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278 NEDBANK GROUP Limited INTEGRATED REPORT 20102 Standards and interpretations2.1 Standards and interpretations issued but not yeteffectiveNew standardsThe following new standards have not been early-adopted by the group:• IFRS 9 Financial InstrumentsThe IASB has issued IFRS 9 Financial Instruments, which is the first stepin its project to replace IAS 39 Financial Instruments: Recognition andMeasurement, in its entirety. The project has three main phases:– Phase I: Classification and measurement of financial instruments;– Phase II: Amortised cost and impairment of financial assets; and– Phase III: Hedge accounting.IFRS 9, as currently issued, includes requirements for the classificationand measurement of financial assets and liabilities, derecognitionrequirements and additional disclosure requirements. The mainrequirements include the following:– Financial assets are to be classified and measured based on thebusiness model for managing the financial asset and the cashflowcharacteristics of the financial asset. There are two measurementapproaches, namely fair value and amortised cost. The financialasset is carried at amortised cost if it is the business model of theentity to hold that asset for the purpose of collecting contractualcashflows and if those cashflows comprise principal repayments andinterest. All other financial assets are carried at fair value.– A financial asset that would otherwise be at amortised cost mayonly be designated as at fair value through profit or loss if such adesignation reduces an accounting mismatch.– The classification and measurement of financial liabilities includerequirements similar to those contained in the existing standardIAS 39 Financial Instruments: Recognition and Measurement.– For financial liabilities designated as at fair value through profit orloss a further requirement is that all changes in the fair value offinancial liabilities attributable to credit risk be transferred to othercomprehensive income with no recycling through profit or loss ondisposal.– The requirements for derecognition are similar to those containedin the existing standard IAS 39 Financial Instruments: Recognitionand Measurement, with certain additional disclosure requirements.Management does not anticipate these requirements to have asignificant impact on the group’s financial statements.IFRS 9 is effective for the group for the year commencing1 January 2013. However, the IASB adopted a phased approach forthe release of IFRS 9, with the requirements for the classification andmeasurement of financial assets having been released in 2009 andthe requirements for the classification and measurement of financialliabilities and derecognition having been released in 2010. Accordingly,the requirements released in 2010 cannot be early-adopted withoutthe simultaneous adoption of the 2009 requirements. However, therequirements released in 2009 may be separately early-adopted.The IASB intends to expand IFRS 9 in 2011 to address the requirementsfor the offsetting of financial assets and financial liabilities, impairmentof financial assets carried at amortised cost and hedge accounting.The implementation of IFRS 9 is anticipated to have a significantimpact on the group’s financial statements. The group is evaluatingthe impact of the standard.Revised standardsThe following revisions to IFRS have not been early-adopted by the group:• IFRS 7 Financial Instruments: DisclosuresThe following amendments were made to this standard during theyear:– Clarification of certain qualitative and quantitative disclosuresrelating to the nature and extent of risks. The amendment iseffective for the group for the year commencing 1 January 2011.– Additional disclosure requirements relating to the transfer offinancial assets. This amendment is effective for the group for theyear commencing 1 January 2012.These amendments address disclosure in the annual financial statementsand will therefore not affect the financial position of the group.• IFRS 3 Business CombinationsThe amendment clarifies the measurement of non-controlling interestsand provides additional guidance on unreplaced and voluntarilyreplaced share-based payment awards.The amendment is effective for the group for the year commencing1 January 2011 and is not expected to have a significant impact onthe group.• IAS 12 Income TaxesThe amendment provides a practical approach for measuring deferredtaxation liabilities and deferred taxation assets when investmentproperty is measured using the fair-value model in IAS 40 InvestmentProperty.The amendment is effective for the group for the year commencingon or after 1 January 2012 and is not expected to have a significantimpact on the group.• IAS 24 Related-party DisclosuresThe amendment provides exemptions from certain disclosurerequirements in respect of government-related entities and clarifiesthe definition of a related party. The amendment is effective for thegroup for the year commencing 1 January 2011.This amendment addresses disclosure in the annual financialstatements and will therefore not affect the financial position of thegroup. Furthermore, the revisions to the disclosures are not expectedto have a significant effect on the group.• Annual improvement projectAs part of its third annual improvement project the IASB has issuedits 2010 edition of annual improvements. The annual improvementproject aims to clarify and improve the accounting standards.The improvements include those involving terminology or editorialchanges, with minimal effect on recognition and measurement.There are no significant changes in the improvement of the currentyear that will affect the group and the improvement is effective for thegroup commencing 1 January 2011.InterpretationsThe following interpretations of existing standards are not yet effectiveand have not been early-adopted by the group:• IFRIC 19 Extinguishing Financial Liabilities with Equity InstrumentsThe interpretation addresses divergent accounting by entities issuingequity instruments to extinguish all or part of a financial liability (oftenreferred to as ‘debt for equity swaps’). The interpretation concludes
