The immediate holding company of the Bank is The Royal Bank of Scotland N.V., a public limited company incorporated in the Netherlands. In 2007, a consortium comprising initially of The Royal Bank of Scotland Group plc (“RBS Group”), Fortis N.V. and Fortis SA/NV (together “Fortis”) and Banco Santander S.A. agreed to acquire ABN AMRO Holding N.V. (later renamed RBS Holdings N.V.) (“AAH”) via RFS Holdings B.V. (“RFS”), a private limited company incorporated in the Netherlands, jointly owned by the consortium. The Fortis shares in RFS were held by Fortis Bank Nederland (Holding) N.V. (“FBNH”).

On 3 October 2008, in light of the significant changes in the financial environment, the State of the Netherlands (the “Dutch State”) acquired the entire issued ordinary share capital of FBNH and on 24 December 2008, the Dutch State directly acquired FBNH’s shares in RFS and became a consortium member by accession.

In accordance with the consortium agreement, the allocated assets in AAH owned by the Dutch State had to be separated from AAH which the Dutch State had proposed to do by transferring and integrating the same into a newly incorporated entity named ABN AMRO II N.V.. When ABN AMRO Bank N.V. was renamed The Royal Bank of Scotland N.V. on 6 February 2010, ABN AMRO II N.V. was at the same date renamed ABN AMRO Bank N.V..

The ultimate consolidating parent of the Bank and RBS Group is controlled by the UK Government. The UK Government therefore is a related party of The Royal Bank of Scotland N.V.

Given the reach of the UK Government and their controlled bodies and the volume and diversity of transactions with them, the disclosure of transactions with these related parties is impractical. Hence, for purposes of the financial statements of the Bank and the Group, related companies refer to members of The Royal Bank of Scotland Group Plc’s group of companies.

The consolidated financial statements of the Bank as at and for the year ended 31 December 2011 comprise the Bank and it subsidiaries (together referred to as the “Group” and individually referred as the “Group entities”) and the Group’s interest in associates and jointly controlled assets and operations. The financial statements of the Bank as at and for the year ended 31 December 2011 do not include other entities.

The principal activities of the Bank are banking and related financial services. The principal activities of the subsidiary companies are to act as nominees, trustees, custodian trustees and agents on behalf of the Bank. There have been no significant changes in the nature of the principal activities during the financial year.

The financial statements of the Group and of the Bank were authorised by the Board of Directors for issuance in accordance with a resolution of the Directors on 8 June 2012.

2.1 Adoption of New and Revised Financial Reporting Standards

In the current financial year, the Group and the Bank have adopted all the new and revised Standards and Issues Committee Interpretations (“IC Int.”) issued by the Malaysian Accounting Standards Board (“MASB”) that are effective for annual periods beginning on or after 1 January 2011 as follows:

The adoption of these new and revised Standards and IC Interpretations have not affected the amounts reported on the financial statements of the Group and of the Bank except for the Standard as set out in section 2.1.1. Details of other Standards and IC Interpretations affecting presentation and disclosure adopted in the financial statements of the Group and of the Bank that have had no effect on the amounts reported but may affect the accounting for future transactions or arrangements are as set out in section 2.1.2.

2.1.1 Standards Affecting Presentation and Disclosure

Amendments to FRS 7 Improving Disclosures and Financial Instruments

2.1.2 Standards and IC Interpretations Adopted With No Effect on Financial Statements

FRS 3 (revised in 2010) Business Combinations

As part of Improvements to FRSs issued in 2011, FRS 3 (revised in 2010) was amended to clarify that the measurement choice regarding non-controlling interests at the date of acquisition (see above) is only available in respect of non-controlling interests that are present ownership interests and that entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation. All other types of non-controlling interests are measured at their acquisition-date fair value, unless another measurement basis is required by other Standards.

In addition, as part of Improvements to FRSs issued in 2011, FRS 3 (revised in 2010) was amended to give more guidance regarding the accounting for share-based payment awards held by the acquiree’s employees. Specifically, the amendments specify that share-based payment transactions of the acquiree that are not replaced should be measured in accordance with FRS 2 Share-based Payment at the acquisition date (‘market-based measure’).

FRS 127 (revised in 2010) Consolidated and Separate Financial Statements

The application of FRS 127 (revised in 2010) has resulted in changes in the Group’s accounting policies for changes in ownership interests in subsidiaries.

