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270 NEDBANK GROUP Limited INTEGRATED REPORT 20101 Principal accounting policies ... continued1.4 Financial instruments ... continuedMeasurement basis of financial instrumentsThere are two bases of measurement:• amortised cost; and• fair value.• Amortised costThe amortised cost of a financial instrument is the amount at whichthe financial instrument is measured on initial recognition minusprincipal repayments, plus or minus the cumulative amortisationusing the effective-interest-rate method of any difference betweenthe initial contractual amount and the maturity amount, less anycumulative impairment losses.The effective-interest-rate method is a method of calculating theamortised cost of a financial instrument and of allocating the interestincome and expense over the relevant period. The effective interestrate is the rate that exactly discounts estimated future cash paymentsor receipts through the expected life of the financial instrument or,when appropriate, a shorter period, to the net carrying amount ofthe financial instrument. When calculating the effective interestrate, cashflows are estimated considering all contractual terms ofthe financial instrument, but future credit losses are not considered.The calculation includes all fees and points paid or received betweenparties to the contract that are an integral part of the effective interestrate, transaction costs, and all other premiums or discounts.• Fair valueThe fair value of a financial instrument is defined as the price atwhich an asset or liability could be exchanged in a current transactionbetween knowledgeable, willing parties, other than in a forced orliquidation sale.The fair value of instruments that are quoted in an active market isdetermined using quoted prices where they represent those at whichregularly and recently occurring transactions take place.The group uses valuation techniques to establish the fair value ofinstruments where quoted prices in active markets are not available.For a detailed discussion of the fair value of financial instruments referto Note 6.1: Valuation of financial instruments on pages 284 to 289 ofthe annual financial statements.Impairment of financial assetsThe group assesses at each reporting date whether there is objectiveevidence that a financial asset or group of financial assets is impaired. Afinancial asset or a group of financial assets is impaired and impairmentlosses are incurred if, and only if, there is objective evidence of impairmentas a result of one or more events that occurred after the initial recognitionof the asset (a loss event) and that loss event has (or events have) animpact on the estimated future cashflows of the financial asset or groupof financial assets that can be reliably estimated. Objective evidence thata financial asset or group of assets is impaired includes observable datathat comes to the attention of the group about the following loss events:• significant financial difficulty of the issuer or obligor;• a breach of contract, such as a default or delinquency in interest orprincipal payments;• the group granting to the borrower, for economic or legal reasonsrelating to the borrower’s financial difficulty, a concession that thegroup would not otherwise consider;• it becoming probable that the borrower will enter bankruptcy or otherfinancial reorganisation;• the disappearance of an active market for that financial asset becauseof financial difficulties; or• observable data indicating that there is a measurable decrease in theestimated future cashflows from a group of financial assets since theinitial recognition of those assets, although the decrease cannot yet beidentified with the individual financial assets in the group, including:– adverse changes in the payment status of borrowers in the group; or– national or local economic conditions that correlate with defaultson the assets in the group.• Assets carried at amortised costIf there is objective evidence that an impairment loss on loans andreceivables or held-to-maturity financial assets carried at amortisedcost has been incurred, the amount of the impairment loss is measuredas the difference between the asset’s carrying amount and the presentvalue of estimated future cashflows (excluding future credit losses thathave not been incurred) discounted at the financial asset’s originaleffective interest rate. The carrying amount of the asset is reducedthrough the use of an allowance account and the amount of the loss isrecognised in profit or loss.The group first assesses whether there is objective evidence ofimpairment individually for financial assets that are individuallysignificant, and individually or collectively for financial assets that arenot individually significant. If the group determines that there is noobjective evidence of impairment for an individually assessed financialasset, whether significant or not, it includes the asset in a group offinancial assets with similar credit risk characteristics and collectivelyassesses them for impairment.If, in a subsequent period, the amount of the impairment loss decreasesand the decrease can be related objectively to an event occurringafter the impairment was recognised (such as an improvement in thedebtor’s credit rating), the previously recognised impairment loss isreversed by adjusting the allowance account. The reversal may notresult in a carrying amount of the financial asset that exceeds whatthe amortised cost would have been had the impairment not beenrecognised at the date on which the impairment is reversed. Theamount of the reversal is recognised in profit or loss for the period.• Available-for-sale financial assetsWhen a decline in the fair value of an available-for-sale financialasset has been recognised directly in equity, in the statement ofcomprehensive income, and there is objective evidence that the assetis impaired, the cumulative loss that has been recognised directlyin equity, in the statement of comprehensive income, is removedfrom equity and recognised in profit or loss. The amount of thecumulative loss that is removed from equity and recognised in profitor loss is the difference between the acquisition cost (net of anyprincipal repayment and amortisation) and current fair value, less anyimpairment loss on that financial asset previously recognised in profitor loss. Impairment losses recognised in profit or loss for an investmentin an equity instrument classified as available for sale are not reversedthrough profit or loss.If, in a subsequent period, the fair value of a debt instrument classifiedas available for sale increases and the increase can be objectivelyrelated to an event occurring after the impairment loss was recognisedin profit or loss, the impairment loss is reversed, with the amount ofthe reversal recognised in profit or loss for the period.• Maximum credit riskCredit risk arises principally from loans and advances to clients,investment securities derivatives and irrevocable commitmentsto provide facilities. The maximum credit risk is typically the grosscarrying amount, net of any amounts offset and impairment losses.