Annual report and accounts 2009 (PDF) - Coventry Building Society

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NOTES TO THE ACCOUNTS(continued)2. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATESJUDGEMENTSIn the process of applying the Society’s accounting policies, the directors have made the following judgements, apart fromthose involving estimations (which are presented below), that have the most significant effect on the amounts recognised inthe financial statements.The treatment of derivative financial instrumentsThe Society uses derivative financial instruments. All such instruments are used to mitigate the interest rate risk andforeign currency risk that arises from the Society’s lending and funding activities. All derivatives used for such purposes aretreated as fair value hedges. This treatment is consistent with the economic purpose of using the derivative instruments,which is to provide a hedge against the movement in the fair value of fixed rate and foreign currency assets and liabilities. Italso enables the Society to take advantage of the fair value hedge accounting provisions of IAS 39, which allow therecognition of movements in the hedged portion of the fair values of the underlying assets and liabilities that shouldmaterially offset the volatility that may arise from recognising the fair value movements of the derivatives themselves.Debt securitiesThe Society maintains a portfolio of liquid assets to ensure it has sufficient funds available to meet its financialcommitments as they fall due. A large part of this portfolio is made up of debt securities, for which there are variousaccounting treatments permitted under IAS 39. The Society has adopted the ‘available-for-sale’ treatment as this mostclosely matches the way debt securities are used within the business, with a portfolio of assets maintained for continuinguse, and individual assets available to be sold depending on particular requirements for funding or the maintenance ofinterest yields. This treatment requires that debt securities are recognised at fair value with movements in fair value takento a reserve in equity.The determination of whether available-for-sale instruments are impaired is assessed based on similar criteria as financialassets carried at amortised cost.Fair value of financial instrumentsWhere the fair values of financial assets and financial liabilities recorded on the balance sheet cannot be derived from activemarkets, they are determined using interest rate yield curves and other relevant market data. These are judged to be themost appropriate valuation tools. The valuation of financial instruments is disclosed in more detail in note 40.Deferred taxThe Society recognises deferred tax on temporary differences arising between the tax bases of assets and liabilities and theircarrying amounts in the financial statements. Deferred tax assets are recognised only to the extent that it is probable thatfuture taxable profits will be available to utilise the asset. The Society considers that sufficient future taxable profit will, infact, be available to utilise all the Society’s deferred tax assets and the Society has therefore recognised deferred tax assetswhere they have arisen.Pension schemesThe Society maintains both a defined benefit and a defined contribution pension scheme for employees and each is accounted forunder the terms of IAS 19. The standard requires the calculation of the net assets or liabilities of the defined benefit scheme andtheir inclusion on the balance sheet. The result is dependent in part on the interest rate used to discount scheme liabilities backto present value. IAS 19 requires that this should equate to a rate available on an AA rated corporate bond. In practice, the ratesavailable on such bonds cover a wide range and there is therefore a range of possible outcomes that could be disclosed as thepension scheme’s net position. In order to avoid this uncertainty, the directors have selected a rate from within a narrow rangerecommended by the Society’s professional pension scheme advisors. This range has been based on an index of relevantcorporate bond yields.ESTIMATION UNCERTAINTYThe key assumptions regarding the future and other key sources of estimation uncertainty at the balance sheet date that have asignificant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year arediscussed opposite.40
