BBK annual report eng 21.5.5

Notes to the Consolidated Financial Statements (continued)31 December 20043 Significant accounting policies (continued)Fair valuesFor investments and derivatives traded in an active market, fair value is determined by reference to quoted market bid prices for assets and quotedmarket offer prices for liabilities at the close of business on the balance sheet date.The fair value of investments in mutual funds, managed funds, unit trusts or similar investment vehicles, where available, are based on lastpublished bid price.For investments where there is no quoted market price a reasonable estimate of the fair value is determined by reference to the current market valueof another similar instrument, or is based on the net present value of future cash flows.The fair value of forward exchange contracts is calculated by reference to forward exchange rates with similar maturities.The fair value of unquoted derivatives is based on either internal pricing models, discounted cash flows or by reference to brokers' quotes.Use of estimatesIn preparation of the consolidated financial statements, the management makes estimates and assumptions regarding valuations and provisions,thereby affecting the reported amount of financial assets and liabilities and disclosure of contingent liabilities. These estimates and assumptions alsoaffect the revenues and expenses and the resultant provisions, as well as fair value changes reported in equity. In particular, judgment by managementis required in the estimation of the amount and timing of future cash flows while determining the level of provisions required for non-performing creditfacilities, as well as for impairment provisions for unquoted investments. Such estimates are necessarily based on assumptions about several factorsinvolving varying degrees of judgment and uncertainty.Investment in associated companyAn associate is a company in which the Group has a long term investment comprising an interest of 20% - 50% in the voting capital or over whichit exerts significant influence, and is accounted for using the equity method of accounting.Premises and equipmentAll items of premises and equipment are initially recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of allpremises and equipment, other than freehold land which is deemed to have an indefinite life.Collateral pending saleThe Group occasionally acquires real estate in settlement of certain loans and advances to customers. Such real estate is stated at the lower of thenet realisable value of the related facility and the current fair value of the collateral acquired assessed on an individual basis. If the current fair value for anyindividual asset is lower, a provision is created. Gains or losses on disposal, and unrealised losses on revaluation, are recognised in the consolidatedincome statement.DepositsAll money market and customer deposits are carried at amortised cost, adjusted for effective hedges, less amounts repaid.Repurchase and resale agreementsAssets sold with a simultaneous commitment to repurchase at a specified future date (repos) are not derecognised in the balance sheet and aremeasured in accordance with accounting policies for non-trading investment securities. The liability for amounts received under these agreementsis shown as borrowings. The difference between sale and repurchase price is treated as interest expense using the effective interest method.Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognised in the balance sheet, asthe Group does not obtain control over the assets. Amounts paid under these agreements are included in deposits with banks and other financialinstitutions or loans and advances to customers, as appropriate. The difference between purchase and resale price is treated as interest income usingthe effective interest rate method.