As filed with the Securities and Exchange Commission on 18 December 2006
FORM 20-F/A
(Mark one) | o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)or (g) OFTHE SECURITIES EXCHANGE ACT OF 1934 | |
OR | x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934 | |
OR | o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934 | |
OR | o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934 | |
Date of event requiring shell company report ______________________ | |||
For the fiscal year ended | 31 December 2005 | ||
Commission file number | 1 – 9266 | |
NATIONAL WESTMINSTER BANK Plc
ENGLAND
135 Bishopsgate, London, EC2M 3UR, England
Securities registered or to be registered pursuant to Section 12 (b) of the Act.
Title of each class | Name of each exchange on which registered | |||
- | American Depositary Shares, each representing one Non-Cumulative | |||
Dollar Preference Share of $25 each, Series B | New York Stock Exchange | |||
- | American Depositary Shares, each representing one Non-Cumulative | |||
Dollar Preference Share of $25 each, Series C | New York Stock Exchange | |||
- | Exchangeable Capital Securities, Series A* | New York Stock Exchange | ||
*redeemed on 16 January 2006 |
Securities registered or to be registered pursuant to Section 12(g) of the Act. |
None |
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. |
None |
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2005, the close of the period covered by the annual report.
- £1 Ordinary shares | 1,678,176,558 | ||
- Non-Cumulative Dollar Preference Shares of $25 each, Series B | 10,000,000 | ||
- Non-Cumulative Dollar Preference Shares of $25 each, Series C | 12,000,000 | ||
- 9% Non-Cumulative Preference Shares of £1 each, Series A | 140,000,000 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | ||||||
o | YES | x | NO | |||
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | ||||||
o | YES | x | NO | |||
Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ||||||
| x | YES | o | NO | ||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of ���accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one): | ||||||
Large accelerated filer o Accelerated filer o Non accelerated filer x | ||||||
Indicate by check mark which financial statement item the registrant has elected to follow. | ||||||
o | Item 17 | x | Item 18 | |||
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | ||||||
o | Yes | x | No | |||
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. | ||||||
o | Yes | o | No | |||
As a wholly-owned subsidiary of The Royal Bank of Scotland plc, which in turn is a wholly-owned direct subsidiary of The Royal Bank of Scotland Group plc, a public company with limited liability incorporated in Great Britain and which has its registered office in Scotland, National Westminster Bank Plc meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K, as applied to reports on Form 20-F, and therefore files its Form 20-F with a reduced disclosure format.
NATIONAL WESTMINSTER BANK Plc
ANNUAL REPORT ON FORM 20-F/A
FOR THE YEAR ENDED 31 DECEMBER 2005
CONTENTS
Item | Item Caption | Page | ||
Explanatory Note | ii | |||
Forward-looking statements | ii |
PART III | ||||
18 | Financial Statements | 52 | ||
19 | Exhibits (to this Form 20-F/A) | |||
Signatures |
i
Explanatory note
The Bank is filing this amendment to its annual report on Form 20-F for the year ended 31 December 2005 (filed with the Securities and Exchange Commission (“SEC”) on 22 June 2006 (the “original filing”)) to correct an inadvertent error in the calculation of the effects of foreign exchange rate changes on cash and cash equivalents in the Group and Bank cash flow statements for the years ended 31 December 2005 and 2004.
Accordingly, amounts included in Item 18, Financial Statements have been restated solely as a result of, and to reflect, the correction of the error, by amending only the following pages:
Item 18: | page 53 (Report of independent registered public accounting firm) | |
page 66 (Cash flow statements) | ||
page 112 (Note 34 Net cash flows from operating activities) | ||
page 135 (Note 48 Restatement to Cash flow statements) |
In addition, the Bank has attached hereto the exhibits required as a result of this amendment. Except for these specific corrections, the Bank has not made any modifications or updates to the original filing and all of the other information contained in the original filing remains unchanged. This amendment does not describe other information, events or developments occurring after the original filing, including exhibits, or modify or update those disclosures affected by any subsequent events. This amendment should be read in conjunction with the Bank’s filings made with SEC subsequent to the original filing, as information in such reports and documents may update or supersede certain information contained in this amendment. This amendment retains the page numbering of the original filing for ease of reference.
