Royal Bank of Canada (Channel Islands) Limited. Annual Report and Consolidated Financial Statements

Transcription

1 Royal Bank of Canada (Channel Islands) Limited Annual Report and Consolidated Financial Statements 31 October 2017

2 REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 2017 CONTENTS Page Officers and professional advisers 2 Directors report 3 Directors responsibilities statement 5 Independent auditor s report 6 Consolidated Statement of Financial Position 8 Consolidated Statement of Income 9 Consolidated Statement of Comprehensive Income 10 Consolidated Statement of Changes in Equity 11 Consolidated Statement of Cash Flows 12 Notes to the Consolidated Financial Statements 13 1

3 OFFICERS AND PROFESSIONAL ADVISERS DIRECTORS C C Blampied A L Creber J J Fenn A J Hunt A N Ratanshi (Chairman) P Niven A M Vibert SECRETARY RBC Corporate Services (Jersey) Limited REGISTERED OFFICE PO Box 48 Canada Court Upland Road St Peter Port Guernsey GY1 3BQ Channel Islands ADVOCATE Mourant Ozannes 1 Le Marchant Street St Peter Port Guernsey GY1 4HP Channel Islands INDEPENDENT AUDITOR PricewaterhouseCoopers CI LLP 37 Esplanade St Helier Jersey JE1 4XA Channel Islands 2

4 DIRECTORS REPORT The directors present their annual report and the audited consolidated financial statements of Royal Bank of Canada (Channel Islands) Limited ( the Company ) and its subsidiaries (together the Group ) for the year ended 31 October INCORPORATION The Company is incorporated in Guernsey, Channel Islands. PRINCIPAL ACTIVITIES The principal activity of the Company and its subsidiaries is that of a banking and related financial services business. REGULATION The Company is licensed to carry out investment business, money service business, fund service business and collective investment fund business under the Banking Supervision (Bailiwick of Guernsey) Law, 1994, the Protection of Investors (Bailiwick of Guernsey) Law, 1987, the Financial Services (Fund Services Business (Accounts, Audits and Reports)) (Jersey) Order 2007 and the Financial Services (Trust Company and Investment Business (Accounts, Audits and Reports)) (Jersey) Order The Group is also licensed to carry out deposit taking under the Banking Business (Jersey) Law 1991 and to act as an Authorised Person under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, The activities of the Group are expected to continue in a similar manner for the foreseeable future. RESULTS The consolidated results of the Group are shown in the Consolidated Statement of Comprehensive Income on page 10. ACCOUNTING STANDARDS The consolidated financial statements are prepared in accordance with all International Financial Reporting Standards (IFRS) as issued and in effect as at 31 October 2017 by the International Accounting Standards Board (IASB). GOING CONCERN The Group has reported an operating profit for the year. Based on a review of five year projections, the current funding and liquidity positions and current capital resources, the directors believe the Group is well placed to manage its business risks successfully. Therefore, the directors have a reasonable expectation, based on a review of budgets and expected liquidity positions, that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements. DIVIDEND A dividend of 25,000,000 was paid during the year ended 31 October 2017 (2016: 15,000,000). The dividend per each ordinary share amounted to 5 (2016: 3) per share. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS The Group makes use of financial instruments in the conduct of its business. The Group s principal risks and uncertainties and financial risk management objectives and policies are discussed in Note 3 of the audited financial statements. DIRECTORS The present directors are shown on page 2, and have all served throughout the year and subsequently except as noted below; S G Rutledge (resigned 2 May 2017) A N Ratanshi (appointed 10 May 2017) SECRETARY The present secretary is shown on page 2, and has served throughout the year and subsequently. On 2 November 2017 RBC Secretaries (CI) Limited changed its name to RBC Corporate Services (Jersey) Limited. 3

