REG - CYBG PLCClydesdale Bank PLC - Final Results <Origin Href="QuoteRef">CYBGC.L</Origin> - Part 4

AucyberAnnouncement

22/11/2016 07:08

- Part 4: For the preceding part double click  ID:nRSV7721Pc 

Depreciation and Amortisation', issued May
2014 and effective for financial years beginning on or after 1 January 2016.  IAS 16 and IAS 38 both establish the
principle for the basis of depreciation and amortisation being the expected pattern of consumption of the future economic
benefits of an asset.  This amendment provides clarification that the use of certain revenue based methods to calculate
depreciation are not appropriate. 
 
·      'Annual Improvements to IFRS 2012-2014 Cycle', issued September 2014 and effective for financial years beginning on
or after 1 January 2016.  The IASB have made amendments to the following standards that are relevant to the Group and
Company: IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', IFRS 7 'Financial Instruments:
Disclosures', IAS 19 'Employee Benefits' and IAS 34 'Interim Financial Reporting'. 
 
·        Amendments to IAS 1: 'Disclosure Initiative', issued December 2014 and effective for financial years beginning on
or after 1 January 2016.  This includes narrow scope amendments providing clarification to existing IAS 1 'Presentation of
Financial Statements' requirements. 
 
There are a number of other standards and amendments relevant to the Group that are not available for adoption in the EU,
nor effective at 30 September 2016 and have not been applied by the Group in preparing these financial statements. The most
significant of these pronouncements is IFRS 9 'Financial Instruments', issued July 2014 and effective for financial years
beginning on or after 1 January 2018. An update on the Group's implementation of IFRS 9 is provided below. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
Update on the implementation of IFRS 9 
 
CYBG implementation strategy and approach 
 
The Group continues to work on its implementation strategy for IFRS 9, which is expected to receive EU endorsement by the
end of the 2016 calendar year, and has mobilised an IFRS 9 project team to ensure implementation in line with the standard
and other evolving regulatory guidance and industry practice. The project has representation from both the Finance and Risk
Management functions, with a Steering Committee and formal Project Control Board in place to provide the necessary
oversight.  The Board has also established a sub committee to oversight the implementation of IFRS 9 and the application of
Internal Rating Basis to regulatory capital. 
 
The primary objectives of the project include: defining accounting policies and approaches; co-ordinating with the Group's
IRB Programme to ensure risk models meet the required specifications; delivery of data and system changes; and updating the
credit provisioning operating model and overall governance framework.  Key decisions on the impairment requirements of IFRS
9 involve appropriate internal stakeholder consultation; rigorous internal review performed by senior representation from
both Finance and Risk Management; external review and challenge exercises; and presentation of the adopted impairment
accounting policy decisions to the project oversight committees. 
 
The Group's intention is to perform an end-to-end parallel run during the year commencing 1 October 2017, capturing the
IFRS 9 requirements for classification, measurement and impairment. The most significant of these will be the impairment
requirements of the standard, which will be closely monitored during the parallel run phase, to compare the results with
expectations and to ensure that the Group's initial proposed staging criteria produces an impairment allowance which
accurately reflects the credit risk provision in those financial assets that will be subject to a lifetime expected loss
calculation. 
 
The Group's current view on the three phases of IFRS 9 (classification and measurement, impairment and hedging) is as
follows: 
 
Classification and measurement 
 
An initial assessment of the classification and measurement requirements of IFRS 9 has been undertaken with the main issue
arising being the classification of financial assets in the IAS 39 category of available for sale (AFS) that does not exist
under IFRS 9. 
 
IFRS 9 simplifies the classification of financial assets by reducing the number of categories to just three (amortised
cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL)). The final
classification is based on a combination of the Group's business model and the contractual cash flow characteristics of the
instruments. The option to designate a financial asset at FVTPL in IAS 39 is largely retained in IFRS 9, with IFRS 9 also
affording a further option to designate certain equity instruments at FVOCI instead of accounting for these as FVTPL. 
 
The majority of the Group's financial assets under IAS 39 relate to loans and advances to customers and are currently
classified under loans and receivables and held at amortised cost; the Group expects these will remain in the amortised
cost category on implementation of IFRS 9. 
 
The Group is still considering the classification options that are available for other financial assets including Treasury
assets and other debt instruments currently held as AFS. 
 
Impairment (including modelling development) 
 
The impairment of financial assets under IFRS 9 is based on an expected credit loss (ECL) model which replaces the current
incurred loss methodology under IAS 39 and is the area where IFRS 9 will have the most significant impact. 
 
IFRS 9 requires a 12 month (Stage 1) ECL calculation where financial assets have not experienced a significant increase in
credit risk since origination; and a lifetime ECL calculation where it has been demonstrated that there has been a
significant increase in credit risk (Stage 2 and 3). The lifetime ECL calculation is further refined into separate stages
depending on whether the financial asset is credit impaired or not. When a financial asset is credit impaired (Stage 3),
the resultant methodology to calculate the loss allowance under IFRS 9 uses the same criteria as the Group's IAS 39
methodology for specific provisions, however it is anticipated that not all financial assets which are classified as Stage
3 will already have been subject to a specific provision under IAS 39. 
 