Loan impairment and other provisionsIAS 39 requires that loan losses are only recognised where there is objective evidence of impairment. The Society has appliedthis requirement in determining the level of losses present in its loans and advances to customers, but has been required toapply management judgement in determining the financial impact of this impairment. IAS 39 makes a distinction betweenindividual and collective impairment. Individual impairment relates to situations where individual assets are assessed for loss.The Society has used this approach on loans in possession and those in arrears. Estimates that have been applied includeassessing the likelihood of the loan going into possession for those cases currently in arrears, the length of time expected to berequired to complete the sale of properties in possession, and the expected costs of realisation. Collective impairment relates tocases where losses are assessed as being present in a loan portfolio, but they cannot be identified to individual accounts. Thisapproach has been used to calculate a value of incurred but not reported losses, where statistical analysis has been used todetermine a value for losses where a loss event has already impacted an account, but has not yet manifested itself in arrearsdata. A portfolio approach is also used on sections of the loan book where there are known problems but individual accounts areagain as yet not identifiable. This method has been applied to loans advanced on city centre buy-to-let flats where a problem ofoversupply is having a negative effect on prices and ease of sale, with the result that the Society has made an impairmentprovision against these assets.The Society has also made provision for the expected cost of various customer claims. It is expected that the liability will mainlycrystallise over the next five years.Estimated asset livesThe Society recognises interest on loans and advances to customers on the basis of their effective interest rate. This is aconstant rate that averages out the effect of incentives and fees across the expected life of the loan account. A criticalassumption in the calculation is the expected life, as this determines the assumed period over which customers may be payingvarious differentiated interest rates. The calculation of the effective interest rate uses assumptions on expected life that arebased on the historic experience of similar products. These assumptions are monitored to ensure their ongoingappropriateness. Changes in the amortised cost balance arising from actual product life experience differing from the assumedlife, are periodically calculated and an adjustment made to the loan balance, with a corresponding adjustment to interest income.Also within the calculations, provision has been made for the uncertainty of the estimates in order to reduce the risk ofoverstatement of interest income.Valuation of derivatives and available-for-sale assetsThe fair values of derivative financial instruments and available-for-sale assets are based on open market prices, whereavailable. If open market prices are not available, the Society uses valuation techniques which comprise discounted cash flowvaluation models. The assumptions in these models are periodically reviewed to ensure that they remain relevant.FSCS levy provisionThe Society is committed to paying levy charges of the UK Financial Services Compensation Scheme (FSCS) (see note 14).All deposit-taking institutions who are members of the FSCS are required to contribute to the costs of the FSCS in safeguardingthe deposits of savers in failed financial institutions. The Society is, and continues to be, a member of the FSCS.Contributions to the FSCS are calculated according to a prescribed formula using the retail savings balances of all deposit-takinginstitutions that are members of the FSCS. The provision for these costs in this year’s accounts relates to payments to be madein future periods. The actual payments to be made are subject to change because they are based on estimations of therepayments by failed institutions and future interest rates.41
Page 1 and 2: ANNUAL REPORT & ACCOUNTS 2009
Page 3: ChairmanDavid HardingDeputy Chairma
Page 11 and 12: DIRECTORS’ REPORTBUSINESS OBJECTI
Page 13 and 14: Financial performanceThe Society ac
Page 15 and 16: ASSETSThe assets of the Group incre
Page 17 and 18: KEY PERFORMANCE INDICATORSNET MORTG
Page 19 and 20: Remuneration CommitteeConsisting of
Page 21 and 22: RISK MANAGEMENT REPORTPRINCIPAL RIS
Page 23 and 24: CORPORATE GOVERNANCEThe board is ac
Page 25 and 26: APPOINTMENTS TO THE BOARDThe appoin
Page 27 and 28: DIRECTORS’ REMUNERATION REPORTINT
Page 29 and 30: STATEMENT OF DIRECTORS’RESPONSIBI
Page 31 and 32: OPINIONIn our opinion:the Annual Ac
Page 33 and 34: BALANCE SHEETSas at 31 December 200
Page 35 and 36: CASH FLOW STATEMENTSfor the year en
Page 37 and 38: Improvements to IFRSThe improvement
Page 39 and 40: FINANCIAL LIABILITIESFinancial liab
Page 41: PENSION COSTSThe Society operates b
Page 45 and 46: 7. OTHER OPERATING INCOMEGroup Soci
Page 47 and 48: 11. DIRECTORS’ EMOLUMENTS (contin
Page 49 and 50: 12. PENSION SCHEME (continued)2009
Page 51 and 52: 13. IMPAIRMENT PROVISIONS ON LOANS
Page 53 and 54: 14. PROVISION FOR FSCS LEVIESAll de
Page 55 and 56: 20. DEBT SECURITIESGroup Society Gr
Page 57 and 58: 21. DERIVATIVES AND OTHER FINANCIAL
Page 59 and 60: 24. INTANGIBLE FIXED ASSETSGroup So
Page 61 and 62: 26. DEFERRED TAXDeferred tax assets
Page 63 and 64: 32. OTHER LIABILITIESGroup Society
Page 65 and 66: 38. FINANCIAL COMMITMENTSGroup Soci
Page 67 and 68: 40. FINANCIAL INSTRUMENTS (continue
Page 75 and 76: 41. RELATED PARTY TRANSACTIONSULTIM
Page 77 and 78: 42. NOTES TO THE CASH FLOW STATEMEN
Page 79 and 80: 2. OTHER PERCENTAGES2009 2008% %As
Page 81 and 82: 3. INFORMATION RELATING TO DIRECTOR
Page 84: www.thecoventry.co.ukCoventry Build

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