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6 DIRECTORS RESPONSIBILITIES STATEMENT The directors are responsible for preparing the consolidated financial statements in accordance with applicable law and regulations. The Companies (Guernsey) Law, 2008 requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The financial statements are required by law to give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. International Accounting Standard 1 requires that financial statements present fairly for each financial year the Group's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the preparation and presentation of financial statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRS. However, the directors are also required to: properly select and apply accounting policies; make judgements and estimates that are reasonable and prudent; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and make an assessment of the Group's ability to continue as a going concern. The directors confirm that they have complied with the above requirements in preparing the financial statements. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008, the Banking Supervision (Bailiwick of Guernsey) Law,1994, the Protection of Investors (Bailiwick of Guernsey) Law, 1987, the Regulation of Fiduciaries (Accounts) Rules, 2001, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000, Banking Business (Jersey) Law 1991 and Financial Services (Jersey) Law They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are also responsible for compliance with the Financial Services (Trust Company and Investment Business (Accounts, Audits and Reports)) (Jersey) Order 2007 and the Financial Services (Fund Services Business (Accounts, Audits and Reports)) (Jersey) Order They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities and for compliance with the Financial Services (Jersey) Law 1998, Banking Business (Jersey) Law 1991 and applicable Codes of Practice. So far as the directors are aware, there is no relevant audit information of which the Group s auditors are unaware, and each director has taken all the steps that he or she ought to have taken as a directors in order to make himself or herself aware of any relevant audit information and to establish that the Group s auditors are aware of that information. 5

7 Independent Auditor s Report to the Members of Royal Bank of Canada (Channel Islands) Limited ( the Company ) and its subsidiaries (together the Group ) Report on the audit of the Group financial statements Opinion In our opinion, Royal Bank of Canada (Channel Islands) Limited s Group financial statements (the financial statements ): give a true and fair view of the state of the Group s affairs as at 31 October 2017 and of its profit and cash flows for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the IASB; and have been prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008, the Banking Supervision (Bailiwick of Guernsey) Law, 1994, the Protection of Investors (Bailiwick of Guernsey) Law, 1987, the Regulation of Fiduciaries (Accounts) Rules 2001, the Financial Services (Trust Company and Investment Business (Accounts, Audits and Reports)) (Jersey) Order 2007 and the Financial Services (Fund Services Business (Accounts, Audits and Reports)) (Jersey) Order We have audited the financial statements, included within the Annual Report and Consolidated Financial Statements (the Annual Report ), which comprise: the consolidated statement of financial position as at 31 October 2017, the consolidated statement of income, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows for the year then ended, and the notes to the consolidated financial statements, which include a description of the significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) ( ISAs (UK) ) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditor s responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in Guernsey which includes the FRC s Ethical Standard and with SEC Independence Rules, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: the directors use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group s ability to continue as a going concern. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditor s report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. 6

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10 CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED 31 OCTOBER (Thousands of British Pounds) Notes Income Interest income ,041 65,608 Interest expense 27 (30,492) (13,239) Net interest income 70,549 52,369 Non-interest income: Fees and commissions income 28 12,937 10,918 Foreign exchange revenue 29 6,383 6,688 Fair value movement in interest rate swaps (781) (598) Fair value movement in assets purchased under reverse repurchase agreements (1,049) 976 Fair value movement on dual currency deposits 30 (37) Fair value movement on foreign exchange forward contracts (203) (4) Other income (8,133) 3,124 Total revenue 79,733 73,436 Provision for credit losses 172 1,956 Non interest expenses Human resources 30 35,573 36,525 Equipment 3,661 4,256 Occupancy 1,935 2,091 Communications 1,234 1,583 Professional fees 3,802 3,532 Amortisation of intangibles Other expenses 31 3,190 2,939 Net internal chargeouts and recoveries 1,549 (10,108) Total expenses 51,501 41,455 Income before taxes 28,060 30,025 Income taxes 6 2,316 2,877 Net income for the year 25,744 27,148 The above results for the current and prior year are derived from continuing activities. The accompanying notes on pages 13 to 68 form an integral part of these consolidated financial statements. 9

