REG - Secure Trust BankArbuthnot Banking - 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 07:05
- Part 3: For the preceding part double click ID:nRSQ3659Sb
- 34.9 34.9
Total comprehensive income for the period - - - 34.9 34.9
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Dividends - - - (12.6) (12.6)
Charge for share based payments - - - 0.2 0.2
Total contributions by and distributions to owners - - - (12.4) (12.4)
Balance at 31 December 2015 7.3 79.3 - 48.6 135.2
Consolidated statement of cash flows
Year ended 31 December Year ended 31 December
2015 2014
Note £million £million
Cash flows from operating activities
Profit for the year 19.3 13.9
Adjustments for:
Income tax expense 10 5.5 3.6
Depreciation of property, plant and equipment 18 0.5 0.4
Amortisation of intangible assets 16 1.3 1.2
Impairment losses on loans and advances to customers 16.8 8.7
Share based compensation 0.2 0.5
Cash flows from operating profits before changes in operating assets and liabilities 43.6 28.3
Changes in operating assets and liabilities:
- net decrease in debt securities held to maturity 12.5 -
- net decrease/(increase) in loans and advances to banks 15.0 (11.3)
- net increase in loans and advances to customers (448.8) (227.7)
- net (increase)/decrease in other assets (2.6) 2.9
- net increase in amounts due to banks 19.1 15.8
- net increase in deposits from customers 424.7 171.8
- net decrease in other liabilities (6.0) (1.3)
Income tax paid (4.2) (0.8)
Net cash inflow/(outflow) from operating activities 53.3 (22.3)
Cash flows from investing activities
Purchase of property, plant and equipment 18 (1.1) (3.5)
Purchase of computer software 16 (2.3) (0.8)
Net cash flows from investing activities (3.4) (4.3)
Cash flows from financing activities
Net inflow on issue of share capital - 52.1
Dividends paid (12.6) (10.2)
Net cash flows from financing activities (12.6) 41.9
Net increase in cash and cash equivalents - Continuing operations 37.3 15.3
Net increase in cash and cash equivalents - Discontinued operations - 0.7
Cash and cash equivalents at 1 January 106.0 90.0
Cash and cash equivalents at 31 December 28 143.3 106.0
Company statement of cash flows
Year ended 31 December Year ended 31 December
2015 2014
Note £million £million
Cash flows from operating activities
Profit for the year 34.9 23.0
Adjustments for:
Income tax expense 2.0 4.8
Depreciation of property, plant and equipment 18 0.3 0.2
Amortisation of intangible assets 16 0.3 0.3
Impairment losses on loans and advances to customers 17.1 8.7
Share based compensation 0.2 0.5
Cash flows from operating profits before changes in operating assets and liabilities 54.8 37.5
Changes in operating assets and liabilities:
- net decrease in debt securities held to maturity 12.5 -
- net decrease/(increase) in loans and advances to banks 15.0 (11.3)
- net increase in loans and advances to customers (449.7) (224.9)
- net increase in other assets (29.8) (15.2)
- net increase in amounts due to banks 20.5 15.8
- net increase in deposits from customers 424.7 171.8
- net increase in other liabilities 7.7 7.0
Income tax paid (3.2) (2.9)
Net cash inflow/(outflow) from operating activities 52.5 (22.2)
Cash flows from investing activities
Purchase of property, plant and equipment 18 (0.8) (3.4)
Purchase of computer software 16 (2.2) (0.7)
Net cash flows from investing activities (3.0) (4.1)
Cash flows from financing activities
Net inflow on issue of share capital - 52.1
Dividends paid (12.6) (10.2)
Net cash flows from financing activities (12.6) 41.9
Net increase in cash and cash equivalents 36.9 15.6
Cash and cash equivalents at 1 January 104.1 88.5
Cash and cash equivalents at 31 December 28 141.0 104.1
Notes to the consolidated financial statements
1. Accounting policies
The principal 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.
1.1 Reporting entity
Secure Trust Bank PLC is a company incorporated in the United Kingdom (referred to as 'the Company'). The registered
address of the Company is One Arleston Way, Solihull, West Midlands, B90 4LH. The consolidated financial statements of the
Company as at and for the year ended 31 December 2015 comprise Secure Trust Bank PLC and its subsidiaries (together
referred to as 'the Group' and individually as 'subsidiaries'). The Group is primarily involved in banking and financial
services.
1.2 Basis of presentation
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 or early adopted by the Group and endorsed by the EU) and the
Companies Act 2006 applicable to companies reporting under IFRS. They have been prepared under the historical cost
convention, as modified by the revaluation of land and buildings and financial instruments at fair value through profit or
loss. The consolidated financial statements are presented in pounds sterling, which is the Group's functional and
presentational currency.
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 2.