Forward-looking statements
Certain sections in this document contain ‘forward-looking statements’ as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words ‘expect’, ‘estimate’, ‘project’, ‘anticipate’, ‘believes’, ‘should’, ‘intend’, ‘plan’, ‘probability’, ‘risk’, ‘Value-at-Risk (“VaR”)’, ‘target’, ‘goal’, ‘objective’, ‘will’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and similar expressions or variations on such expressions.
In particular, this document includes forward-looking statements relating, but not limited, to NatWest Group’s potential exposures to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. Such statements are subject to risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.
Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic conditions in the UK and in other countries in which NatWest Group has significant business activities or investments, including the United States; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G-7 central banks; inflation; deflation; unanticipated fluctuations in interest rates, foreign currency exchange rates, commodity prices and equity prices; changes in UK and foreign laws, regulations and taxes; changes in competition and pricing environments; natural and other disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of NatWest Group in managing the risks involved in the foregoing.
The forward-looking statements contained in this report speak only as of the date of this report, and NatWest Group does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
For a further discussion on certain risks faced by NatWest Group, see Risk Factors on page 9.
ii
ITEM 18. CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Page | ||
Statement of directors’ responsibilities | 52 | |
Report of independent registered public accounting firm | 53 | |
Accounting policies | 54 | |
Consolidated income statement for the year ended 31 December 2005 | 63 | |
Balance sheets at 31 December 2005 | 64 | |
Statements of recognised income and expense for the year ended | ||
31 December 2005 | 65 | |
Cash flow statements for the year ended 31 December 2005 | 66 | |
Notes on the accounts | 67 |
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Statement of directors’ responsibilities |
The Directors are required by Article 4 of the IAS Regulation (European Commission Regulation No 1606/2002) to prepare Group accounts and, as permitted by the Companies Act 1985 have elected to prepare Bank accounts for each financial year and have elected to prepare them in accordance with International Financial Reporting Standards. They are responsible for preparing accounts that present fairly the financial position, financial performance and cash flows of the Group and the Bank. In preparing those accounts, the directors are required to:
- select suitable accounting policies and then apply themconsistently;
- make judgements and estimates that are reasonable andprudent;
- state whether applicable accounting standards have beenfollowed, subject to any material departures disclosed andexplained in the accounts; and
- prepare the accounts on the going concern basis unless it isinappropriate to presume that the Bank will continue inbusiness.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Bank and to enable them to ensure that the Annual report and accounts complies with the Companies Act 1985. They are also responsible for safeguarding the assets of the Bank and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
By order of the Board.
Miller McLean
Secretary
29 March 2006
52
Report of independent registered public accounting firmto the members of National Westminster Bank Plc |
We have audited the accompanying consolidated balance sheets of National Westminster Bank Plc (the “Bank”) and its subsidiary undertakings (together “the Group”) as at 31 December 2005 and 2004, and the related consolidated income statements, the statements of recognised income and expense and the consolidated cash flow statements for each of the years then ended. These financial statements are the responsibility of the directors. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of National Westminster Bank Plc and subsidiaries as at 31 December 2005 and 2004, and the results of their operations and their cash flows for each of the years then ended in conformity with International Financial Reporting Standards (“IFRS”).
As discussed in Note 48, the accompanying financial statements have been restated.