11 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 OCTOBER (Thousands of British Pounds) Notes Net income for the year 25,744 27,148 Other comprehensive income, net of tax Items that may be reclassified subsequently to profit or loss Movement in unrealised gains on securities Items that may not be reclassified subsequently to profit or loss Remeasurement of net defined benefit deficit 21 (667) (1,912) Total comprehensive income for the year 26,020 25,679 Total comprehensive income attributable to: Shareholders 26,020 25,679 The accompanying notes on pages 13 to 68 form an integral part of these consolidated financial statements. 10

12 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 OCTOBER Share Share Capital Available Defined Retained Total Capital Premium Reserve for sale Benefit Earnings Equity (Thousands of British Pounds) securities Plan Balances at 1 November ,000 2,500 3,500 (508) (4,666) 303, ,521 Total comprehensive income for the year Net income for the year ,148 27,148 Other comprehensive income, net of tax (1,912) - (1,469) Total comprehensive income for the year (1,912) 27,148 25,679 Dividends (15,000) (15,000) Balances at 31 October ,000 2,500 3,500 (65) (6,578) 315, ,200 Balances at 1 November ,000 2,500 3,500 (65) (6,578) 315, ,200 Total comprehensive income for the year Net income for the year ,744 25,744 Other comprehensive income, net of tax (667) Total comprehensive income for the year (667) 25,744 26,020 Dividends (25,000) (25,000) Balances at 31 October ,000 2,500 3, (7,245) 316, ,220 The accompanying notes on pages 13 to 68 form an integral part of these consolidated financial statements. 11

13 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 OCTOBER (Thousands of British Pounds) Notes CASH FLOWS FROM OPERATING ACTIVITIES Income before income taxes 28,060 30,025 Adjustments for non-cash items and others: Amortisation of intangible assets Depreciation 16 1,552 1,762 Fair value adjustments 2,881 24,199 Loss on disposal of intangible assets Adjustment for pension funding (667) (1,912) Deferred taxation ,884 54,777 Changes in operating assets and liabilities: Loans and advances to bank (140,710) (454,908) Loans and advances to customers 330, ,863 Assets purchased under reverse repurchase agreements 9 1,597,359 (1,189,796) Trade and other receivables (7,360) (2,462) Deposits due to banks (15,376) (34,334) Deposits due to customers (794,097) 1,410,462 Current income taxes 6 (558) (230) Trade and other payables 19 (4,646) 10,675 Pension scheme liabilities (5,759) 1,461 Fair value of derivatives (5,149) 1, ,943 (1,442) Income taxes paid (2,503) (1,439) Net cash (used in) operating activities 984,440 (2,881) Cash in flows from investing activities Proceeds from sale of investment securities 17,526 40,362 Acquisition of securities (1,379,498) (1,259) Acquisition of premises and equipment 16 (473) (668) Acquisition of intangible assets 15 (321) (7) Net cash investing activities (1,362,766) 38,428 Cash in/out flows from financing activities Proceeds from loan with related party 1,892,005 - Repayments of loan with related party (1,513,822) - Dividends paid (25,000) (15,000) Net cash used in financing activities 353,183 (15,000) Net change in cash and cash equivalents (25,143) 20,547 Cash and cash equivalents at the beginning of the year 43,618 23,071 Cash and cash equivalents at end of year 18,475 43,618 The accompanying notes on pages 13 to 68 form an integral part of these consolidated financial statements. 12

