(F)Hedge accounting
As permitted by IFRS 9, the Group continues to apply the requirements of IAS 39 to its hedging relationships.
Changes in the fair value of all derivative instruments, other than those in effective cash flow and net investment hedging relationships, are
recognised immediately in the income statement. As noted in (2) below, the change in fair value of a derivative in an effective cash flow hedging
relationship is allocated between the income statement and other comprehensive income.
Hedge accounting allows one financial instrument, generally a derivative such as a swap, to be designated as a hedge of another financial
instrument such as a loan or deposit or a portfolio of such instruments. At the inception of the hedge relationship, formal documentation is
drawn up specifying the hedging strategy, the hedged item, the hedging instrument and the methodology that will be used to measure the
effectiveness of the hedge relationship in offsetting changes in the fair value or cash flow of the hedged risk. The effectiveness of the hedging
relationship is tested both at inception and throughout its life and if at any point it is concluded that it is no longer highly effective in achieving
its documented objective, hedge accounting is discontinued. Note 12 provides details of the types of derivatives held by the Group and
presents separately those designated in hedge relationships.
Where there is uncertainty arising from interest rate benchmark reform, the Group assumes that the interest rate benchmark on which the
hedged cash flows and/or the hedged risk are based, or the interest rate benchmark on which the cash flows of the hedging instrument are
based, are not altered as a result of interest rate benchmark reform. The Group does not discontinue a hedging relationship during the period
of uncertainty arising from the interest rate benchmark reform solely because the actual results of the hedge are not highly effective.
Where the contractual terms of a financial asset, financial liability or derivative are amended, on an economically equivalent basis, as a direct
consequence of interest rate benchmark reform, the uncertainty arising from the reform is no longer present. In these circumstances, the Group
amends the hedge documentation to reflect the changes required by the reform; these changes to the documentation do not in and of
themselves result in the discontinuation of hedge accounting or require the designation of a new hedge relationship.
(1)Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with
the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk; this also applies if the hedged asset is
classified as a financial asset at fair value through other comprehensive income. If the hedge no longer meets the criteria for hedge accounting,
changes in the fair value of the hedged item attributable to the hedged risk are no longer recognised in the income statement. The cumulative
adjustment that has been made to the carrying amount of the hedged item is amortised to the income statement using the effective interest
method over the period to maturity.
(2)Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other
comprehensive income in the cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the
income statement. Amounts accumulated in equity are reclassified to the income statement in the periods 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 in the income statement 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.
(G)Offset
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right of offset and
there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Cash collateral on exchange traded
derivative transactions is presented gross unless the collateral cash flows are always settled net with the derivative cash flows. In certain
situations, even though master netting agreements exist, the lack of management intention to settle on a net basis results in the financial assets
and liabilities being reported gross on the balance sheet.
(H)Impairment of financial assets
The impairment charge in the income statement reflects the change in expected credit losses, including those arising from fraud. Expected
credit losses are recognised for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets (other
than equity investments) measured at fair value through other comprehensive income, and certain loan commitments and financial guarantee
contracts. Expected credit losses are calculated as an unbiased and probability-weighted estimate using an appropriate probability of default,
adjusted to take into account a range of possible future economic scenarios, and applying this to the estimated exposure of the Group at the
point of default after taking into account the value of any collateral held, repayments, or other mitigants of loss and including the impact of
discounting using the effective interest rate.
At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is made for expected credit losses
resulting from default events that are possible within the next 12 months (12-month expected credit losses). In the event of a significant increase
in credit risk since origination, allowance (or provision) is made for expected credit losses resulting from all possible default events over the
expected life of the financial instrument (lifetime expected credit losses). Financial assets where 12-month expected credit losses are recognised
are considered to be Stage 1; financial assets which are considered to have experienced a significant increase in credit risk since initial
recognition are in Stage 2; and financial assets which have defaulted or are otherwise considered to be credit-impaired are allocated to Stage 3.
Some Stage 3 assets are subject to individual rather than collective assessment. Such cases are subject to a risk-based impairment sanctioning
process, and these are reviewed and updated at least quarterly, or more frequently if there is a significant change in the credit profile. The
collective assessment of impairment aggregates financial instruments with similar risk characteristics, such as whether the facility is revolving in
nature or secured and the type of security against financial assets.
An assessment of whether credit risk has increased significantly since initial recognition considers the change in the risk of default occurring over
the remaining expected life of the financial instrument. In determining whether there has been a significant increase in credit risk, the Group
uses quantitative tests based on relative and absolute probability of default (PD) movements linked to internal credit ratings together with
qualitative indicators such as watchlists and other indicators of historical delinquency, credit weakness or financial difficulty. The use of internal
credit ratings and qualitative indicators ensures alignment between the assessment of staging and the Group’s management of credit risk which
utilises these internal metrics within distinct retail and commercial portfolio risk management practices. However, unless identified at an earlier
stage, the credit risk of financial assets is deemed to have increased significantly when more than 30 days past due. The use of a payment
holiday in and of itself has not been judged to indicate a significant increase in credit risk, with the underlying long-term credit risk deemed to
be driven by economic conditions and captured through the use of forward-looking models. These portfolio-level models are capturing the
anticipated volume of increased defaults and therefore an appropriate assessment of staging and expected credit loss. Where the credit risk