IFRS vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 46 to the consolidated financial statements.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
Edinburgh, United Kingdom
22 June 2006 (18 December 2006 as to the effects of the restatement discussed in Note 48)
53
Accounting policies |
1. Adoption of International Financial Reporting Standards
The annual accounts have, for the first time, been prepared in accordance with International Financial Reporting Standards adopted by the International Accounting Standards Board (“IASB”), and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB (together “IFRS”) as endorsed by the European Union (“EU”). The EU has not endorsed the complete text of IAS 39 ‘Financial Instruments: Recognition and Measurement’; it has relaxed some of the standard’s hedging requirements. The Group has not taken advantage of this relaxation and has adopted IAS 39 as issued by the IASB. The date of transition to IFRS for the Group and the Bank and the date of their opening IFRS balance sheets was 1 January 2004. The Bank accounts have been presented in accordance with the Companies Act 1985.
The main differences between IFRS and previously applied generally accepted accounting principles in the United Kingdom (“UK GAAP”) and the effect of implementing IFRS on the Group and Bank balance sheets and shareholders’ funds as at 1 January and 31 December 2004 and on the Group’s 2004 consolidated income statement are set out on pages 117 to 125.
On initial adoption of IFRS, the Group (and the Bank where relevant) applied the following exemptions from the requirements of IFRS and from their retrospective application as permitted by IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’:
Business combinations– the Group has applied IFRS 3‘Business Combinations’ to business combinations that occurred on or after 1 January 2004. Business combinations before that date have not been restated. Under UK GAAP, goodwill arising on acquisitions was capitalised and amortised over its estimated useful economic life. The carrying amount of goodwill in the Group’s opening IFRS balance sheet was £273 million, its carrying value under UK GAAP as at 31 December 2003.
Fair value or revaluation as deemed cost– under UK GAAP, the Group’s freehold and long leasehold property occupied for its own use was recorded at valuation on the basis of existing use value. The Group has elected to use this valuation as at 31 December 2003 as deemed cost for its opening IFRS balance sheet. At this date, the carrying value under UK GAAP of freehold and long leasehold property occupied for own use was £1,334 million.
Compound financial instruments– the Group has not separated compound instruments between liability and equity components, as required by IAS 32 ‘Financial Instruments: Disclosure and Presentation’, where the liability component was not outstanding at 1 January 2004. UK GAAP did not permit compound instruments to be separated between liability and equity components on issue.
Derecognition– the Group has applied the derecognition requirements of IAS 39 to transactions occurring on or after 1 January 1992.
Implementation of IAS 32 and IAS 39– as allowed by IFRS 1, the Group and the Bank implemented IAS 32 and IAS 39 with effect from 1 January 2005 without restating the income statement, balance sheet and notes for 2004. The Group has adopted the Amendment to IAS 39 ‘The Fair Value Option’ issued by the IASB in June 2005 also from 1 January 2005. The effect of implementing IAS 32 and IAS 39 on the Group and Bank balance sheets and shareholders’ funds as at 1 January 2005 is set out on pages 126 to 128. In preparing the 2004 comparatives, UK GAAP principles then current have been applied to financial instruments. The main differences between UK GAAP and IFRS on financial instruments are summarised on pages 119 to 121.
IFRS 1 prohibits retrospective application of some aspects of IFRS:
Derecognition of financial assets and liabilities– non-derivative financial assets and liabilities derecognised before 1 January 1992 (the date from which the derecognition requirements of IAS 39 have been implemented) under the Group’s previous GAAP have not been recognised in its opening IFRS balance sheet. | |
Hedge accounting– hedging relationships of a type that does not qualify for hedge accounting under IAS 39 are not reflected in the Group’s opening IFRS balance sheet. | |
Discontinued operations and assets classified as held for sale– the Group has applied IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ from 1 January 2005. |
The Group has adopted the Amendment ‘Actuarial Gains and Losses, Group Plans and Disclosures’ to IAS 19 ‘Employee Benefits’ from 1 January 2004.
2. Accounting convention
The Bank is incorporated in the UK and registered in England. The financial statements have been prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, held-for-trading financial assets and financial liabilities, financial assets and financial liabilities that are designated as at fair value through profit or loss, available-for-sale financial assets and investment property. Recognised financial assets and financial liabilities in fair value hedges are adjusted for changes in fair value in respect of the risk that is hedged.