14 1. GENERAL INFORMATION Royal Bank of Canada (Channel Islands) Limited is a limited liability Company incorporated in Guernsey, Channel Islands on 10 July 1973 and the Company is domiciled in Guernsey. The address of the registered office is PO Box 48, Canada Court, Upland Road, St Peter Port, Guernsey, GY1 3BQ, Channel Islands. The principal activity of the Group is that of a banking and related financial services business. The consolidated financial statements are prepared in accordance with all International Financial Reporting Standards (IFRS) as issued and in effect as at 31 October 2017 by the International Accounting Standards Board (IASB). These consolidated financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates, with the exception of Note 25 where disclosure relating to key management personnel and directors is in Canadian dollars, as indicated, this being the functional currency of the parent bank, Royal Bank of Canada. 2. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of preparation i) Statement of compliance The consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB. ii) Historical cost convention The financial statements have been prepared on a historical cost basis except for the following: available for sale financial assets, financial assets and liabilities (including derivative instruments) defined benefit pension plans assets measured at fair value The particular accounting policies adopted by the directors are described below. (b) Going concern The directors have made an assessment of the Group s ability to continue as a going concern and are satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, the directors are not aware of any material uncertainties that may cast significant doubt upon the Group s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis. (c) Basis of consolidation The consolidated financial statements include the assets and liabilities and results of operations of the Company and its subsidiaries ( together the Group ) after elimination of intercompany transactions, balances, revenues and expenses. Subsidiaries are those entities over which the Company has control. Control is achieved when the Company has the power over the investee, is exposed, or has rights to variable returns from its involvement with the investee and has the ability to use its power to affect its return. Subsidiaries are consolidated from the date control is transferred to the Company, and cease consolidation when they are no longer controlled by the Company. The acquisition method of accounting is used to account for business combinations by the Group. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of income from the effective date of disposal, as appropriate. Where necessary, adjustments are made to the consolidated financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. (d) Use of estimates and assumptions In preparing the consolidated financial statements, management is required to make subjective estimates and assumptions that affect the reported amount of assets, liabilities, net income and related disclosures. Estimates made by management are based on historical experience and other assumptions that are believed to be reasonable. Key sources of estimation uncertainty include: the allowance for credit losses, determination of fair value of financial instruments, valuation of pensions and other post-employment benefits, carrying value of goodwill and finite-life intangible, the useful lives of tangible assets and income taxes. Accordingly, actual results may differ from these and other estimates thereby impacting the Group s future consolidated financial statements. (e) Significant accounting judgements In the preparation of these consolidated financial statements, management is required to make significant judgements that affect the carrying amounts of certain assets and liabilities, and the reported amounts of revenues and expenses recorded during the year. Significant judgements have been made in the following areas: 13

15 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED (e) Significant accounting judgements - continued (i) Impairment of Securities When assessing impairment for debt instruments, management primarily consider counterparty ratings and securityspecific factors, including subordination, external ratings, and the value of any collateral held, for which there may not be a readily accessible market. Significant judgement is required in assessing impairment as management is required to consider all available evidence in determining whether objective evidence of impairment exists and whether the principal and interest on the available-for-sale (AFS) debt security can be fully recovered. For complex debt instruments, cash flow projection models are used which incorporate actual and projected cash flows for each security based on security specific factors using a number of assumptions and inputs that involve management judgement, such as default, prepayment and recovery rates. Due to the subjective nature of choosing these inputs and assumptions, the actual amount of the future cash flows and their timing may differ from the estimates used by management and consequently may cause a different conclusion as to the recognition of impairment or measurement of impairment loss. In assessing whether there is any objective evidence that suggests that equity securities are impaired, factors which include the length of time and extent the fair value has been below cost are considered, along with management s assessment of the financial condition, business and other risks of the issuer. Management weighs all these factors to determine the impairment but to the extent that management judgement may differ from the actual experience of the timing and amount of the recovery of the fair value, the estimate for impairment could change from period to period based upon future events that may or may not occur. Management believes there is no objective evidence of impairment on the AFS securities, as disclosed in Note 8, that are in an unrealised loss position at 31 October ii) Fair value of Financial Instruments (Note 4) For instruments not traded in an active market, fair value is determined, when possible, using a valuation technique that maximises the use of observable market inputs. For more complex or illiquid instruments, significant judgement is required in the determination of the model used, the selection of model inputs, and in some cases the application of valuation adjustments to the model value or quoted price for inactively traded financial instruments to arrive at the fair value, as the selection may be subjective and the inputs may be unobservable. Unobservable inputs are inherently uncertain as there is little or no market data available from which to determine the level at which an arm s length transaction would occur under normal business circumstances. When the valuation technique and inputs selected do not fully reflect the Group s expectation as to the amount that could be received in a market transaction, valuation adjustments are made to incorporate model and parameter risk, liquidity risk and credit risk in the fair value calculation. These adjustments may be subjective as they require significant judgement in the input selection, such as probability of default and recovery rate, but are intended to arrive at fair value that is determined based on the assumptions that market participants would use in pricing the financial instrument. The realised price for a transaction previously valued using management judgement may be different than its recorded value, and will therefore impact unrealised gains and losses recognised in Non-interest income. iii) The allowance for credit losses (Note 11) Allowance for credit losses represent management s best estimates of losses incurred in the Group s loan portfolio at the Consolidated Statement of Financial Position date. Management s judgement is required in making assumptions and estimations when calculating loan impairment allowances. Any changes in the underlying assumptions and estimates used for loans can change from period to period and significantly affect the Group s results of operations. Loans which are individually significant are assessed individually for objective indicators of impairment. A loan is considered impaired when management determines that it will not be able to collect all amounts due according to the original contractual terms or the equivalent value. Credit exposures of individually significant loans are evaluated based on factors including the borrower s overall financial condition, resources and payment record, and where applicable, the realisable value of any collateral. If there is evidence of impairment leading to an impairment loss, then the amount of the loss is determined as the difference between the carrying amount of the loan, including accrued interest, and the estimated recoverable amount. The estimated recoverable amount is measured as the present value of expected future cash flows discounted at the loan s original effective interest rate, including cash flows that may result from the realisation of collateral less costs to sell. Individually-assessed impairment losses reduce the carrying amount of the loan through the use of an allowance account and the amount of the loss is recognised in Provision for credit losses in the Consolidated Statement of Income. Following impairment, interest income is recognised on the unwinding of the discount from the initial recognition of impairment. 14

16 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED (e) Significant accounting judgements - continued iv) Pension obligations (Note 21) The calculation of defined benefit expenses and obligations depends on various assumptions such as discount rates, expected rates of return on assets, healthcare cost trend rates, projected salary increases, retirement age, and mortality and termination rates. The discount rate assumption is determined using a yield curve of AA corporate debt securities. All other assumptions are determined by management, applying significant judgement, and are reviewed by actuaries. Due to the long-term nature of these plans, such estimates and assumptions are subject to significant uncertainty. Actual experience that differs from the actuarial assumptions will affect the amounts of benefits obligations and expenses that are recognised, as disclosed in Note 21. v) Income Taxes (Note 6) The tax laws in the jurisdictions in which the Group operates are potentially subject to different interpretations by the Group and the relevant taxation authority. Significant judgement is required in the interpretation of the relevant tax laws and in estimating the provision for current and deferred income taxes due to uncertainty in timing and amount of taxable income and in the design and ability to implement tax planning strategies. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the Statement of Financial Position liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each Statement of Financial Position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted at the Statement of Financial Position date. Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited in comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. vi) Goodwill and intangible assets (notes 14 & 15) The estimation of fair value involves significant judgement and due to the longer time period used for the Group s cash flow projections, the ultimate outcome of the cash flow projections has greater uncertainty than those used in the Group s value in use model. Variability in timing and amount of future cash flows, discount rates and terminal growth rates applied to cash flows beyond the forecast period are therefore more likely. Significant judgement is involved in estimating the model inputs used to determine the recoverable amount of RBC Treasury Services (CI) Limited, in particular future cash flows, discount rates and terminal growth rates, due to the uncertainty in the timing and amount of cash flows and the forward-looking nature of these inputs. Future cash flows are based on financial plans agreed by management which are estimated based on forecast results, business initiatives, planned capital investments and returns to shareholders. Discount rates are based on the bank-wide cost of capital, adjusted for RBC Treasury Services (CI) Limited specific risks and currency exposure as reflected by differences in historical and expected inflation. RBC Treasury Services (CI) Limited specific risks include country risk, business/operational risk, geographic risk (including political risk, devaluation risk, and government regulation), currency risk, and price risk (including product pricing risk and inflation). Terminal growth rates reflect the gross domestic product and inflation for the countries within which RBC Treasury Services (CI) Limited operates. Changes in these assumptions may impact the amount of impairment loss recognised in Non-interest expense. Other intangible assets with a finite life are amortised on a straight line basis over their estimated useful lives. They are tested for impairment when there is an indication that the assets may be impaired. Significant judgement is applied in estimating the useful lives and recoverable amount and addressing whether certain events or circumstances constitute objective evidence of impairment. 15

