently measured at the lower of its carrying amount and fair value less costs to sell. Once classified as held for
sale, intangible assets and property, plant and equipment are no longer amortised or depreciated.
3.14. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net
identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of
subsidiaries or associates is included in 'intangible assets'. Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold.
The Group reviews the goodwill for impairment at least annually or more frequently when events or changes in economic
circumstances indicate that impairment may have taken place and carry goodwill at cost less accumulated impairment losses.
Assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are
largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit" or "CGU"). For
impairment testing purposes goodwill cannot be allocated to a CGU that is greater than a reported operating segment. CGUs
to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest
level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is
allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The test for impairment
involves comparing the carrying value of goodwill with the present value of pre-tax cash flows, discounted at a rate of
interest that reflects the inherent risks of the CGU to which the goodwill relates, or the CGU's fair value if this is
higher.
(b) Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the
specific software. These costs are amortised on the basis of the expected useful lives (three to ten years).
Costs associated with maintaining computer software programs are recognised as an expense as incurred.
Costs associated with developing computer software which are assets in the course of construction, which management has
assessed to not be available for use, are not amortised.
(c) Other intangibles
Other intangibles include trademarks, customer relationships, broker relationships, technology and banking licences
acquired. These costs are amortised on the basis of the expected useful lives (three to ten years).
3.15. Property, plant and equipment
Land and buildings comprise mainly branches and offices and are stated at the latest valuation with subsequent additions at
cost less depreciation. Plant and equipment is stated at historical cost less depreciation. Historical cost includes
expenditure that is directly attributable to the acquisition of the items.
Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost
to their residual values over their estimated useful lives, applying the following annual rates, which are subject to
regular review:
Freehold buildings 50 years
Office equipment 6 to 20 years
Computer equipment 3 to 5 years
Motor vehicles 4 years
Leasehold improvements are depreciated over the term of the lease (until the first break clause). Gains and losses on
disposals are determined by deducting carrying amount from proceeds. These are included in the Statement of Comprehensive
Income. Depreciation on revalued freehold buildings is calculated using the straight-line method over the remaining useful
life. Revaluation of assets and any subsequent disposals are addressed through the revaluation reserve and any changes are
transferred to retained earnings.
3.16. Leases
(a) As a lessor
Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or
without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, the present
value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present
value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease
using the net investment method, which reflects a constant periodic rate of return.
Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are
classified as operating leases. When assets are held subject to operating leases, the underlying assets are held at cost
less accumulated depreciation, The assets are depreciated down to their estimated residual values on a straight line basis
over the lease term. Lease rental income is recognised on a straight line basis over the lease term.
(b) As a lessee
Rentals made under operating leases are recognised in the Statement of Comprehensive Income on a straight line basis over
the term of the lease.
Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified
as finance leases. Leased assets by way of finance leases are stated at an amount equal to the lower of their fair value
and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation. Minimum lease
payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is
allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining
balance of the liability.
3.17. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash equivalents comprises cash on hand and demand deposits, and
cash equivalents are deemed highly liquid investments that are convertible into cash with an insignificant risk of changes
in value with a maturity of three months or less at the date of acquisition.
3.18. Employee benefits
(a) Post-retirement obligations
The Group contributes to a defined contribution scheme and to individual defined contribution schemes for the benefit of
certain employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the
contribution rates agreed with individual employees.
The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an
employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash
refund or a reduction in the future payments is available.
There are no post-retirement benefits other than pensions.
(b) Share-based compensation
The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period in
which the employees become unconditionally entitled to the awards (the vesting period). The amount is recognised as
personnel expenses in the profit and loss, with a corresponding increase in equity. The Group adopts a Black-Scholes
valuation model in calculating the fair value of the share options as adjusted for an attrition rate of members of the
scheme and a probability of pay-out reflecting the risk of not meeting the terms of the scheme over the vesting period. The
number of share options that are expected to vest are reviewed at least annually.
The fair value of cash settled share-based payments is recognised as personnel expenses in the profit or loss with a
corresponding increase in liabilities over the vesting period. The liability is remeasured at each reporting date and at
settlement date based on the fair value of the options granted, with a corresponding adjustment to personnel expenses.
When share-based payments are changed from cash settled to equity settled and there is no change in the fair value of the
replacement award, it is seen as a modification to the terms and conditions on which the equity instruments were granted
and is not seen as the settlement and replacement of the instruments. Accordingly, the liability in the Statement of
Financial Position is reclassified to equity and the prospective charge to the profit or loss from the modification
reflects the spreading of the initial grant date fair value of the award over the remaining vesting period in line with the
policy on equity settled awards.
3.19. Taxation
Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits
arise. Income tax recoverable on tax allowable losses is recognised as an asset only to the extent that it is regarded as
recoverable by offset against current or future taxable profits.
Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from the
initial recognition of goodwill, the initial recognition of an asset or liability in a transaction other than a business
combination that at the time of the transaction affects neither accounting nor taxable profit or loss, and differences
relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future.
Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the Statement of
Financial Position date and are expected to apply when the related deferred tax asset is realised or the deferred tax
liability is settled.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities
and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax
entities, when they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities
will be realised simultaneously.
Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the
temporary differences can be utilised.