The directors have assessed, in the light of current and anticipated economic conditions, the Group's ability to continue
as a going concern. The directors confirm they are satisfied that the Company and the Group have adequate resources to
continue in business for the foreseeable future. For this reason, they continue to adopt the 'going concern' basis for
preparing accounts.
The consolidated financial statements were authorised for issue by the Board of Directors on 16 March 2016.
The following International Financial Reporting Standards have been issued which are not yet effective and which have not
been adopted early:
· IFRS 9 'Financial instruments' (effective for annual periods beginning after 1 January 2018). This is the IASB's
replacement of IAS 39 'Financial Instruments: Recognition and Measurement'. 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. The expected
impact of this standard on the Group is set out in Principal risks and uncertainties.
· IFRS 15 'Revenue from contracts with customers' (effective for annual periods beginning after 1 January 2018). This
standard replaces a number of existing standards and interpretations and applies to contracts with customers, but does not
apply to insurance contracts, financial instruments or lease contracts, which are in the scope of other IFRSs. It also does
not apply if two companies in the same line of business exchange non-monetary assets to facilitate sales to other parties.
The standard specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide
users of financial statements with more informative relevant disclosures. It introduces a new revenue recognition model
that recognises revenue either at a point in time or over time. The model features a principles-based five-step model to be
applied to all contracts with customers. This standard is unlikely to have a material impact on the Group.
· 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 standard, 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).
The above standards have not yet been endorsed by the EU.
1.3 Consolidation
Subsidiaries
Subsidiaries are all investees 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.
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 and
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 share 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.
The parent company's investments in subsidiaries are recorded at cost less, where appropriate, provision for impairment in
value.
Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are
eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies
adopted by the Group.
Non-current assets held for sale and discontinued operations
Subsidiaries are de-consolidated from the date that control ceases. Under IFRS5, the Group classifies a non-current asset
as held-for-sale if its carrying amount will be recovered mainly through selling the asset rather than through usage. The
classification also applies to disposal groups, which are a group of assets and liabilities which an entity intends to
dispose of in a single transaction.
The conditions for a non-current asset or disposal group to be classified as held-for-sale are as follows:
· the assets must be available for immediate sale in their present condition and its sale must be highly probable;
· the asset must be currently marketed actively at a price that is reasonable in relation to its current fair value;
· the sale should be completed, or expected to be so, within a year from the date of the classification; and
· the actions required to complete the planned sale will have been made, and it is unlikely that the plan will be
significantly changed or withdrawn.
1.4 Interest income and expense
Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at
amortised cost and held to maturity using the effective interest method.
The effective interest method calculates the amortised cost of a financial asset or a financial liability and allocates the
interest income or interest expense over the relevant period. 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.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss,
interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of
measuring the impairment loss.
1.5 Net fee and commission income
Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an
accruals basis when the service has been provided. Fees and commissions income consists principally of weekly and monthly
fees from the OneBill and Current Account products, arrears fees in the Everyday Loans business along with associated
insurance commissions and commissions earned on debt collection activities in the Debt Managers business. Fee and
commission expenses consist primarily of fees and commission relating to the Current Account product.
1.6 Financial assets and financial liabilities
The Group classifies its financial assets at fair value through profit or loss, loans and receivables or held-to-maturity
and classifies its financial liabilities as other financial liabilities. Management determines the classification of its
investments at initial recognition. 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 at fair value through profit or loss
This category comprises derivative financial instruments which are utilised by the Group for hedging purposes. Financial
assets 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 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 the funds are advanced to customers. Loans and receivables are carried at
amortised cost using the effective interest method (see below).
(c) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities
that the Group's management has the positive intention and ability to hold to maturity. Held-to-maturity investments are
carried at amortised cost using the effective interest method.
(d) 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.
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 of the risks and rewards of ownership. In transactions in 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 or expire.
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, minus 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. The fair value of assets and liabilities traded in active markets are
based on current bid and offer prices respectively. If the market for a financial instrument is not active the Group
establishes a fair value by using an appropriate 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.
1.7 Foreign currencies
Transactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated into the Company's
functional currency at the rates prevailing on the balance sheet date. Exchange differences arising on the settlement of
monetary items, and on the retranslation of monetary items, are included in the profit and loss account for the period.
1.8 Derivative financial instruments and hedge accounting
For the Group, these comprise cash flow hedges. These are recognised at their fair value and are shown in the Statement of
Financial Position as assets when their face value is positive and as liabilities when their face value is negative.
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 items is realised, when it is amortised; the ineffective portion of the hedging instrument is recognised
immediately in profit or loss.
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.
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.
1.9 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the Statement of Financial Position when there
is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously.
1.10 Impairment of financial assets
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
impacts on the estimated 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;
· Breach of financial covenants or contractual obligations;
· Cash flow difficulties experienced by the borrower; and
· Initiation of bankruptcy proceedings.