17 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED (f) Foreign currencies Transactions denominated in foreign currencies are translated into sterling at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the exchange rate ruling at the Consolidated Statement of Financial Position date. Foreign exchange gains and losses resulting from the translation and settlement of these items are recognised in non-interest income in the Consolidated Statement of Income. Non-monetary assets and liabilities that are measured at historical cost are translated into sterling at historical rates. Nonmonetary financial assets classified as AFS securities, such as debt equity instruments, that are measured at fair value are translated into Sterling at rates prevailing at the Consolidated Statement of Financial Position date, and the resulting foreign exchange gains and losses are recorded in other comprehensive income until the asset is sold or becomes impaired. (g) Financial instruments recognition and measurement i) Securities Securities are classified at inception, based on management s intention, as available-for-sale (AFS) or as at fair value through profit or loss (FVTPL). AFS securities are securities which may be sold to meet liquidity needs, in response to or in anticipation of changes in interest rates and resulting prepayment risk, changes in foreign currency risk, changes in funding sources or terms. AFS securities, which include asset backed securities, are measured at fair value. Unrealised gains and losses arising from changes in fair value are included in Available for sale securities in the Consolidated Statement of Changes in Equity. Changes in foreign exchange translation for AFS securities are recognised in OCI through available for sale securities reserve. When the security is sold the cumulative gain or loss, recorded in Available for sale securities in the Consolidated Statement of Changes in Equity, is included as Net gains on AFS securities under Noninterest income. Purchase premiums or discounts on AFS debt securities are amortized over the life of the security using the effective interest rate method and are recognised in Interest income. Dividends on AFS equity securities are recorded in other income while interest income accruing on AFS debt securities are recorded in Interest income. At each reporting date, and more frequently when conditions warrant, the AFS securities are evaluated to determine whether there is any objective evidence of impairment. Such evidence includes: for debt instruments, when an adverse effect on future cash flows from the asset or group of assets can be reliably estimated; for equity securities, when there is a significant or prolonged decline in the fair value of the investment below its cost. If an AFS security is impaired, the cumulative unrealised loss previously recognised in OCI in the Available for sale securities in the Consolidate Statement of Changes in Equity is removed from equity and recognised in Net loss on AFS securities under Non-interest income. This amount is determined as the difference between the cost/amortised cost and current fair value of the security less any impairment loss previously recognised. Subsequent to impairment, further declines in fair value are recorded in Consolidated Statement of Comprehensive Income, while increases in fair value are recognised in other comprehensive income until sold. For AFS debt securities, reversal of previously recognised impairment losses is recognised in the Consolidated Statement of Income if the recovery is objectively related to a specific event occurring after recognition of the impairment loss. ii) Fair Value Option A financial instrument can be designated at FVTPL (the fair value option) on its initial recognition even if the financial instrument was not acquired or incurred principally for the purpose of selling or repurchasing it in the near term. An instrument that is designated as at FVTPL by way of this fair value option must have a reliably measurable fair value and satisfy one of the following criteria: (i) it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities, or recognising gains and losses on them on a different basis; (ii) it belongs to a group of financial assets or financial liabilities or both that are managed, evaluated, and reported to senior management on a fair value basis in accordance with the group s risk management strategy, and it can be demonstrated that significant financial risks are eliminated or significantly reduced or (iii) there is an embedded derivative in the financial or non-financial host contract and the derivative is not closely related to the host contract. Financial instruments designated as at FVTPL are recorded at fair value and any gain or loss arising due to changes in fair value is included in Other non-interest income. These instruments cannot be reclassified out of the FVTPL category while they are held or issued. 16