279Reports andcertificationsConsolidatedannual financialstatementsShareholdermeeting mattersDefinitions andabbreviationsInstrumentcodesContactdetailsnotes to the financial statements for the year ended 31 December 2010that the issue of equity instruments to extinguish an obligationconstitutes consideration paid.The consideration should be measured at the fair value of the equityinstruments issued, unless that fair value is not readily determinable,in which case the equity instruments should be measured at the fairvalue of the obligation extinguished. Any difference between the fairvalue of the equity instruments issued and the carrying value of theliability extinguished is recognised in profit or loss.If the issue of equity instruments is to settle a portion of a financialliability, the entity should assess whether a part of the considerationrelates to a renegotiation of the portion of the liability that remainsoutstanding.The adoption of this standard is not expected to have a materialimpact on the group’s annual financial statements.The standard is effective for the group for the year commencing1 January 2011.2.2 Standards and interpretations adopted in the currentyearRevised standardsThe following revisions to IFRS have been adopted by the group:• Amendments to IFRS 2 Group-settled ArrangementsThe amendment provides additional guidance on the accounting forshare-based payment transactions among group entities. The mostsignificant change is that the entity receiving the goods or serviceswill recognise the transaction as an equity-settled share-basedpayment transaction only if the awards granted are its own equityinstruments or if it has no obligation to settle the transaction. In allother circumstances the entity will measure the transaction as a cashsettledshare-based payment.The scope of IFRS 2 has also been amended to clarify that the standardapplies to all share-based payment transactions, irrespective ofwhether or not the goods or services received under the share-basedpayment transaction can be individually identified.The adoption of the amendments to the standard did not have aneffect on the group’s financial statements.• Amendments to IAS 32 Classification of Rights IssuesThe amendment states that rights, options and warrants – otherwisemeeting the definition of equity instruments in IAS 32.11 – issuedto acquire a fixed number of an entity’s own non-derivative equityinstruments for a fixed amount in any currency are classified asequity instruments, provided the offer is made pro rata to all existingowners of the same class of the entity’s own non-derivative equityinstruments.The amendment was early-adopted and did not have a significanteffect on the group’s financial statements.• Amendments to IFRIC 14 Prepayment of a Minimum FundingRequirementThe interpretation was amended to remedy an unintended consequenceof IFRIC 14, where entities are, in some circumstances, not permittedto recognise prepayments of minimum funding contributions as anasset.The amendment was early-adopted and did not have a significanteffect on the group’s financial statements.• Annual improvement projectAs part of its second annual improvement project, the IASB issuedits 2009 edition of annual improvements. The annual improvementproject aimed to clarify and improve the accounting standards.These improvements included those involving terminology or editorialchanges with minimal effect on recognition and measurement.No significant changes were made to the group financial statementsfor the revisions that were effective for the year commencing1 January 2010.3 KEY ASSUMPTIONS CONCERNING THE FUTUREAND KEY SOURCES OF ESTIMATIONThe group’s accounting policies are set out on pages 266 to 277. Certain ofthese policies, as well as estimates made by management, are consideredto be important to an understanding of the group’s financial conditionsince they require management to make difficult, complex or subjectivejudgements and estimates, some of which may relate to matters thatare inherently uncertain. The following accounting policies includeestimates that are particularly sensitive in terms of judgements and theextent to which estimates are used. Other accounting policies involvesignificant amounts of judgements and estimates, but the total amountsinvolved are not significant to the financial statements. Management hasdiscussed the accounting policies and critical accounting estimates withthe board and Audit Committee.3.1 Allowances for loan impairment and other credit riskprovisionsAllowances for loan impairment represent management’s estimate of thelosses incurred in the loan portfolios at the balance sheet date.The group assesses its loan portfolios for impairment at each balance sheetdate. In determining whether an impairment loss should be recorded in thestatement of comprehensive income, the group makes judgements as towhether there is observable data indicating a measurable decrease in theestimated future cashflows from a portfolio of loans before the decrease canbe allocated to an individual loan in that portfolio. Estimates are made ofthe duration between the occurrence of a loss event and the identificationof a loss on an individual basis. The impairment for performing loans iscalculated on a portfolio basis, based on historical loss ratios, adjusted fornational and industry-specific economic conditions and other indicatorspresent at the reporting date that correlate with defaults on the portfolio.These include early arrears and other indicators of potential default, suchas changes in macroeconomic conditions and legislation affecting creditrecovery. These annual loss ratios are applied to loan balances in theportfolio and scaled to the estimated loss emergence period.Within the retail, wealth and business bank portfolios, which compriselarge numbers of small homogeneous assets with similar riskcharacteristics where credit-scoring techniques are generally used,statistical techniques are used to calculate impairment allowances onthe portfolio, based on historical recovery rates and assumed emergenceperiods. These statistical analyses use as primary inputs the extent towhich accounts in the portfolio are in arrears and historical informationon the eventual losses encountered from such delinquent portfolios.There are many such models in use, each tailored to a product, line ofbusiness or client category.Judgement and knowledge is needed in selecting the statistical methodsto use when the models are developed or revised. The impairmentallowance reflected in the financial statements for these portfolios istherefore considered to be reasonable and supportable.
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