54
Accounting policiescontinued
3. Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Bank and entities (including certain special purpose entities) controlled by the Group (its subsidiaries). Control exists where the Group has the power to govern the financial and operating policies of the entity; generally conferred by holding a majority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair value. Any excess of the cost (the fair value of assets given, liabilities incurred or assumed and equity instruments issued by the Group plus any directly attributable costs) of an acquisition over the fair value of the net assets acquired is recognised as goodwill. The interest of minority shareholders is stated at their share of the fair value of the subsidiary’s net assets.
The results of subsidiaries acquired are included in the consolidated income statement from the date control passes to the Group. The results of subsidiaries sold are included up until the Group ceases to control them.
All intra-group balances, transactions, income and expenses are eliminated on consolidation. The consolidated accounts are prepared using uniform accounting policies.
4. Revenue recognition
Interest income on financial assets that are classified as loans and receivables, available-for-sale or held-to-maturity and interest expense on financial liabilities other than those at fair value through profit or loss are determined using the effective interest rate method. The effective interest rate method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or liabilities) and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows to the instrument’s initial carrying amount. Calculation of the effective interest rate takes into account fees receivable, that are an integral part of the instrument’s yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows.
Financial assets and financial liabilities held-for-trading or designated as at fair value through profit or loss are recorded at fair value. Changes in fair value are recognised in profit or loss together with dividends and interest receivable and payable.
Commitment and utilisation fees are determined as a percentage of the outstanding facility. If it is unlikely that a specific lending arrangement will be entered into, such fees are taken to profit or loss over the life of the facility otherwise they are deferred and included in the effective interest rate on the advance.
Fees in respect of services are recognised as the right to consideration accrues through the provision of the service tothe customer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable. The application of this policy to significant fee types is outlined below.
Payment services:this comprises income received for payment services including cheques cashed, direct debits, Clearing House Automated Payments (the UK electronic settlement system) and BACS payments (the automated clearing house that processes direct debits and direct credits). These are generally charged on a per transaction basis. The income is earned when the payment or transaction occurs. Payment services income is usually charged to the customer’s account, monthly or quarterly in arrears. Accruals are raised for services provided but not charged at period end.
Card related services:fees from credit card business include:
Commission received from retailers for processing credit and debit card transactions: income is accrued to the income statement as the service is performed. | |
Interchange received: as issuer, the Group receives a fee (interchange) each time a cardholder purchases goods and services. The Group also receives interchange fees from other card issuers for providing cash advances through its branch and Automated Teller Machine networks. These fees are accrued once the transaction has taken place. | |
An annual fee payable by a credit card holder is deferred and taken to profit or loss over the period of the service i.e. 12 months. |
Insurance brokerage:this is made up of fees and commissions received from the agency sale of insurance. Commission on the sale of an insurance contract is earned at the inception of the policy as the insurance has been arranged and placed. However, provision is made where commission is refundable in the event of policy cancellation in line with estimated cancellations.
Investment management fees:fees charged for managing investments are recognised as revenue as the services are provided. Incremental costs that are directly attributable to securing an investment management contract are deferred and charged as expense as the related revenue is recognised.
5. Pensions and other post-retirement benefits
The Group provides post-retirement benefits in the form of pensions and healthcare plans to eligible employees.
For defined benefit schemes, scheme liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a rate that reflects the current rate of return on a high quality corporate bond of equivalent term and currency to the scheme liabilities. Scheme assets are measured at their fair value. Cumulative actuarial gains or losses that exceed 10 per cent of the greater of the assets or
55
the obligations of the scheme are amortised to the income statement over the expected average remaining lives of participating employees. Past service costs are recognised immediately to the extent that benefits have vested; otherwise they are amortised over the period until the benefits become vested.
Any surplus or deficit of scheme assets over liabilities adjusted for unrecognised actuarial gains and losses and past service costs is recognised in the balance sheet as an asset (surplus) or liability (deficit).
Contributions to defined contribution pension schemes are recognised in the income statement when payable.
6. Intangible assets and goodwill
Intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss using methods that best reflect the economic benefits over their estimated useful economic lives and is included in Depreciation and amortisation. The estimated useful economic lives are as follows:
Core deposit intangibles | up to 8 years | ||
Other acquired intangibles | 5-10 years | ||
Computer software | 3-5 years |
Expenditure on internally generated goodwill and brands is written-off as incurred. Acquired goodwill being the excess of the cost of an acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary, associate or joint venture acquired is initially recognised at cost and subsequently at cost less any accumulated impairment losses. Goodwill arising on the acquisition of subsidiaries and joint ventures is included in the balance sheet caption ‘Intangible assets’ and that on associates within their carrying amounts. The gain or loss on the disposal of a subsidiary, associate or joint venture includes the carrying value of any related goodwill.
7. Property, plant and equipment
Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for separately. Property that is being constructed or developed for future use as investment property is classified as property, plant and equipment and stated at cost until construction or development is complete, at which time it is reclassified as investment property.
Depreciation is charged to profit or loss on a straight-line basis so as to write-off the depreciable amount of property, plant and equipment (including assets owned and let on operating leases (except investment property – see note 18 below)) over their estimated useful lives. The depreciable amount is the cost of an asset less its residual value. Land is not depreciated.
Estimated useful lives are as follows:
Freehold and long leasehold buildings | 50 years | ||
Short leaseholds | unexpired period | ||
of the lease | |||
Property adaptation costs | 10 to 15 years | ||
Computer equipment | up to 5 years | ||
Other equipment | 4 to 15 years |
8. Impairment of intangible assets and property, plant and equipment
At each reporting date, the Group assesses whether there is any indication that its intangible assets, or property, plant and equipment are impaired. If any such indication exists, the Group estimates the recoverable amount of the asset and the impairment loss if any. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. If an asset does not generate cash flows that are independent from those of other assets or groups of assets, recoverable amount is determined for the cash-generating unit to which the asset belongs. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cash generating unit that have not been reflected in the estimation of future cash flows. If the recoverable amount of an intangible or tangible asset is less than its carrying value, an impairment loss is recognised immediately in profit or loss and the carrying value of the asset reduced by the amount of the loss. A reversal of an impairment loss on intangible assets (excluding goodwill) or property, plant and equipment is recognised as it arises provided the increased carrying value does not exceed that which it would have been had no impairment loss been recognised. Impairment losses on goodwill are not reversed.
9. Foreign currencies
The Group’s consolidated financial statements are presented in sterling which is the functional currency of the Bank.
Transactions in foreign currencies are translated into sterling at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Foreign exchange differences arising on translation are recognised in profit or loss except for differences arising on cash flow hedges and hedges of net investments in foreign operations. Non-monetary items denominated in foreign currencies that are stated at fair value are translated into sterling at foreign exchange rates ruling at the dates the values were determined. Translation differences arising on non-monetary items measured at fair value are recognised in profit or loss except for differences arising on available-for-sale non-monetary financial assets, for example equity shares, which are included in the available-for-sale reserve in equity unless the asset is the hedged item in a fair value hedge.
56
Accounting policiescontinued
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into sterling at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on the translation of foreign operations are recognised directly in equity.
10. Leases
Contracts to lease assets are classified as finance leases if they transfer substantially all the risks and rewards of ownership of the asset to the customer. Other contracts to lease assets are classified as operating leases.
Finance lease receivables are stated in the balance sheet at the amount of the net investment in the lease being the minimum lease payments and any unguaranteed residual value discounted at the interest rate implicit in the lease. Finance lease income is allocated to accounting periods so as to give a constant periodic rate of return before tax on the net investment. Unguaranteed residual values are subject to regular review to identify potential impairment. If there has been a reduction in the estimated unguaranteed residual value, the income allocation is revised and any reduction in respect of amounts accrued is recognised immediately.