18 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED (g) Financial instruments recognition and measurement - continued iii) Determination of fair value The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is determined by incorporating all factors that market participants would consider in setting a price, including commonly accepted valuation approaches. In determining fair value, a hierarchy is used which prioritises the inputs to valuations techniques. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Determination of fair value bases on this hierarchy requires the use of observable market data whenever available. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the group have the ability to access at the measurement date. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model inputs that are either observable, or can be corroborated by observable market data for substantially the full terms of the assets or liabilities. Level 3 inputs are one or more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement date. The availability of inputs for valuation may affect the selection of valuation techniques. The classification of a financial instrument in the hierarchy for disclosure purposes is based upon the lowest level of input that is significant to the measurement of fair value. iv) Assets purchased under reverse repurchase agreements The Group purchased securities under agreements to resell (reverse repurchase agreement) and take possession of these securities. Reverse repurchase agreements are treated as collateralised lending transactions whereby the Group monitor the market value of the securities purchased and additional collateral is obtained when appropriate. The Group have the right to liquidate the collateral held in the event of counterparty default. The Group also sell securities under agreements to repurchase (repurchase agreements), which are treated as collateralised borrowing transactions. The securities received under reverse repurchase agreements and securities delivered under repurchase agreements are not recognised on, or derecognised from, the Consolidated Statement of Financial Position, respectively, unless the risks and rewards of ownership are obtained or relinquished. Reverse repurchase agreements and repurchase agreements are carried at the amounts at which the securities were initially acquired or sold, except when they are designated as at FVTPL and are recorded at fair value on the Consolidated Statement of Financial Position. Interest earned on reverse repurchase agreements is included in Interest income, and interest incurred on repurchase agreements is included in Interest expense in the Consolidated Statement of Income. Changes in fair value for reverse repurchase agreements and repurchase agreements designated as at FVTPL are shown on the Consolidated Statement of Income. v) Loans and advances to banks and customers Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and which are not classified as AFS. Loans are initially recognised at fair value. Fair value is represented by the cash advanced to the borrowers plus direct and incremental costs. Loans are subsequently measured at amortised cost using the effective interest rate method less impairments, if any. The Group assess at each Consolidated Statement of Financial Position date whether there is objective evidence that the loans are impaired. Evidence of impairment may include indications that the borrower is experiencing significant financial difficulty, probability of bankruptcy or other financial reorganisation, as well as a measurable decrease in the estimated future cash flows evidenced by the adverse changes in the payments status of the borrower or economic conditions that correlate with defaults. Whenever a payment is 90 days past due, loans are classified as impaired unless they are fully secured and collection efforts are reasonably expected to result in repayment of debt within 180 days of the loans becoming past due. Interest on loans is included in Interest income and is accounted for as described under the revenue recognition policy (m) in this note. vi) Allowance for credit losses An allowance for credit losses is established if there is objective evidence that the Group will be unable to collect all amounts due on its loans portfolio according to the original contractual terms or the equivalent value. This portfolio includes on-balance sheet exposures, such as loans and acceptances, and loans not included in the Consolidated Statement of Financial Position, such as letters of credit, guarantees and undrawn commitments. 17