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.
1.11 Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of the acquisition over the fair value of the Group's share of the net
identifiable assets acquired at the date of acquisition. Goodwill is held at cost less accumulated impairment losses and is
deemed to have an infinite life.
The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances
indicate that impairment may have taken place. Impairment losses are recognised in the Statement of Comprehensive Income if
the carrying amount exceeds the recoverable amounts.
(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, which are between three to ten
years.
Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred unless
it is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally
assessed standard of performance.
(c) Other intangibles
The acquisition of subsidiaries is accounted for in accordance with IFRS 3 'Business Combinations', which requires the
recognition of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. As part of
this process, it is necessary to recognise certain intangible assets which are separately identifiable and which are not
included on the acquiree's balance sheet.
Other intangible assets include trademarks, customer relationships, broker relationships and technology. The intangible
assets recognised as part of the Everyday Loans and V12 Finance Group acquisitions have been recorded at fair value and are
being amortised over their expected useful lives, which are between five and ten years, apart from Everyday Loans broker
relationships, which are being amortised over three years. The intangible asset relating to Everyday Loans has been
reclassified as an asset held for sale and has not been amortised since the conditional sale was agreed.
1.12 Property, plant and equipment
Property is held at historic cost as modified by subsequent revaluations less depreciation. The Group has elected under IAS
16.31 to measure its property at fair value. Revaluations are kept up to date such that the carrying amount does not differ
materially from its fair value as required by IAS 16.34. Revaluation of assets and any subsequent disposal are addressed
through the revaluation reserve and any changes are transferred to retained earnings.
Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Depreciation is calculated using the straight-line method to allocate their
cost to their residual values over their estimated useful lives, which are subject to regular review:
Land not depreciated
Freehold buildings 50 years
Leasehold improvements shorter of life of lease or 7 years
Computer equipment 3 to 5 years
Other equipment 5 to 10 years
Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the
Statement of Comprehensive Income.
1.13 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.
(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.
1.14 Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash equivalents comprise cash in hand and demand deposits, and
cash equivalents comprise highly liquid investments which 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, including certain loans and advances to banks
and short-term highly liquid debt securities.
1.15 Employee benefits
(a) Post-retirement obligations
The Group contributes to 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 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.
1.16 Share issue costs
Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of
the equity instruments. Costs associated with the listing of shares are expensed immediately.
1.17 Taxation
Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits
arise.
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. Deferred tax is determined using tax rates (and laws) that have
been enacted or substantially 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 assets and
liabilities, 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.
1.18 Dividends
Dividends on ordinary shares are recognised in equity in the period in which they are approved.
1.19 Significant items
Items which are material by both size and nature (i.e. outside of the normal operating activities of the Group) are treated
as significant items and disclosed separately on the face of the Statement of Comprehensive Income. The separate reporting
of these items helps to provide an indication of the Group's underlying business performance.
1.20 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.
2. Critical judgements and estimates
The Group makes certain judgements and estimates which affect the reported amounts of assets and liabilities. Critical
judgements and the assumptions used in calculating estimates 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.
2.1 Impairment losses on loans and advances to customers
The Group reviews its loan portfolios to assess impairment at least on a half-yearly basis. The basis for evaluating
impairment losses is described in accounting policy 1.10. 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 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. Loans and advances are identified as impaired by taking account of the age
of the debt's delinquency and the product type. The impairment provision is calculated by applying a percentage rate to the
balance of different ages and categories of impaired debt. The methodology and assumptions used for estimating both the
amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and recent
actual loss experience.
Within the Real Estate Finance and Asset Finance businesses, accounts which are impaired are assessed against the
discounted cashflows expected to arise in order to identify any impairment provisions. Collective provisions are assessed
only to the extent that there is sufficient data to justify an inherent level of losses within the current portfolios.
For specific Invoice Finance clients assessment is made as to the collectability of outstanding invoices in relation to the
amounts lent against them. If there is a deficit against outstanding invoices then other security is considered in terms of
value and collectability. If there is an overall shortfall then the unsecured amount is assessed as to whether a provision
is required. For collective provisions a view of the overall level of non-collectability in the portfolio is taken. The
level of provision required is under review as the product is new to the Bank therefore data is developing, so we have
estimated a level appropriate based on other data available in the industry.
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.
In assessing collective impairment the Group uses historical trends of the probability of default, 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.
As described in Note 1.10, certain customers' accounts may be modified to such an extent that they are no longer considered
to be past due but, rather, are treated as new loans. There is judgement involved in determining the level of modification
that results in this reassessment and with regard to the fair value at which the renegotiated loans are recorded. The Group
makes these judgements based on analyses of the loans involved and consideration of market rates of interest.