Rental income from operating leases is credited to the income statement on a receivable basis over the term of the lease. Operating lease assets are included within Property, plant and equipment and depreciated over their useful lives (see note 7 above).
11. Taxation
Provision is made for taxation at current enacted rates on taxable profits, arising in income or in equity, taking into account relief for overseas taxation where appropriate. Deferred taxation is accounted for in full for all temporary differences between the carrying amount of an asset or liability for accounting purposes and its carrying amount for tax purposes, except in relation to overseas earnings where remittance is controlled by the Group, and goodwill.
Deferred tax assets are only recognised to the extent that it is probable that they will be recovered.
12. Financial assets
Financial assets are classified into held-to-maturity investments; available-for-sale financial assets; held-for-trading; designated as at fair value through profit or loss; or loans and receivables.
Held-to-maturity investments– a financial asset is classified as a held-to-maturity investment only if it has fixed or determinable payments, a fixed maturity and the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at amortised cost using the effective interest method (see note 4 above) less any impairment losses.
Held-for-trading– a financial asset is classified as held-for-trading if it is acquired principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial assets are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses on held-for-trading financial assets are recognised in profit or loss as they arise.
Designated as at fair value through profit or loss– financial assets that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss and are subsequently measured at fair value. Gains and losses on financial assets that are designated as at fair value through profit or loss are recognised in profit or loss as they arise.
Financial assets may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.
Loans and receivables– non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans and receivables except those that are classified as available-for-sale or as held-for-trading, or designated as at fair value through profit or loss. Loans and receivables are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at adjusted cost using the effective interest method (see note 4 above) less any impairment losses.
Available-for-sale– financial assets that are not classified as held-to-maturity; held-for-trading; designated at fair value through profit or loss; or loans and receivables are classified as available-for-sale. Financial assets can be designated as available-for-sale on initial recognition. Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs. They are subsequently measured at fair value. Impairment losses and exchange differences resulting from retranslating the amortised cost of currency monetary available-for-sale financial assets are recognised in profit or loss together with interest calculated using the effective interest rate (see note 4 above). Other changes in the fair value of available-for-sale financial assets are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognised in profit or loss.
Regular way purchases of financial assets classified as loans and receivables are recognised on settlement date; all other regular way purchases are recognised on trade date.
57
Fair value for a net open position in a financial asset that is quoted in an active market is the current bid price times the number of units of the instrument held. Fair values for financial assets not quoted in an active market are determined using appropriate valuation techniques including discounting future cash flows, option pricing models and other methods that are consistent with accepted economic methodologies for pricing financial assets.
13. Impairment of financial assets
The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets classified as held-to-maturity, available-for-sale or loans and receivables is impaired. A financial asset or portfolio of financial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.
Financial assets carried at amortised cost– if there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and receivables or as held-to-maturity investments has been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets discounted at the effective interest rate of the instrument at initial recognition. Impairment losses are assessed individually for financial assets that are individually significant and individually or collectively for assets that are not individually significant. In making collective assessment of impairment, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the contractual cash flows and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted, on the basis of current observable data, to reflect the effects of current conditions not affecting the period of historical experience.
Impairment losses are recognised in profit or loss and the carrying amount of the financial asset or group of financial assets reduced by establishing an allowance for impairment losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.
Financial assets carried at fair value– when a decline in the fair value of a financial asset classified as available-for-sale has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss is removed from equity and recognised in profit or loss. The loss is measured as the difference between the amortised cost of the financial asset and its current fair value. Impairment losses on available-for-sale equity instruments are not reversed through profit or loss, but those on available-for-sale debt instruments are reversed, if there is an increase in fair value that is objectively related to a subsequent event.
14. Financial liabilities
A financial liability is classified as held-for-trading if it is incurred principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held-for-trading financial liabilities are recognised at fair value with transaction costs being recognised in profit or loss. Subsequently they are measured at fair value. Gains and losses are recognised in profit or loss as they arise. Financial liabilities that the Group designates on initial recognition as being at fair value through profit or loss are recognised at fair value, with transaction costs being recognised in profit or loss and are subsequently measured at fair value. Gains and losses on financial liabilities that are designated as at fair value through profit or loss are recognised in profit or loss as they arise.
Financial liabilities may be designated as at fair value through profit or loss only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract.
The principal category of financial liabilities designated as at fair value through profit or loss is structured liabilities issued by the Group: designation significantly reduces the measurement inconsistency between these liabilities and the related derivatives carried at fair value.
All other financial liabilities are measured at amortised cost using the effective interest method (see note 4 above).
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Fair value for a net open position in a financial liability that is quoted in an active market is the current offer price times the number of units of the instrument held or issued. Fair values for financial liabilities not quoted in an active market are determined using appropriate valuation techniques including discounting future cash flows, option pricing models and other methods that are consistent with accepted economic methodologies for pricing financial liabilities.
15. Derecognition
A financial asset is derecognised when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either: (a) transfers the contractual rights to receive the asset’s cash flows; or (b) retains the right to the asset’s cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group assesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards have been retained, the asset remains on the balance sheet. If substantially all of the risks and rewards have been transferred, the asset is derecognised. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether or not it has retained control of the asset. If it has not retained control, the asset is derecognised. Where the Group has retained control of the asset, it continues to recognise the asset to the extent of its continuing involvement.
A financial liability is removed from the balance sheet when the obligation is discharged, or cancelled, or expires.
16. Capital instruments
The Group classifies a financial instrument that it issues as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument is classified as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms. An instrument is classified as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities. The components of a compound financial instrument issued by the Group are classified and accounted for separately as financial assets, financial liabilities or equity as appropriate.
17. Derivatives and hedging
Derivative financial instruments are recognised initially, and subsequently measured, at fair value. Derivative fair values are determined from quoted prices in active markets where available. Where there is no active market for an instrument, fair value is derived from prices for the derivative’s components using appropriate pricing or valuation models.
A derivative embedded in a contract is accounted for as stand-alone derivative if its economic characteristics are not closely related to the economic characteristics of the host contract; unless the entire contract is carried at fair value through profit or loss.
Gains and losses arising from changes in fair value of a derivative are recognised as they arise in profit or loss unless the derivative is the hedging instrument in a qualifying hedge. There are three types of hedge relationship: hedges of changes in the fair value of a recognised asset or liability or firm commitment (fair value hedges); hedges of the variability in cash flows from a recognised asset or liability or a forecast transaction (cash flow hedges); and hedges of the net investment in a foreign entity.
Hedge relationships are formally documented at inception. The documentation includes identification of the hedged item and the hedging instrument, details the risk that is being hedged and the way in which effectiveness will be assessed at inception and during the period of the hedge. If the hedge is not highly effective in offsetting changes in fair values or cash flows attributable to the hedged risk, consistent with the documented risk management strategy, hedge accounting is discontinued.
Fair value hedge– in a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss. The gain or loss on the hedged item attributable to the hedged risk is recognised in profit or loss and adjusts the carrying amount of the hedged item. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting or if the hedging instrument expires or is sold, terminated or exercised or if hedge designation is revoked. If the hedged item is one for which the effective interest rate method is used, any cumulative adjustment is amortised to profit or loss over the life of the hedged item using a recalculated effective interest rate.