Specifically, the revised Standard has affected the Group’s accounting policies regarding changes in ownership interests in its subsidiaries that do not result in loss of control. In prior years, in the absence of specific requirements in FRSs, increases in interests in existing subsidiaries were treated in the same manner as the acquisition of subsidiaries, with goodwill or a bargain purchase gain being recognised when appropriate; for decreases in interests in existing subsidiaries that did not involve a loss of control, the difference between the consideration received and the adjustment to the non-controlling interests was recognised in profit or loss. Under FRS 127 (revised in 2010), all such increases or decreases are dealt with in equity, with no impact on goodwill or profit or loss.

When control of a subsidiary is lost as a result of a transaction, event or other circumstance, the revised Standard requires that the Group derecognise all assets, liabilities and non-controlling interests at their carrying amount and to recognise the fair value of the consideration received. Any retained interest in the former subsidiary is recognised at its fair value at the date control is lost. The resulting difference is recognised as a gain or loss in profit or loss.

Convergence of the FRSs with the International Financial Reporting Standards

On 19 November 2011, the MASB issued a new MASB approved accounting framework, the Malaysian Financial Reporting Standards Framework (MFRS Framework) in conjunction with its planned convergence of FRSs with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board on 1 January 2012.

The MFRS Framework is a fully IFRS-compliant framework, equivalent to IFRSs which is mandatory for adoption by all Entities Other than Private Entities for annual periods beginning on or after 1 January 2012, with the exception for Transitioning Entities. Transitioning Entities, being entities which are subject to the application of MFRS 141 Agriculture and/or IC Interpretation 15 Agreements for the Construction of Real Estate are given an option to defer adoption of the MFRS Framework for an additional one year. Transitioning Entities also includes those entities that consolidate, equity account or proportionately consolidate an entity that has chosen to continue to apply the FRS Framework for annual periods beginning on or after 1 January 2012.

Accordingly, the Group and the Bank which are not Transitioning Entities will be required to apply MFRS 1 First-time Adoption of Malaysian Financial Reporting Standards (MFRS 1) in their financial statements for the financial year ending 31 December 2012, being the first set of financial statements prepared in accordance with the new MFRS Framework. Further, an explicit and unreserved statement of compliance with IFRSs will be made in these financial statements.

The Group and the Bank are currently assessing the impact of adoption of MFRS 1, including identification of the differences in existing accounting policies as compared to the new MFRSs and the use of optional exemptions as provided for in MFRS 1. As at the date of authorisation of issue of the financial statements, accounting policy decisions or elections have not been finalised. Thus, the impact of adopting the new MFRS Framework on the Group’s and the Bank’s first set of financial statements prepared in accordance with the MFRS Framework cannot be determined and estimated reliably until the process is complete.

The financial statements of the Group and of the Bank have been prepared under the historical cost basis, unless otherwise indicated in the significant accounting policies stated below.

Investment in Subsidiary Companies

Subsidiaries are entities, including unincorporated entities, controlled by the Bank. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Control exists when the Bank has the ability to exercise its power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

In the Bank’s separate financial statements, investments in subsidiaries are stated at cost less impairment losses. On disposal of such investments, the difference between net disposal proceeds and their carrying amounts is included in profit or loss.

Basis of Consolidation

The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as of the reporting date. The financial statements of the subsidiaries are prepared up to the same reporting date as the Bank.

Business combinations are accounted for using the acquisition method from the acquisition date, which is the date on which control is transferred to the Group.

From 1 January 2011, the Group has applied FRS3, Business Combinations (revised in 2010) in accounting for business combinations. The change in accounting policy has been applied prospectively in accordance with the transitional provisions provided by the standard and does not have impact on earnings per share.

Acquisition on or after 1 January 2011
For acquisition on or after 1 January 2011, the Group measures the cost of goodwill at the acquisition date as:

• the fair value of the consideration transferred; plus
• the recognised amount of any non-controlling interests in the acquirees; plus
• if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less
• the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.

For each business combination, the Group elects whether it measures the non-controlling interests in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets at the acquisition date.

Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

Acquisitions between 1 January 2006 and 1 January 2011
For acquisition between 1 January 2006 and 1 January 2011, goodwill represents the excesses of cost of the acquisition over the Group’s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase option was recognised immediately in profit or loss.

Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of the acquisition.

Acquisitions prior to 1 January 2006
For acquisitions prior to 1 January 2006, goodwill represents the excess of the cost of acquisition over the Group’s interest in the fair values of the net identifiable assets and liabilities.