The area of IFRS 9's impairment criteria where the greatest judgement is required relates to when financial assets display
a significant deterioration in credit quality since initial recognition and subsequently move from a 12 month ECL
calculation (Stage 1) to a non-credit impaired lifetime ECL calculation (Stage 2). 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Update on the implementation of IFRS 9 (continued) 
 
The Group has reflected on what a significant increase in credit risk since initial recognition means in terms of both
Retail and SME portfolios and determined that here is no single factor that influences this decision; rather, a combination
of different criteria require to be assessed before concluding that a significant increase in credit risk since initial
recognition has taken place. For example, in SME portfolios, a combination of the Group's internal rating system and other
qualitative factors such as 'watch' status and 'approaching financial difficulty' status could be used in making this
determination. For Retail portfolios, the proposed approach will move accounts to a lifetime ECL when the residual lifetime
Probability of Default (PD) has deteriorated since origination by a pre-determined threshold, supplemented with other
credit quality indicators. The 30 DPD presumption for a significant increase in credit risk since origination that exists
within IFRS 9 will not be rebutted, and will form part of the overall assessment. The Group will not take advantage of the
low credit risk exemption offered in IFRS 9. The low credit risk exemption allows entities not to assess whether there has
been a significant increase in credit risk in a financial asset since initial recognition where the financial asset is
deemed as being of low credit risk at the reporting date. The Group will assess all financial assets under the same
criteria.  For both Retail and SME portfolios, the Group's forbearance programmes will also play a part in determining a
significant increase in credit risk since initial recognition. 
 
The Group will look to align the accounting and regulatory definition of default for IFRS 9 in both Retail and SME
portfolios. As part of this alignment, a review of the Group's forbearance strategies will be necessary and where a total
or partial change outside the normal terms and conditions of a contract is identified, this may come under the Group's
revised definition of default. Other forbearance measures undertaken by the Group that do not fall under the definition of
default would form part of the assessment of a significant increase in credit risk since origination and attract a lifetime
ECL calculation under Stage 2. 
 
The Group will look to leverage off the model development work that is necessary under the IRB Programme as far as
practically possible for IFRS 9 purposes with new Retail models and the transformation and alignment of existing SME models
developed for all products and portfolios. The model development programme for IFRS9 will run concurrently with the IRB
Programme. The Group will look to apply appropriate and proportional segmentation to the modelling approach for the Retail
portfolio of mortgages, personal loans, credit cards and current accounts. For the SME portfolio, the segmentation that
exists within the Group's internal rating system already meets the requirements of IFRS 9. 
 
The Group's loan commitments and financial guarantee contracts will be assessed under IFRS 9's impairment criteria as part
of the overall Retail and SME impairment methodologies.  In addition, the Group will also apply the single impairment
principles introduced by IFRS 9 to all other financial assets identified by the Group under the amortised cost and FVOCI
classification categories. 
 
The Group will continue to refine the ECL approach under IFRS 9 and provide an update on the progress made at each
reporting period until implementation. This is in line with the approach recommended by the Enhanced Disclosure Task Force
in their ECL report in November 2015. 
 
Hedging 
 
Until the guidance on hedging accounting is finalised by the IASB, the Group will look to exercise the accounting policy
choice afforded by IFRS 9 and continue to apply the hedge accounting requirements of IAS 39. The Group is assessing the
revised hedge accounting disclosures required by the amendment to IFRS 7 'Financial Instruments: Disclosures' and will look
to implement these where appropriate. 
 
Other standards and amendments 
 
Listed below are the other standards and amendments relevant to the Group that are not available for adoption in the EU,
nor effective at 30 September 2016 and that have not therefore been applied by the Group in preparing these financial
statements. The Group is currently assessing the impact of these standards and amendments. 
 
·      IFRS 16 'Leases' issued on 13 January 2016 and effective for financial years beginning on or after 1 January 2019.
This standard replaces IAS 17: Leases and will result in most leases being brought onto a lessee's balance sheet under a
single lease model, removing the distinction between finance and operating leases. The standard requires lessees to
recognise a right of use asset and a liability for future payments arising from a lease contract. Lessor accounting
requirements remain aligned to the current approach under IAS 17. 
 
·     Amendments to IAS 12: 'Recognition of Deferred Tax Assets for Unrealised Losses' issued on 19 January 2016 and
effective for financial years beginning on or after 1 January 2017. The amendments clarify the requirements on the
recognition of deferred tax assets for unrealised losses. 
 
·     Amendments to IAS 7: 'Disclosure initiative' issued on 29 January 2016 and effective for financial years beginning on
or after 1 January 2017. The amendments to IAS 7: Statement of Cash Flows require disclosures that enable users of the
financial statements to evaluate changes in liabilities arising from an entity's financing activities. 
 
·     Amendments to IFRS 2: 'Classification and Measurement of Share-based Payment Transactions' issued on 20 June 2016 and
effective for financial years beginning on or after 1 January 2017. The amendments provide guidance on the effects of
vesting and non-vesting conditions on the measurement of cash-settled equity based payments; classification of equity based
payments with a net settlement feature for withholding tax obligations; and accounting for modifications to a equity based
payment that change the classification from cash-settled to equity-settled. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Foreign currency 
 
Functional and presentation 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 pounds sterling (GBP), which is also the Group's presentation currency, rounded to the nearest million pounds
sterling (£m) unless otherwise stated. 
 
