Annual Report 2012 - National Savings Bank

212THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTSof financial position cannot be derived fromactive markets, they are determined usingvaluation techniques that include the use ofmathematical models. The inputs to thesemodels are derived from observable marketdata where possible, but where observablemarket data are not available, judgment isrequired to establish fair values.2.2.3 Impairment losses on loans andadvancesThe Bank reviews its individually significantloans and advances at each statement offinancial position date to assess whetheran impairment loss should be recordedin the Income Statement. In particular,management judgment is required in theestimation of the amount and timing offuture cash flows when determining theimpairment loss. These estimates arebased on assumptions about a numberof factors and actual results may differ,resulting in future changes to the allowance.Loans and advances that have beenassessed individually and found not to beimpaired and all individually insignificantloans and advances are then assessedcollectively, in groups of assets with similarrisk characteristics, to determine whetherprovision should be made due to incurredloss events for which there is objectiveevidence but whose effects are not yetevident. The collective assessment takesaccount of data from the loan portfolio(such as levels of arrears, credit utilization,loan to collateral ratios, etc.) and judgmentsto the effect of concentrations of risksand economic data (including levels ofunemployment, real estate prices indices,country risk and the performance ofdifferent individual groups).2.3. Financial Instruments2.3.1 Financial instruments - Initialrecognition and subsequentmeasurementi. Date of recognitionAll financial assets and liabilities are initiallyrecognized on the trade date, i.e. the datethat the Bank becomes a party to thecontractual provisions of the instrument.Note: In maintaining the General Ledger,Government Securities are recognized onthe settlement date which falls due afterthree days from the date of trade. Theposition is rectified in preparation of theFinancial Statements.ii. Initial measurement of financialinstrumentsThe classification of financial instruments atinitial recognition depends on the purposeand the management’s intention for whichthe financial instruments were acquiredand their characteristics. All financialinstruments are measured initially at theirfair value plus transaction costs, except inthe case of financial assets and financialliabilities recorded at fair value throughprofit or loss.iii. Derivatives recorded at fair valuethrough profit or lossThe Bank uses derivatives such as interestrate swaps. Derivatives are recorded at fairvalue and carried as assets when their fairvalue is positive and as liabilities when theirfair value is negative. Changes in the fairvalue of derivatives are included in ‘Nettrading income’.iv. Financial assets or financial liabilitiesheld-for-tradingFinancial assets or financial liabilities heldfor-tradingare recorded in the Statementof Financial Position at fair value. Changesin fair value are recognized in ‘Net tradingincome’. Dividend income or expense isrecorded in ‘Net trading income’ accordingto the terms of the contract, or when theright to the payment has been established.Included in this classification areGovernment Securities held for trading anddealing securities.v. Financial assets and financial liabilitiesdesignated at fair value through profitor loss (FVTPL)Financial assets and financial liabilitiesclassified in this category are those thathave been designated by managementon initial recognition, and designation isdetermined on an instrument by instrumentbasis.Financial assets and financial liabilities atfair value through profit or loss are recordedin the statement of financial position at fairvalue. Changes in fair value are recordedin ‘Net gain or loss on financial assets andliabilities designated at fair value throughprofit or loss’. Interest is earned or incurredis accrued in ‘Interest income’ or ‘Interestexpense’, respectively using the effectiveinterest rate (EIR), while dividend incomeis recorded in ‘Other operating income’when the right to the payment has beenestablished.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012