Loss of control

Upon the loss control of a subsidiary, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measure at fair value at the date that control is lost. Subsequently it is accounted for as an equity accounted investee or as an available-for-sale financial asset depending on the level of influence retained.

Investment in Associate

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but not in control or joint control over those policies.

Investment in associate is accounted for in the consolidated financial statements using the equity method of accounting. Under the equity method, the investment in associate is carried in the statements of financial position of the Group at cost adjusted for post-acquisition changes in the Group’s share of net assets of the associate. The Group’s share of the net profit or loss of the associate is recognised in profit or loss of the Group. Where there has been a change recognised directly in the equity of the associate, the Group recognises its share of such changes.

In applying the equity method, unrealised gains and losses on transactions between the Group and the associate are eliminated to the extent of the Group’s interest in the associate. After application of the equity method, the Group determines whether it is necessary to recognise any additional impairment loss with respect to the Group’s net investment in the associate. The associate is equity accounted for from the date the Group obtains significant influence until the date the Group ceases to have significant influence over the associate.

Goodwill relating to an associate is included in the carrying amount of the investment and is not amortised but are tested for impairment annually and whenever there is any indication that they may be impaired. Any excess of the Group’s share of the net fair value of the associate’s identifiable assets, liabilities and contingent liabilities over the cost of the investment is excluded from the carrying amount of the investment and is instead included as income in the determination of the Group’s share of the associate’s profit or loss in the period in which the investment is acquired.

When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any long-term interests that, in substance, form part of the Group’s net investment in the associates, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

The most recent available management financial statements of the associates are used by the Group in applying the equity method. Where the dates of the audited financial statements used are not coterminous with those of the Group, the share of results is arrived at from the last audited financial statements available and management financial statements to the end of the accounting period. Uniform accounting policies are adopted for like transactions and events in similar circumstances.

In the Bank’s separate financial statements, investment in associate is stated at cost less impairment losses.

On disposal of such investment, the difference between net disposal proceeds and the carrying amounts is included in profit or loss.

Intangible Assets

Computer software acquired is measured at cost on initial recognition. Following initial recognition, computer software is carried at cost less accumulated amortisation and accumulated impairment losses, if any. The cost are amortised on a straight-line basis over the estimated economic useful lives and assessed for impairment whenever there is an indication that it may be impaired. The amortisation period and amortisation method are reviewed at least at each reporting date.

Property, Plant and Equipment, and Depreciation

All items of property, plant and equipment are initially recorded at cost. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the Bank and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.

Subsequent to recognition, property, plant and equipment except for freehold land and building are stated at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation of other property, plant and equipment is provided for on a straight-line basis to write off the cost of each asset to its residual value over the estimated useful life, at the following annual rates:

The residual values, useful life and depreciation method are reviewed at each financial year end to ensure that the amount, method and period of depreciation are consistent with previous estimates and the expected pattern of consumption of the future economic benefits embodied in the items of property, plant and equipment.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. The difference between the net disposal proceeds, if any and the net carrying amount is recognised in profit or loss.

A lease is recognised as a finance lease if it transfers substantially to the Group and the Bank all the risks and rewards incidental to ownership. All other leases are classified as operating leases.

At each reporting date, the Group and the Bank review the carrying amounts of assets, other than deferred tax assets, to determine whether there is any indication of impairment. If any such indication exists, impairment is measured by comparing the carrying values of the assets with their recoverable amounts. Recoverable amount is the higher of net selling price and value in use, which is measured by reference to discounted future cash flows. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs.

An impairment loss is recognised in the statements of comprehensive income immediately, unless the asset is carried at revalued amount. Any impairment loss of a revalued asset is treated as a revaluation decrease to the extent of any available previously recognised revaluation surplus for the same asset.

Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairment losses recognised for the asset no longer exist or have decreased. The reversal is recognised to the extent of the carrying amount of the asset that would have been determined (net of amortisation and depreciation) had no impairment loss been recognised. The reversal is recognised in profit or loss immediately, unless the asset is carried at revalued amount. A reversal of an impairment loss on a revalued asset is credited directly to revaluation surplus. However, to the extent that an impairment loss on the same revalued asset was previously recognised as an expense in profit or loss, a reversal of that impairment loss is recognised as income in profit or loss.

Provisions for Liabilities

Provisions for liabilities are recognised when the Group and the Bank have a present obligation as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount can be made. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as finance cost.