Transactions and balances 
 
Initially, at the date of a foreign currency transaction, the Group records an asset, liability, expense or revenue arising
from a transaction using the end of day spot exchange rate between the functional and foreign currency on the transaction
date. 
 
Subsequently, at each reporting date, the Group translates foreign currency monetary items at the closing spot rate.
Foreign exchange differences arising on translation or settlement of monetary items are recognised in the income statement
during the year in which the gains or losses arise. 
 
Foreign currency non-monetary items measured at historical cost are translated at the date of the transaction.  Foreign
currency non-monetary items measured at fair value will be translated at the date when the fair value is determined. 
Foreign exchange differences are recognised directly in equity for non-monetary items where any component of associated
gains or losses is recognised directly in equity.  Foreign exchange differences arising from non-monetary items, whereby
the associated gains or losses are recognised in the income statement, are also recognised in the income statement. 
 
Revenue recognition 
 
Net interest income 
 
Interest income is reflected in the income statement using the effective interest method. 
 
The effective interest method is a method of calculating amortisation using the effective interest rate of a financial
asset or financial liability.  The effective interest rate is the rate that exactly discounts the estimated stream of
future cash payments or receipts over the expected life of the financial instrument or, when appropriate, a shorter period,
to the net carrying amount of the financial asset or liability. 
 
When calculating the effective interest rate, the cash flows are estimated considering all contractual terms of the
financial instrument (e.g. prepayment, call and similar options) excluding future credit losses. 
 
The calculation of the effective interest rate includes all fees and points 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. 
Where it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of
financial instruments), the contractual cash flows over the full contractual term of the financial instrument (or group of
financial instruments) are used. 
 
Loan origination and commitment fees are recognised as revenue within the effective interest rate calculation.  When the
non-utilisation of a commitment fee occurs, this is taken as revenue upon expiry of the agreed commitment period.  Loan
related administration and service fees are recognised as revenue over the period of service. 
 
Direct loan origination costs are netted against loan origination fees and the net amount recognised as revenue over the
life of the loan as an adjustment of yield.  All other loan related costs are expensed as incurred. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Revenue recognition (continued) 
 
Fees and commissions 
 
Fees and commissions not integral to the effective interest rate, arising from services provided to customers and third
parties, are recognised on an accruals basis when the service has been provided or on completion of the underlying
transaction to which the fee relates. 
 
Gains less losses on financial instruments at fair value through profit or loss 
 
Gains less losses on financial instruments at fair value through profit or loss comprise fair value gains and losses from
three distinct activities: 
 
·              derivatives classified as held for trading; 
 
·              hedged assets, liabilities and derivatives designated in hedge relationships; and 
 
·              financial assets and liabilities designated at fair value through profit or loss. 
 
For trading derivatives, the full change in fair value is recognised inclusive of interest income and expense arising on
those derivatives.  However, in cases where a trading derivative is economically hedging an interest bearing financial
asset or liability designated at fair value through profit or loss, the interest income and expense attributable to the
derivative is recognised within net interest income and not as part of the fair value movement of the trading derivative. 
 
Hedged assets, liabilities and derivatives designated in hedge relationships result in the recognition in income of (i)
fair value movements on both the hedged item and hedging derivative in a fair value hedge relationship (the net of which
represents hedge ineffectiveness), and (ii) hedge ineffectiveness on cash flow hedge relationships. 
 
Other assets and liabilities at fair value comprise fair value movements on those items designated as fair value through
profit or loss. 
 
Interest income and interest expense on hedged assets and liabilities and financial assets and liabilities designated as
fair value through profit or loss are recognised in net interest income. 
 
Dividend income 
 
Dividend income is recorded in the income statement on an accruals basis when the Group's right to receive the dividend has
been established. 
 
Taxation 
 
Income tax on the profit or loss for the year comprises current and deferred tax.  Income tax is recognised in the income
statement except to the extent that it is related to items recognised in equity, in which case the tax is also recognised
in equity. 
 
Income tax expense or revenue is the tax payable or receivable on the current year's taxable income based on the applicable
tax rate adjusted by changes in deferred tax assets and liabilities. 
 
Current tax 
 
Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted
or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Taxation (continued) 
 
Deferred tax 
 
Deferred tax assets and liabilities are recognised 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 substantively enacted by the balance sheet date and are expected to apply when the
related deferred tax asset is realised or the deferred tax liability is settled. 
 
Deferred tax assets are only recognised for temporary differences, unused tax losses and unused tax credits if it is
probable that future taxable amounts will arise against which those temporary differences and losses may be utilised. 
 
Dividends on ordinary shares 
 
Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the
Company's shareholders.  Interim dividends are deducted from equity when they are declared and no longer at the discretion
of the Company. 
 
Dividends for the year that are approved after the balance sheet date are disclosed as an event after the balance sheet
date. 
 
Earnings per share 
 
Basic earnings per share is calculated by taking the profit attributable to ordinary shareholders of the parent company and
dividing this by the weighted-average number of ordinary shares outstanding during the period.  Any own shares held in
employee benefit trusts are excluded from this calculation. 
 
Diluted earnings per share requires that the weighted average number of ordinary shares in issue is adjusted to assume
conversion of all dilutive potential ordinary shares.  These arise from awards made under share-based incentive schemes. 
Share awards with performance conditions attaching to them are not considered to be dilutive unless these conditions have
been met at the reporting date. 
 
Cash and cash equivalents 
 
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months'
maturity from the date of acquisition.  This includes cash and liquid assets and amounts due to other banks (to the extent
less than 90 days). 
 
Repurchase and reverse repurchase agreements 
 
Securities sold subject to repurchase agreements ('repos') are retained in their respective balance sheet categories.  The
counterparty liability is included in amounts due to other banks, or due to customers as appropriate, based upon the
counterparty to the transaction. 
 
Securities purchased under agreements to resell ('reverse repos') are accounted for as collateralised loans.  Securities
borrowed are not recognised in the financial statements unless they are sold to third parties, in which case the purchase
and sale are recorded with the gain or loss included in trading income.  The obligation to return securities borrowed is
recorded at fair value as a trading liability.  Receivables due to the Group under reverse repo agreements are normally
classified as deposits with other banks or cash and cash equivalents as appropriate. 
 
The difference between the sale and repurchase price of repos and reverse repos is treated as interest and accrued over the
life of the agreements using the effective interest method. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Financial instruments 
 
Recognition and derecognition of financial instruments 
 
A financial asset or a financial liability is recognised on the balance sheet when the Group becomes party to the
contractual provisions of the instrument.  Loans and receivables are recognised when cash is advanced (or settled) to the
borrowers. 
 
Purchases and sales of financial assets classified within fair value through profit or loss are recognised on trade date,
being the date that the Group is committed to purchase or sell a financial asset. 
 
The Group classifies its financial assets in the following categories: financial assets at fair value through profit or
loss; loans and receivables; and financial assets available for sale.  Management determines the classification of its
financial assets at initial recognition. 
 
The Group classifies its financial liabilities in the following categories: financial liabilities at fair value through
profit or loss; and other financial liabilities measured at amortised cost. 
 
The Group derecognises a financial asset when the contractual cash flows from the asset expire or it transfers the right to
receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of
ownership are transferred. 
 
A financial liability is derecognised from the balance sheet when the Group has discharged its obligation to the contract,
or the contract is cancelled or expires. 
 
Offsetting financial instruments 
 
A financial asset and a financial liability will be offset and the net amount presented on the balance sheet if, and only
if, the Group currently has a legally enforceable right to set off the recognised amounts and it intends either to settle
on a net basis, or to realise the asset and settle the liability simultaneously. 
 
Financial instruments designated at fair value through profit or loss 
 
Upon initial recognition, financial assets and liabilities may be designated at fair value through profit or loss and are
initially recognised at fair value, with transaction costs being recognised in the income statement immediately. 
Subsequently, they are measured at fair value with gains and losses recognised in the income statement as they arise. 
Items held at fair value through profit or loss comprise both items held for trading and items specifically designated as
fair value through profit or loss at initial recognition. 
 
Restrictions are placed on the use of the designated fair value measurement option and the classification can only be used
in the following circumstances: 
 
·       if a host contract contains one or more embedded derivatives, the Group may designate the entire contract as being
held at fair value; 
 
·    designating the instruments will eliminate or significantly reduce measurement or recognition inconsistencies (i.e.
eliminate an accounting mismatch) that would otherwise arise from measuring related assets or liabilities on a different
basis; or 
 
·      assets and liabilities are both managed and their performance is evaluated on a fair value basis in accordance with
documented risk management and investment strategies. 
 
Financial assets held for trading 
 
A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the near
term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of
short term profit taking, or it is a derivative not in a qualifying hedge relationship. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Financial instruments (continued) 
 
Financial assets available for sale 
 
Financial assets available for sale can be listed or unlisted and are non-derivative financial assets that are designated
as available for sale and are not classified into any of the categories of (i) fair value through profit or loss; or (ii)
loans and receivables and are recognised on trade date. 
 
Financial assets available for sale are initially recognised at fair value including direct and incremental transaction
costs.  They are subsequently measured at fair value.  Gains and losses arising from changes in fair value are included as
a separate component of equity until sale or impairment when the cumulative gain or loss is transferred to the income
statement. 
 
Interest income is determined using the effective interest method.  Impairment losses and translation differences on
monetary items are recognised in the income statement within the year in which they arise. 
 
Financial liabilities 
 
A financial liability is classified as held for trading if it is incurred principally for the purpose of selling in the
near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence
of short term profit taking, or it is a derivative not in a qualifying hedge relationship. 
 
All other financial liabilities are measured at amortised cost using the effective interest method. 
 
Fair value measurement 
 
Fair value is defined as 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. 
 