To the extent that the default rates differ from those estimated by 10%, the allowance for impairment on loans and advances
would change by an estimated £5.1 million.
2.2 Share Option Scheme valuations
The valuation of the equity settled Share Option Scheme was determined at the original grant date of 2 November 2011 using
Black-Scholes valuation models. In the opinion of the directors the terms of the scheme are such that there remains a
number of key uncertainties to be considered when calculating the probability of pay-out, which are set out below. The
directors also considered the probability of option holder attrition prior to the vesting dates, details of which are also
set out below.
Uncertainties in the regulatory environment continue. Any tightening of capital requirements will impact on the ability of
the Company to exploit future market opportunities and furthermore may inhibit its ability to maintain the required growth
in distributions. Taking these into account, the probability of pay-out has been judged as 100% for the remaining share
options (SOS2) which vest on 2 November 2016.
Although one participant in the Share Option Scheme left the Company during 2012 and was consequently withdrawn from the
Scheme, the directors consider that there is no further uncertainty surrounding whether the remaining participants will all
still be in situ and eligible at the vesting date. Therefore the directors have assumed no attrition rate for the remaining
share options over the scheme period.
The valuation of the cash settled Share Option Scheme was determined at 31 December 2015 using Black-Scholes valuation
models. In the opinion of the directors the terms of the scheme are such that there remains a number of key uncertainties
to be considered when calculating the probability of pay-out, which are considered to be similar to those set out above.
2.3 Average life of lending
IAS 39 requires interest earned from lending to be measured under the effective interest rate method. The effective
interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of
the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset.
Management must therefore use judgement to estimate the expected life of each instrument and hence the expected cash flows
relating to it. The accuracy of these estimates would therefore be affected by unexpected market movements resulting in
altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.
2.4 PPI Provisioning
The Group provides for its best estimate of redress payable in respect of historical sales of PPI, by considering the
likely future uphold rate for claims, in the context of confirmed issues and historical experience. The likelihood of
potential new claims is projected forward to 2018, as management believe this to be an appropriate time horizon,
recognising the significant decline in recent claims experience and the increasing subjectivity beyond that. The accuracy
of these estimates would be affected, were there to be a significant change in either the number of future claims or, the
incidence of claims upheld by the Financial Ombudsman. The amounts are included within accruals.
3. Maturity analysis of consolidated assets and liabilities
The table below shows the contractual maturity analysis of the Group's assets and liabilities as at 31 December 2015:
Due within one year Due after more than one year Total
At 31 December 2015 £million £million £million
ASSETS
Cash and balances at central banks 131.8 - 131.8
Loans and advances to banks 9.8 - 9.8
Loans and advances to customers 439.7 520.9 960.6
Debt securities held-to-maturity 3.8 - 3.8
Property, plant and equipment - 8.5 8.5
Intangible assets - 7.0 7.0
Deferred tax assets - 0.3 0.3
Other assets 7.1 - 7.1
Assets held for sale 118.5 - 118.5
Total assets 710.7 536.7 1,247.4
LIABILITIES
Due to banks 35.0 - 35.0
Deposits from customers 563.3 469.8 1,033.1
Current tax liabilities 3.2 - 3.2
Other liabilities 22.5 3.7 26.2
Liabilities held for sale 8.7 - 8.7
Total liabilities 632.7 473.5 1,106.2
The table below shows the contractual maturity analysis of the Group's assets and liabilities as at 31 December 2014:
Due within one year Due after more than one year Total
At 31 December 2014 £million £million £million
ASSETS
Cash and balances at central banks 81.2 - 81.2
Loans and advances to banks 39.8 - 39.8
Loans and advances to customers 220.7 401.8 622.5
Debt securities held-to-maturity 16.3 - 16.3
Property, plant and equipment - 8.1 8.1
Intangible assets - 8.2 8.2
Deferred tax assets 1.0 - 1.0
Other assets 5.2 - 5.2
Total assets 364.2 418.1 782.3
LIABILITIES
Due to banks 15.9 - 15.9
Deposits from customers 342.4 266.0 608.4
Current tax liabilities 3.6 - 3.6
Other liabilities 25.2 4.3 29.5
Total liabilities 387.1 270.3 657.4
The directors do not consider that the behavioural maturity is significantly different to the contractual maturity.
The table below shows the contractual maturity analysis of the Company's assets and liabilities as at 31 December 2015:
Due within one year Due after more than one year Total
At 31 December 2015 £million £million £million
ASSETS
Cash and balances at central banks 131.8 - 131.8
Loans and advances to banks 9.2 - 9.2
Loans and advances to customers 423.2 509.5 932.7
Debt securities held-to-maturity 3.8 - 3.8
Property, plant and equipment - 4.2 4.2
Intangible assets - 3.2 3.2
Investments - 3.7 3.7
Deferred tax assets
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