3.20. Issued debt and equity securities
Issued financial instruments or their components are classified as liabilities where the contractual arrangement results in
the Group having a present obligation to either deliver cash or another financial asset to the holder, to exchange
financial instruments on terms that are potentially unfavourable. Issued financial instruments, or their components, are
classified as equity where they meet the definition of equity and confer on the holder a residual interest in the assets of
the Company. The components of issued financial instruments that contain both liability and equity elements are accounted
for separately with the equity component being assigned the residual amount after deducting from the instrument as a whole
the amount separately determined as the fair value of the liability component.
Financial liabilities, other than trading liabilities at fair value, are carried at amortised cost using the effective
interest method as set out in policy 3.4. Equity instruments, including share capital, are initially recognised as net
proceeds, after deducting transaction costs and any related income tax. Dividend and other payments to equity holders are
deducted from equity, net of any related tax.
3.21. Share capital
(a) Share issue costs
Incremental costs directly attributable to the issue of new shares or options or the acquisition of a business by Arbuthnot
Banking Group or its subsidiaries, are shown in equity as a deduction, net of tax, from the proceeds.
(b) Dividends on ordinary shares
Dividends on ordinary shares are recognised in equity in the period in which they are approved.
(c) Share buybacks
Where any Group company purchases the Company's equity share capital (treasury shares), the consideration paid, including
any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company's
equity holders until the shares are cancelled or reissued.
3.22. Financial guarantee and loan commitments
Financial guarantees represent undertakings that the Group will meet a customer's obligation to third parties if the
customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the
form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total
guarantees or unused commitments, however, the likely amount of loss is expected to be significantly less; most commitments
to extend credit are contingent upon customers maintaining specific credit standards. Liabilities under financial guarantee
contracts are initially recorded at their fair value, and the initial fair value is amortised over the life of the
financial guarantee. Subsequently, the financial guarantee liabilities are measured at the higher of the initial fair
value, less cumulative amortisation, and the best estimate of the expenditure to settle obligations.
3.23. Fiduciary activities
The Group commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on
behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are
excluded from these financial statements, as they are not assets of the Group.
3.24. New standards and interpretations not yet adopted
The following standards, interpretations and amendments to existing standards have been published and are mandatory for the
Group's accounting periods beginning on or after 1 January 2016 or later periods, but the Group has not early adopted
them:
• IFRS 9, 'Financial instruments' (effective from 1 January 2018). This standard deals with the classification and
measurement of financial assets and will replace IAS 39. Phase one of this standard deals with the classification and
measurement of financial assets and represents a significant change from the existing requirements in IAS 39. The standard
contains three primary measurement categories for financial assets: 'amortised cost', 'fair value through other
comprehensive income' and 'fair value through profit or loss' and eliminates the existing categories of 'held to maturity',
'available for sale' and 'loans and receivables'. Phase two of the standard covers impairment, with a new expected loss
impairment model that will require expected credit losses to be accounted for from when financial instruments are first
recognised and lowers the threshold for the recognition of full lifetime expected losses. Phase three covers general hedge
accounting and introduces a substantially reformed model for hedge accounting with enhanced disclosure about risk
management activity. The new model aligns the accounting treatment with risk management activities.
• IFRS 15, 'Revenue from contracts with customers' (effective 1 January 2017). This standard establish the principles that
an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and
uncertainty of revenue and cash flows arising from a contract with a customer. This standard is unlikely to have a material
impact on the Group. (This standard has not yet been endorsed by the EU.)
• IFRS 16, 'Leases' (effective from 1 January 2019). The standard sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract i.e. the customer ('lessee') and the supplier
('lessor'). IFRS 16 replaces the previous leases Standards, IAS 17 Leases, and related Interpretations. IFRS 16 eliminates
the classification of leases as either operating leases or finance leases for a lessee. Instead all leases are treated in a
similar way to finance leases applying IAS 17. Leases are 'capitalised' by recognising the present value of the lease
payments and showing them either as lease assets (right-of-use assets) or together with property, plant and equipment. If
lease payments are made over time, a company also recognises a financial liability representing its obligation to make
future lease payments. The most significant effect of the new requirements in IFRS 16 will be an increase in lease assets
and financial liabilities. Accordingly, for companies with material off balance sheet leases, there will be a change to key
financial metrics derived from the company's assets and liabilities (for example, leverage ratios).
4. Critical accounting estimates and judgements in applying accounting policies
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next
financial year. Estimates and judgements are continually evaluated and are based on historical experience and other
factors, including expectations of future events that are believed to be reasonable under the circumstances.
4.1 Credit losses
The Group reviews its loan portfolios and held-to-maturity investments to assess impairment at least on a half-yearly
basis. The basis for evaluating impairment losses is described in accounting policy 3.9. Where financial assets are
individually evaluated for impairment, management uses their best estimates in calculating the net present value of future
cash flows. Management has to make judgements on the financial position of the counterparty and the net realisable value of
collateral (where held), in determining the expected future cash flows.
Any change in timing of estimated future cash flows (other than impairment) will adjust carrying value with gain or loss in
profit or loss. The revised carrying amount will be recalculated by discounting the revised estimated future cash flows at
the portfolios original effective interest rate.
In determining whether an impairment loss should be recorded in the Statement of Comprehensive Income, the Group makes
judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated
future cash flows from a portfolio of loans or held-to-maturity investments with similar credit characteristics, before the
decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating
that there has been an adverse change in the payment status of borrowers in a group, or national or local economic
conditions that correlate with defaults on assets in the Group. Management uses estimates based on historical loss
experience for assets with credit risk characteristics and
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