Where no such active market exists for the particular asset or liability, the Group uses a valuation technique to arrive at
the fair value, including the use of transaction prices obtained in recent arm's length transactions where possible,
discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. 
In doing so, fair value is estimated using a valuation technique that makes maximum possible use of market inputs and that
places minimal possible reliance upon entity-specific inputs. 
 
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, which
represents the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by
comparison with other observable current market transactions in the same instrument (i.e. without modification or
repackaging) or based on a valuation technique whose variables include only data from observable markets.  When such
evidence exists, the Group recognises profits or losses on the transaction date. 
 
The carrying value of financial assets at fair value through profit or loss incorporates the credit risk attributable to
the counterparty.  Changes in the credit profile of the counterparty are reflected in the fair value of the asset and
recognised in the income statement. 
 
In certain limited circumstances the Group applies the fair value measurement option to financial assets. This option is
applied to loans and advances where the inherent market risks (principally interest rate and option risk) are individually
hedged using appropriate interest rate derivatives. The loan is designated as being carried at fair value through profit or
loss to offset the movements in the fair value of the derivative within the income statement and therefore avoid accounting
mismatch. When this option is applied the asset is included within other financial assets at fair value, and not within
loans and advances. When a loan is held at fair value, a statistical based calculation is used to estimate expected losses
attributable to adverse movements in credit risk on the assets held. This adjustment to the credit quality of the asset is
then applied to the carrying amount of the loan to arrive at fair value. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Derivative financial instruments and hedge accounting 
 
All derivatives are recognised on the balance sheet at fair value on trade date and are classified as trading except where
they are designated as part of an effective hedge relationship.  The carrying value of a derivative is measured at fair
value throughout the life of the contract.  Derivatives are carried as assets when the fair value is positive and as
liabilities when the fair value is negative. 
 
The method of recognising the resulting fair value gain or loss on a derivative depends on whether the derivative is
designated as a hedging instrument and, if so, the nature of the item being hedged.  The Group designates certain
derivatives as either hedges of the fair value of recognised assets or liabilities or firm commitments (a fair value
hedge); or hedges of highly probable future cash flows attributable to a recognised asset or liability, or a highly
probable forecast transaction (a cash flow hedge).  Hedge accounting is used for derivatives designated in this way
providing certain criteria are met. The Group makes use of derivative instruments to manage exposures to interest rates and
foreign currency 
 
The Group documents, at the inception of a transaction, the relationship between hedging instruments and the hedged items,
and the Group's risk management objective and strategy for undertaking these hedge transactions.  The Group documents how
effectiveness will be measured throughout the life of the hedge relationship and its assessment, both at hedge inception
and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items.  A hedge is expected to be highly effective if the changes
in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated are
expected to offset in a range of 80% to 125%. 
 
Fair value hedge 
 
The carrying value of the hedged item on initial designation is adjusted for the fair value attributable to the hedged
risk.  Subsequent to initial designation, changes in the fair value of derivatives that are designated and qualify as fair
value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk.  The movement in the fair value of the hedged item attributable to the
hedged risk is made as an adjustment to the carrying value of the hedged asset or liability.  Where the hedged item is
derecognised from the balance sheet, the adjustment to the carrying amount of the asset or liability is immediately
transferred to the income statement. 
 
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, the
adjustment to the carrying amount of a hedged item is amortised to the income statement on an effective interest basis over
the remaining life of the asset or liability. 
 
Cash flow hedge 
 
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are
recognised in equity.  Specifically, the separate component of equity is adjusted to the lesser of the cumulative gain or
loss on the hedging instrument, and the cumulative change in fair value of the expected future cash flows on the hedged
item from the inception of the hedge.  Any remaining gain or loss on the hedging instrument is recognised in the income
statement.  The carrying value of the hedged item is not adjusted.  Amounts accumulated in equity are transferred to the
income statement in the period(s) in which the hedged item affects profit or loss. 
 
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any
cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction
is ultimately recognised in the income statement.  When a forecast transaction is no longer expected to occur, the
cumulative gain or loss that was reported in equity is immediately transferred to the income statement. 
 
Derivatives that do not qualify for hedge accounting 
 
Certain derivative instruments do not qualify for hedge accounting.  This could occur for two reasons: 
 
·      the derivative is held for purposes of short term profit taking; or 
 
·      the derivative is held to economically hedge an exposure but does not meet the accounting criteria for hedge
accounting. 
 
In both these cases, the derivative is classified as a trading derivative and changes in the value of the derivative are
immediately recognised in the income statement. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Loans and advances 
 
Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market and which are not classified as available for sale or designated at fair value through profit or loss.  They arise
when the Group provides money or services directly to a customer with no intention of trading the loan.  Loans and advances
include overdrafts, credit card lending, market rate advances, bill financing, mortgages, lease finance and term lending. 
 
Loans and advances are initially recognised at fair value including direct and incremental transaction costs.  They are
subsequently recorded at amortised cost, using the effective interest method, adjusted for impairment losses and unearned
income.  They are derecognised when the rights to receive cash flows have expired or the Group has transferred
substantially all the risks and rewards of ownership. 
 
As noted above, in certain limited circumstances the Group applies the fair value measurement option to financial assets. 
This option is applied to loans and advances where the inherent market risks (principally interest rate and option risk)
are individually hedged using appropriate interest rate derivatives.  The loan is designated as being carried at fair value
through profit or loss to offset the movements in the fair value of the derivative within the income statement and
therefore avoid accounting mismatch.  When this option is applied the asset is included within other financial assets at
fair value, and not within loans and advances.  When a loan is held at fair value, a statistical-based calculation is used
to estimate expected losses attributable to adverse movements in credit risk on the assets held.  This adjustment to the
credit quality of the asset is then applied to the carrying amount of the loan to arrive at fair value. 
 
Impairment of financial assets other than fair value loans 
 
The Group assesses at each balance sheet date whether there is evidence that a financial asset or a portfolio of financial
assets that is not carried at fair value through profit or loss is impaired.  A financial asset or portfolio of financial
assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a
result of one or more loss events that occurred after the initial recognition of the asset and prior to the balance sheet
date ('a loss event'), and that loss event or events has had an impact on the estimated future cash flows of the financial
asset or the portfolio that can be reliably estimated. 
 
The Group first assesses whether objective evidence of impairment exists individually for financial assets that are
individually significant, and individually or collectively for financial assets that are not individually significant.  If
the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether
significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and
collectively assesses them for impairment.  Assets that are individually assessed for impairment and for which an
impairment loss is or continues to be recognised are not included in a collective assessment of impairment. 
 
For loans and advances, the amount of impairment loss is measured as the difference between the asset's carrying amount and
the present value of the estimated future cash flows discounted at the asset's original effective interest rate.  The
amount of the loss is recognised using an allowance account and the amount of the loss is included in the income
statement. 
 
The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the
cash flows that may result from foreclosure and any costs for obtaining and selling the collateral, whether or not
foreclosure is probable. 
 
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar risk
characteristics, taking into account asset type, industry, geographical location, collateral type, past-due status and
other relevant factors.  These characteristics are relevant to the estimation of future cash flows for groups of such
assets by being indicative of the counterparty's ability to pay all amounts due according to the contractual terms of the
assets being evaluated. 
 
Future cash flows for a group of financial assets that are collectively evaluated for impairment are estimated on the basis
of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk
characteristics similar to those in the group.  Historical loss experience is adjusted on the basis of current observable
data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is
based and to remove the effects of conditions in the historical period that do not currently exist.  In addition, the Group
uses its experienced judgement to estimate the amount of an impairment loss.  This incorporates amounts calculated to
overcome model deficiencies and systemic risks where appropriate and is supported by historic loss experience data.  The
use of such judgements and reasonable estimates is considered by management to be an essential part of the process. 
 
The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences
between loss estimates and actual loss experience. 
 
Following impairment, interest income is recognised using the original effective rate of interest which was used to
discount the future cash flows for the purpose of measuring the impairment loss. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Impairment of financial assets other than fair value loans (continued) 
 
When a loan is uncollectible, it is written off against the related provision.  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 reduce the amount of the expense in the income statement. 
 
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an
event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the
allowance account.  The amount of the reversal is recognised in the income statement. 
 
If the originally contracted terms of loans and advances are amended, the amounts are classified as restructured and may
also be disclosed as forbearance if the customer is experiencing, or is about to experience, difficulties in meeting their
financial commitments to the Group.  Such accounts accrue interest as long as the loan performs in accordance with the
restructured terms. 
 
Equity and debt instruments - classed as available for sale 
 
In the case of equity instruments classified as available for sale, the Group seeks evidence of a significant or prolonged
decline in the fair value of the security below its cost to determine whether impairment exists.  Where such evidence
exists, the cumulative net loss that has been previously recognised directly in equity is removed from equity and
recognised in the income statement. 
 
Reversals of impairment of equity shares classified as available for sale are not recognised in the income statement. 
Increases in the fair value of equity shares classified as available for sale after impairment are recognised directly in
equity. 
 
In the case of debt instruments classified as available for sale, impairment is assessed based on the same criteria as all
other financial assets.  Where evidence of impairment exists, the net loss that has been previously recognised directly in
equity is recognised in the income statement.  Reversals of impairment of debt securities classified as available for sale
are recognised in the income statement. 
 
Leases 
 
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and
requires an assessment of whether: 
 
·      fulfilment of the arrangement is dependent on the use of a specific asset or assets; and 
 
·      the arrangement conveys a right to use the asset. 
 
As lessee 
 
The leases entered into by the Group as lessee are primarily operating leases.  Operating lease rentals are charged to the
income statement on a straight line basis over the period of the lease. 
 
When an operating lease is terminated before the end of the lease period, any payment made to the lessor by way of penalty
is recognised as an expense in the period of termination. 
 
Sale and leaseback leases entered into by the Group as lessee are primarily operating leases.  Where an operating lease is
established at fair value, any excess of sales proceeds over the carrying amount is recognised immediately in the income
statement. 
 