Provision for restructuring costs is recognised in the period in which the Group and the Bank become legally or constructively committed to payment.

Revenue Recognition

Revenue is recognised when it is probable that the economic benefits associated with the transaction will flow to the enterprise and the amount of the revenue can be measured reliably.

Income Tax

Financial instruments are recognised on the statements of financial position when the Group and the Bank have become a party to the contractual provisions of the instrument. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement.

Financial instruments are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss (“FVTPL’), which are initially measured at fair value.

Effective Interest Method

The effective interest method is a method of calculating the amortised cost of a financial asset/liability and of allocating interest income/expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts and payments (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial assets/liability, or, where appropriate, a shorter period. Income/expense is recognised on an effective interest basis for debt instruments other than those financial asset/liability designated as at fair value through profit and loss.

Financial Assets

The table above shows the fair values of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts. The notional amount, recorded at gross, is the amount of a derivative’s underlying variable or reference rate and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at year-end and are indicative of neither the market risk nor the credit risk.

The fair values of the Group’s and the Bank’s derivative instruments are estimated by reference to quoted market prices. Internal models are used where no market price is available.

The non-interest bearing statutory deposits are maintained with Bank Negara Malaysia (“BNM”) in compliance with Section 37(1)(c) of the Central Bank of Malaysia Act, 1958 (revised 1994) to satisfy the Statutory Reserve Requirement (“SRR”), the amounts of which are determined at set percentages of total eligible liabilities.

With effect from 25 June 2009, BNM has allowed the Bank, as a Principal Dealer for Government, BNM and BNM Sukuk Berhad to utilise its holdings of Malaysian Government Securities (“MGS”) and/or Government Investment Issues (“GII”) in place of cash deposits to meet this SRR.

There were no MGS being used to meet the SRR as of the end of the financial year upon expiry of the above incentive given by the BNM to utilise the holdings of MGS and/or GII in place of cash deposits on 31 December 2011. Hence, the Bank has maintained a cash deposit with BNM to meet this SRR as of the end of the financial year.

The subsidiary companies of the Bank, both of which are incorporated in Malaysia, are as follows:

Details of the associate, which is incorporated in Malaysia, are as follows:

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority.

The components and movements of deferred tax assets and liabilities during the financial year prior to offsetting are as follows:

Deferred tax assets of the Group and of the Bank:

Deferred tax liabilities of the Group and of the Bank:

On 8 June 2007, the Bank issued RM 200 million in aggregate principal amount of redeemable Subordinated NIDs maturing on 8 June 2017 at 4.15% per annum subject to revision on year 6 onwards. The Subordinated NIDs, unless redeemed at end of year 5, shall bear an interest stepped up by 0.5% per annum from the 6th year onwards till the end of maturity. The subordinated debts will constitute direct, unconditional and unsecured obligations of the Bank and are subordinated to the Bank’s deposits..

Operating revenue of the Group and of the Bank comprises all types of revenue derived from the business of banking and comprises gross interest income (after adding back net interest/income suspended), fee and commission income, investment income, gross dividends and other income derived from banking operations.

Given the reach of the UK Government and their controlled bodies and the volume and diversity of transactions with them, the disclosure of transactions with these related parties is impractical. Hence, for purposes of the financial statements of the Bank and the Group, related companies refer to members of The Royal Bank of Scotland Group Plc’s group of companies.

The Group and the Bank have entered into non-cancellable operating lease agreements for the use of buildings. These leases have an average life of 9 years with an option for cancellation every 3 years. There are no restrictions placed upon the Group and the Bank by entering into these leases.

The future aggregate minimum lease payments under non-cancellable operating leases contracted for as of the reporting date but not recognised as liabilities are as follows:

The credit exposures above are derived based on Bank Negara Malaysia’s revised Guidelines on Credit Transactions and Exposures with Connected Parties, which are effective on 1 January 2008.

In the normal course of business, the Group and the Bank makes various commitments and incurs certain contingent liabilities with legal recourse to its customers. No material losses are anticipated as a result of these transactions. The commitments and contingencies are not secured against the Group’s and Bank’s assets.

Risk Weighted Exposures of the Group and of the Bank as of 31 December are as follows:

*   The credit equivalent amount is arrived at using the credit conversion factor as per Bank Negara Malaysia guidelines.

Capital management is performed at the holding company level. The primary objectives of the Capital Management function include the following: