REG - Royal Bk Scot.Grp. - Final Results - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 11

NatwestAnnouncement

26/02/2015 07:14

- Part 11: For the preceding part double click  ID:nRSZ9136Fj 

which will require national resolution
funds to raise "ex ante" contributions on banks and investment firms in proportion to their liabilities and risk profiles
as well as "ex post" funding contributions. Following the adoption of the European delegated regulation on "ex-ante"
contributions, the UK government confirmed that it would implement the "ex post" funding requirements through the UK bank
levy of the Finance Act 2011. 
 
To the extent that other jurisdictions where the Group operates have introduced or plan to introduce similar compensation,
contributory or reimbursement schemes (such as in the US with the Federal Deposit Insurance Corporation), the Group may
make further provisions and may incur additional costs and liabilities, which may have an adverse impact on its financial
condition and results of operations. 
 
The value of certain financial instruments recorded at fair value is determined using financial models incorporating
assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate 
 
Under International Financial Reporting Standards (IFRS), the Group recognises at fair value: (i) financial instruments
classified as held-for-trading or designated as at fair value through profit or loss; (ii) financial assets classified as
available-for-sale; and (iii) derivatives. 
 
Generally, to establish the fair value of these instruments, the Group relies on quoted market prices or, where the market
for a financial instrument is not sufficiently active, internal valuation models that utilise observable market data. In
certain circumstances, the data for individual financial instruments or classes of financial instruments utilised by such
valuation models may not be available or may become unavailable due to prevailing market conditions. In such circumstances,
the Group's internal valuation models require the Group to make assumptions, judgements and estimates to establish fair
value, which are complex and often relate to matters that are inherently uncertain. These assumptions, judgements and
estimates also need to be updated to reflect changing facts, trends and market conditions. The resulting change in the fair
values of the financial instruments has had and could continue to have a material adverse effect on the Group's earnings,
financial condition and capital position. 
 
Appendix 5 Risk factors 
 
The Group relies on valuation, capital and stress test models to conduct its business and anticipate capital and funding
requirements. Failure of these models to provide accurate results or accurately reflect changes in the micro and macro
economic environment in which the Group operates could have a material adverse effect on the Group's business, capital and
results. 
 
Given the complexity of the Group's business, strategy and capital requirements, the Group relies on analytical models to
assess the value of its assets and its risk exposure and anticipate capital and funding requirements. The Group's
valuation, capital and stress test models and the parameters and assumptions on which they are based, need to be constantly
updated to ensure their accuracy. Failure of these models to accurately reflect changes in the environment in which the
Group operates or the failure to properly input any such changes could have an adverse impact on the modelled results or
could fail to accurately capture the risk profile of the Group's financial instruments. Some of the analytical models used
by the Group are predictive in nature. The use of predictive models has inherent risks and may incorrectly forecast future
behavior, leading to flawed decision making and potential losses. The Group also uses valuation models that rely on market
data inputs. If incorrect market data is input into a valuation model, it may result in incorrect valuations or valuations
different to those which were predicted and used by the Group in its forecasts or decision making. Should such models prove
to be incorrect or misleading, decisions made by the Group in reliance thereon could expose the Group to business, capital
and funding risk. 
 
The Group's results could be adversely affected in the event of goodwill impairment 
 
The Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of
the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised initially at cost
and subsequently at cost less any accumulated impairment losses. As required by IFRS, the Group tests goodwill for
impairment annually, or more frequently when events or circumstances indicate that it might be impaired. An impairment test
involves comparing the recoverable amount (the higher of the value in use and fair value less cost to sell) of an
individual cash generating unit with its carrying value. At 31 December 2014, the Group carried goodwill of £6.3 billion on
its balance sheet. 
 
The value in use and fair value of the Group's cash generating units are affected by market conditions and the performance
of the economies in which the Group operates. Where the Group is required to recognise a goodwill impairment, it is
recorded in the Group's income statement, although it has no effect on the Group's regulatory capital position. Further
impairments of the Group's goodwill could have an adverse effect on the Group's results and financial condition. 
 
Any significant write-down of goodwill could have a material adverse effect on the Group's results of operations. 
 
Appendix 5 Risk factors 
 
The recoverability of certain deferred tax assets recognised by the Group depends on the Group's ability to generate
sufficient future taxable profits and may be affected by changes to tax legislation 
 
In accordance with IFRS, the Group has recognised deferred tax assets on losses available to relieve future profits from
tax only to the extent that it is probable that they will be recovered. The deferred tax assets are quantified on the basis
of current tax legislation and accounting standards and are subject to change in respect of the future rates of tax or the
rules for computing taxable profits and offsetting allowable losses. Failure to generate sufficient future taxable profits
or changes in tax legislation (including rates of tax) or accounting standards may reduce the recoverable amount of the
recognised deferred tax assets. At 31 December 2014, the value of the Group's deferred tax assets was £1.5 billion. In
December 2014 the UK Government announced a proposed restriction on the use of certain brought forward tax losses of
banking companies to 50% of relevant profits from 1 April 2015 which may also affect the recoverable amount of recognised
deferred tax assets. In addition, the implementation of the rules relating to ring-fencing and the resulting restructuring
of the Group may further restrict the Group's ability to recognise tax losses within the Group  as deferred tax assets . 
 
This information is provided by RNS
The company news service from the London Stock Exchange