As lessor 
 
Leases entered into by the Group as lessor, where the Group transfers substantially all the risks and rewards of ownership
to the lessee, are classified as finance leases.  The net investment in the lease, which is comprised of the present value
of the lease payments including any guaranteed residual value and initial direct costs, is recognised as a receivable.  The
difference between the gross receivable and the present value of the receivable is unearned income.  Income is recognised
over the term of the lease using the net investment method (before tax) reflecting a constant periodic rate of return. 
 
Assets under operating leases are included within property, plant and equipment at cost and depreciated over the useful
life of the lease after taking into account anticipated residual values.  Operating lease rental income is recognised
within other operating income in the income statement on a straight line basis over the life of the lease.  Depreciation is
recognised within depreciation expense in the income statement consistent with the nature of the asset. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Property, plant and equipment 
 
All freehold and long term leasehold land and buildings are revalued annually on an open market basis by the directors to
reflect current market values, based on advice received from independent valuers.  In addition, full independent valuations
are carried out on a three year cycle on an open market basis, including directly attributable acquisition costs but
without deducting expected selling costs.  For properties that are vacant, valuations are carried out on an open market
basis.  Revaluation increments are credited to the asset revaluation reserve, unless these reverse deficits on revaluations
charged to the income statement in prior years.  To the extent that they reverse previous revaluation gains, revaluation
losses are charged against the asset revaluation reserve.  This policy is applied to assets individually. Revaluation
increases and decreases are not offset, even within a class of assets, unless they relate to the same asset. 
 
All other items of property, plant and equipment are carried at cost, less accumulated depreciation and impairment losses. 
Historical cost includes expenditure that is directly attributable to acquisition of the asset. 
 
Property, plant and equipment carrying amounts are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.  An asset's carrying amount is written down immediately to its
recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.  The recoverable amount
is the higher of (i) the asset's fair value less costs to sell and (ii) the asset's value in use. 
 
Where a group of assets working together supports the generation of cash inflows largely independent of cash inflows from
other assets or groups of assets, the recoverable amount is assessed in relation to that group of assets (a cash-generating
unit). 
 
With the exception of freehold land, all items of property, plant and equipment are depreciated or amortised using the
straight line method, at rates appropriate to their estimated useful life to the Group.  For major classes of property,
plant and equipment, the annual rates of depreciation or amortisation are: 
 
 ·      buildings                        2%                                                                     
 ·      leases (leasehold improvements)  the lower of the expected lease term and the asset's useful life; and  
 ·      fixtures and equipment           10% to 33.33%                                                          
 
 
The residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each reporting date.  Gains or
losses on the disposal of property, plant and equipment, which are determined as the difference between the net sale
proceeds and the carrying amount at the time of sale, are included in the income statement.  Any realised amounts in the
asset revaluation reserve are transferred directly to retained earnings. 
 
Investment properties 
 
These are properties (land or buildings, or part of a building, or both) held by the owner or by the lessee under a finance
lease to earn rentals or for capital appreciation or both, rather than for: 
 
·      use in the production or supply of goods or services or for administrative purposes; or 
 
·      sale in the ordinary course of business. 
 
Investment property assets are carried at fair value, with fair value movements taken to the income statement in the year
in which they arise.  Investment property assets are revalued annually by the directors to reflect fair values.  Directors'
valuations are based on advice received from independent valuers.  Such valuations are performed on an open market basis
being the amounts for which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable willing
seller in an arm's length transaction at the valuation date.  Newly acquired investment property assets are held at cost
(equivalent to fair value due to their recent acquisition) until the time of the next annual review, a period not exceeding
12 months. 
 
Investments in controlled entities and associates 
 
The Group's investments in controlled entities and associates are valued at cost or valuation less any provision for
impairment.  Such investments are reviewed annually for impairment, or more frequently when there are indications that
impairment may have occurred.  Losses relating to impairment in the value of shares in controlled entities and associates
are recognised in the income statement. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Intangible assets 
 
The identifiable and directly associated external and internal costs of acquiring and developing software are capitalised
where the software is controlled by the Group, and where it is probable that future economic benefits that exceed its cost
will flow from its use over more than one year.  Costs associated with maintaining software are recognised as an expense as
incurred.  Capitalised computer software costs are amortised on a straight line basis over their expected useful lives,
usually between three and eight years.  Impairment losses are recognised in the income statement as incurred. 
 
Computer software is stated at cost, less amortisation and provision for impairment, if any. 
 
Impairment of non-financial assets 
 
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.  An impairment loss is recognised for the amount by which the carrying
amount of an asset exceeds its recoverable amount. 
 
The recoverable amount of an asset is the higher of its fair value less costs of disposal or its value in use. 
 
For assets that do not generate largely independent cash inflows, the recoverable amount is determined for the cash
generating unit to which that asset belongs.  Management judgement is applied to identify cash generating units and they
represent a group of assets that generate cash inflows that are largely independent from other assets or groups of assets. 
 
Provisions for liabilities and charges 
 
Provisions for liabilities and charges are recognised when a legal or constructive obligation exists as a result of past
events, it is probable that an outflow of economic benefits will be necessary to settle the obligation, and the obligation
can be reliably estimated.  Provisions for liabilities and charges are not discounted to the present value of their
expected net future cash flows except where the time value of money is considered material. 
 