19 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED (g) Financial instruments recognition and measurement continued vi) Allowance for credit losses - continued The allowance is increased by the impairment losses recognised and decreased by the amount of write-offs, net of recoveries. The allowance for credit losses for Consolidated Statement of Financial Position items is included as a reduction to assets, and the allowance relating to off-balance sheet items is included in other liabilities. The Group assess whether objective evidence of impairment exists individually for each loan. The allowance for credit losses at 31 October 2017 was 2,101,000 and 2,079,000 at 31 October vii) Write off of loans Loans and the related impairment allowance accounts are written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, they are generally written off after receipt of any proceeds from the realisation of the collateral. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier. viii) Derivatives Derivatives are used in customer dealing activities to provide clients with the ability to manage their own market risk exposures and by the Group to manage its own exposure to interest, currency and other market risks. The derivatives used are forward foreign exchange contracts and interest rate swaps. The derivatives are recorded in the Consolidated Statement of Financial Position at fair value through the profit and loss account. Interest rate swaps are fair valued to reflect the accounting treatment of the associated assets and liabilities. Forward foreign exchange contracts are revalued at current exchange rates with unrealised gains/ (losses) recognised on the Consolidated Statement of Financial Position. When derivatives are used to manage the Group s own exposures, the Group determines for each derivative whether hedge accounting can be applied, as discussed in the Hedge accounting section below. ix) Hedge accounting The Group uses derivatives to manage the Group s exposure to interest rate and currency risks. Where hedge accounting can be applied, a hedge relationship is designated and documented at inception to detail the particular risk management objective and strategy for undertaking the hedge transaction. The documentation identifies the specific asset, liability or anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used and how effectiveness will be assessed. The Group assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging instruments are highly effective in offsetting changes in the fair value or cash flows of the hedged items. A hedge is regarded as highly effective only if the following criteria are met: (i) at inception of the hedge and throughout its life, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, and (ii) actual results of the hedge are within a pre-determined range. In the case of hedging a forecast transaction, the transaction must have a high probability of occurring and must present an exposure to variations in cash flows that could ultimately affect the reported net profit or loss. Hedge accounting is discontinued when it is determined that the hedging instrument is no longer effective as a hedge, the hedging instrument or hedged item is terminated or sold, or the forecast transaction is no longer deemed highly probable. x) Fair value hedges In a fair value hedging relationship, the carrying value of the hedged item is adjusted for changes in fair value attributable to the hedged risk and recognised in Non-interest income. Changes in fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by changes in the fair value of the hedging derivative, which are also recognised in Non-interest income. When hedge accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged items are amortised to Net income over the expected remaining life of the hedged items. The Group predominantly use interest rate swaps to hedge the Group s exposure to changes in a fixed interest rate instrument s fair value caused by changes in interest rates. 18

20 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED (g) Financial instruments recognition and measurement continued (xi) Guarantees Financial guarantee contracts are contracts that contingently require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Liabilities are recognised on the Consolidated Statement of Financial Position at the inception of a guarantee for the fair value of the obligation undertaken in issuing the guarantee. Financial guarantees are subsequently re-measured at the higher of (i) the amount initially recognised and (ii) a best estimate of the present value of the expenditure required to settle the present obligation at the end of the reporting period. If the financial guarantee contracts meets the definition of a derivative, it is measured at fair value at each Consolidated Statement of Financial Position date and reported under Derivatives on the Consolidated Statement of Financial Position. (h) Employee benefits Pensions and other post-employment benefits and share-based payments The Group operates both defined contribution and defined benefit pension plans. Defined benefit pension plans: Defined benefit pension expense, which is included in Human Resources costs in the Consolidated Statement of Comprehensive Income, consists of the cost of employee pension benefits for the current year s service, net interest on the Net defined benefit liability, past service cost and gains or losses on settlement. Remeasurements of the Net defined benefit liability, which comprise actuarial gains and losses and return on plan assets (excluding amounts included in net interest on the Net defined benefit liability), are recognised immediately in Other Comprehensive Income in the period in which they occur. Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in actuarial assumptions. Past service cost is the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment and is charged immediately to income. For the defined benefit plan for Jersey employees, the Group recognises the present value of the defined benefit obligations less the fair value of the plan assets, as a defined benefit liability reported in Retirement benefit liabilities on the Consolidated Statement of Financial Position. For the defined benefit plan for Jersey employees where there is a net defined benefit asset, the amount is reported as an asset in Retirement benefit assets on the Consolidated Statement of Financial Position. Defined contribution pension plans: The Group s contribution to defined contribution plans are expensed when employees have rendered services in exchange for such contributions, generally in the year of contribution. Defined contribution plan expense is included in Human Resources Costs in the Consolidated Statement of Income and disclosed in Note