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Rothschild & Co | Annual Report 2017
10 Impairment of financial assets
Objective evidence that a financial asset or group of assets is impaired includes observable data about the following loss events:
• significant financial difficulty of the issuer;
• a breach of contract, such as a default or delinquency in repayment of interest or principal;
• granting to the borrower, for economic or legal reasons relating to its financial difficulty, a concession that the lender would not otherwise consider;
• it becoming probable that the borrower will enter bankruptcy or other financial reorganisation.
IMPAIRMENT OF LOANS AND RECEIVABLES
The Group first assesses whether objective evidence of impairment exists: individually for financial assets that are individually significant, and individually
or collectively for financial assets that are not individually significant. Impairment losses are calculated on a collective basis for any losses on loans that are
subject to individual assessment for impairment, where those losses have been incurred but not yet identified. Collective assessment is also used for
homogeneous groups of loans that are not considered individually significant. If no objective evidence of impairment exists for an individually assessed
financial asset, it is included in a collective assessment for impairment with other assets with similar risk characteristics.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying
amount and the present value of expected future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the
asset is reduced using an allowance account. The amount of the loss is recognised in the income statement.
The calculation of the present value of the estimated future cash flows of a financial asset reflects the cash flows that may result from scheduled interest
payments, principal repayments or other payments due, including liquidation of collateral where available. In estimating these cash flows, management
makes judgements about a counterparty’s financial situation and the value of any underlying collateral or guarantees in the Group’s favour. Each impaired
asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are reviewed by the relevant Credit Committee
on a regular basis. The methodology and assumptions used for estimating both the amount and the timing of future cash flows are reviewed regularly to
reduce any differences between loss estimates and actual loss experience.
Collectively assessed credit risk allowances cover credit losses inherent in portfolios of financial assets with similar economic characteristics where there is
objective evidence to suggest that they contain impaired assets but the individual impaired items cannot yet be identified. For the purposes of a collective
evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Future cash flows are estimated on the basis of
historical loss experience. These estimates are subject to regular review and adjusted to reflect the effects of current conditions that did not affect the
period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using
the original effective interest rate which was used to discount the future cash flows for the purpose of measuring the impairment loss.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related to an objective event occurring after the
impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting
the allowance for loan impairment. The amount of the reversal is recognised in the income statement.
When a loan is deemed uncollectable, it is written off against the related allowance for loan impairment. Recoveries received in respect of loans previously
written off are recorded as a decrease in the impairment losses on loans and advances recorded in the income statement in the year in which the recovery
was made. Loans whose terms have been renegotiated and which would have been past due or impaired had they not been renegotiated, are reviewed to
determine whether they are impaired or past due.
IMPAIRMENT OF AVAILABLE-FOR-SALE FINANCIAL ASSETS
Available-for-sale assets are assessed at each balance sheet date to determine whether there is objective evidence that these are impaired.
For equity instruments, a significant or prolonged fall in their price below their acquisition cost is an objective indication of value impairment. The Group
considers that this is the case, in particular, for equity instruments which at the reporting date show unrealised losses exceeding 40% of their acquisition
cost and for those in a situation of an unrealised loss during a continuous five-year period. Even if the criteria mentioned above were not met, management
may decide to examine the results for other criteria (financial position of the issuer, outlook for the issuer, multiple-criteria valuations, etc.) in order to
determine whether the fall in value is of a permanent nature. Where there is an objective indication of value impairment, the cumulative loss is removed
from equity and recognised in the income statement. If, in a subsequent period, the fair value on an impaired AFS equity increases, the impairment loss
is not reversed through the income statement. However, any further decline in the fair value will be recognised as a further impairment charge.
Impairment of available-for-sale debt securities is based on the same criteria as for all other financial assets. If in a subsequent period the fair value of
a debt instrument classified as available for sale increases, and the increase can be objectively related to an event occurring after the impairment loss
was recognised in the income statement, the impairment loss is reversed through the income statement.
The loss recognised in the income statement is the difference between the acquisition cost and current fair value, less any impairment loss on that
financial asset previously recognised in the income statement.
Notes to the consolidated financial statements