Conduct Indemnity 
 
As part of the demerger, NAB and the Company have entered into a Conduct Indemnity Deed.  The accounting for this matter is
discussed in note 27. 
 
Pension and post retirement costs 
 
Employees of the Group are entitled to benefits on retirement, disability or death from the Group's pension plans.  The
Group operates both defined benefit and defined contribution pension schemes. 
 
Defined contribution pension scheme 
 
The defined contribution scheme receives fixed contributions from Group companies and the Group's obligation for
contributions to these plans recognised as an expense in the income statement as incurred.  Prepaid contributions are
recognised as an asset to the extent that a cash refund or a reduction in the future payment is available. 
 
Defined benefit pension scheme 
 
The defined benefit scheme provides defined benefits based on years of service and career averaged revalued earnings for
benefits accruing after 1 April 2006.  A liability or asset in respect of the defined benefit scheme is recognised on the
balance sheet and is measured as the present value of the defined benefit obligation less the fair value of the defined
benefit scheme assets at the reporting date.  The present value of the defined benefit obligation for the scheme is
discounted by high quality corporate bond rates that have maturity dates approximating to the terms of the Group's defined
benefit obligation. 
 
Pension expense attributable to the Group's defined benefit scheme comprises current service cost, net interest on the net
defined benefit obligation/(asset), past service cost resulting from a scheme amendment or curtailment, gains or losses on
settlement and administrative costs incurred.  Where actuarial remeasurements arise, the Group's policy is to fully
recognise such amounts directly in equity through the statement of comprehensive income, in the period in which they occur.
 Actuarial remeasurements arise from experience adjustments (the effects of differences between previous actuarial
assumptions and what has actually occurred) and changes in actuarial assumptions. 
 
The Group also provides post-retirement health care for certain retired employees.  The calculation of the post-retirement
health care liability is calculated in the same manner as the defined benefit pension obligation. 
 
CYBG PLC 
 
Notes to the consolidated financial statements (continued) 
 
 2.  Accounting policies (continued)  
 
 
Subordinated debt and related entity balances 
 
Subordinated debt and related entity balances, other than derivatives, are recorded at amortised cost.  Prior to the
demerger, the subordinated debt was included within amounts due to related entities on the balance sheet.  Subordinated
debt outstanding at 30 September 2016 is included in debt securities in issue. 
 
Debt issues 
 
Debt issues are short and long term debt issued by the Group including commercial paper, notes, term loans and residential
mortgage backed securities (RMBS).  Debt issues are typically recorded at amortised cost using the effective interest
method.  Premiums, discounts and associated issue expenses are recognised using the effective interest method through the
income statement from the date of issue to accrete the carrying value of securities to redemption values by maturity date. 
Interest is charged to the income statement using the effective interest method. 
 
Securitisation 
 
The Group has securitised certain loans (principally housing mortgage loans) by transfer of these to structured entities
(SEs) controlled by the Group.  The securitisation enables a subsequent issue of debt, either by the Bank or the SEs, to
investors who gain security of the underlying assets as collateral.  Those SEs are fully consolidated into the Group's
accounts.  All such transferred loans continue to be held on the consolidated balance sheet, and a liability recognised for
the proceeds of the funding transaction, as the Group retains substantially all the risks and rewards associated with the
transferred loans. 
 
Financial guarantees 
 
The Group provides guarantees in the normal course of business on behalf of its customers.  Guarantees written are
conditional commitments issued by the Group to guarantee the performance of a customer to a third party.  Guarantees are
primarily issued to support direct financial obligations such as commercial bills or other debt instruments issued by a
counterparty.  It is the rating of the Group as a guarantee provider that enhances the marketability of the paper issued by
the counterparty in these circumstances. 
 
The financial guarantee contract is initially recorded at fair value which is equal to the premium received, unless there
is evidence to the contrary.  Subsequently, the Group records and measures the financial guarantee contract at the higher
of: 
 
·     where it is likely the Group will incur a loss as a result of issuing the contract, a liability is recognised for the
estimated amount of the loss payable; and 
 
·      the amount initially recognised less, when appropriate, amortisation of the fee which is recognised over the life of
the guarantee. 
 
Contingent liabilities 
 
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or
present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured.  Contingent
liabilities are not recognised on the balance sheet but are disclosed unless they are remote. 
 
Equity based compensation 
 
The Group engages in equity based payment transactions in respect of services received from certain of its employees and to
provide long term incentives.  The fair value of the services received is recognised as an expense.  The total amount to be
expensed is measured by reference to the fair value of the Company's shares, performance options or performance rights
granted, including, where relevant, any market performance conditions and any non-vesting conditions. 
 
The impacts of any service and non-market performance vesting conditions are not included in the fair value and instead are
included in estimating the number of awards or options that are expected to vest. 
 
The total expense is recognised over the vesting period, which is the period over which all of the specified vesting
conditions are to be satisfied.  A corresponding credit is recognised in the equity based compensation reserve.  In some
circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is
estimated for the purposes of recognising the expense during the period between start of the service period and grant
date. 
 
At the end of each reporting period, the Group revises its estimates of the number of shares, performance options and
performance rights that are expected to vest 

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