Cash flow hedge– where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability or a highly probable forecast transaction, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity. The ineffective portion is recognised in profit or loss. When the forecast transaction results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity in the same periods in which the asset or liability affects profit or loss. Otherwise the cumulative gain or loss is removed from equity and recognised in profit or loss at the same time as the hedged transaction. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; if the hedging instrument expires or is sold, terminated or exercised; if the forecast transaction is no longer expected to occur; or if hedge designation is revoked. On the discontinuance of hedge accounting (except where a forecast transaction is no longer expected to occur), the cumulative unrealised gain or loss recognised in equity is recognised in profit or loss when the hedged cash flow occurs or, if the forecast transaction results in the recognition of a financial asset or financial liability, in the same periods during which the asset or liability affects profit or loss. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss is recognised in profit or loss immediately.
59
Hedge of net investment in a foreign operation– where a foreign currency liability hedges a net investment in a foreign operation, the portion of foreign exchange differences arising on translation of the liability determined to be an effective hedge is recognised directly in equity. Any ineffective portion is recognised in profit or loss.
18. Investment property
Investment property comprises freehold and leasehold properties that are held to earn rentals or for capital appreciation or both. It is not depreciated but is stated at fair value based on valuations by independent registered valuers. Fair value is based on current prices in an active market for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognised in profit or loss. Rental income from investment property is recognised on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.
19. Cash and cash equivalents
Cash and cash equivalents comprises cash and demand deposits with banks together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.
20. Shares in Group entities
The Bank’s investments in its subsidiaries are stated at cost less any impairment.
Critical accounting policies and key sources of estimation uncertainty
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. UK company law and IFRS require the directors, in preparing the Group's financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, requires management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB’s Framework for the Preparation and Presentation of Financial Statements.
The judgements and assumptions involved in the Group’s accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.
Loan impairment provisions
The Group’s loan impairment provisions are established to recognise incurred impairment losses in its portfolio of loans classified as loans and receivables and carried at amortised cost. A loan is impaired when there is objective evidence thatevents since the loan was granted have affected expected cash flows from the loan. The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows at the loan's original effective interest rate.
At 31 December 2005, gross loans and advances to customers totalled £161,974 million (2004 – £133,619 million) and customer loan impairment provisions amounted to £2,031 million (2004 – £1,940 million).
There are two components to the Group’s loan impairment provisions: individual and collective.
Individual component – all impaired loans that exceed specific thresholds are individually assessed for impairment.
Individually assessed loans principally comprise the Group's portfolio of commercial loans to medium and large businesses. Impairment losses are recognised as the difference between the carrying value of the loan and the discounted value of management’s best estimate of future cash repayments and proceeds from any security held. These estimates take into account the customer’s debt capacity and financial flexibility; the level and quality of its earnings; the amount and sources of cash flows; the industry in which the counterparty operates; and the realisable value of any security held. Estimating the quantum and timing of future recoveries involves significant judgement. The size of receipts will depend on the future performance of the borrower and the value of security, both of which will be affected by future economic conditions; additionally, collateral may not be readily marketable. The actual amount of future cash flows and the date they are received may differ from these estimates and consequently actual losses incurred may differ from those recognised in these financial statements.
Collective component – this is made up of two elements: loan impairment provisions for impaired loans that are below individual assessment thresholds (collective impaired loan provisions) and for loan losses that have been incurred but have not been separately identified at the balance sheet date (latent loss provisions). These are established on a portfolio basis taking into account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends. The most significant factors in establishing these provisions are the expected loss rates and the related average life. These portfolios include credit card receivables and other personal advances including mortgages. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behaviour and bankruptcy trends.
Pensions
The Group operates a number of defined benefit pension schemes as described in Note 3 on the financial statements. The assets of the schemes are measured at their fair value at
60
Accounting policiescontinued
the balance sheet date. Scheme liabilities are measured using the projected unit method, which takes account of projected earnings increases, using actuarial assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. These cash flows are discounted at the interest rate applicable to high-quality corporate bonds of the same currency and term as the liabilities. Any surplus or deficit in excess of 10% of the greater of scheme assets and scheme liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). In determining the value of scheme liabilities, assumptions are made as to price inflation, dividend growth, pension increases, earnings growth and employees. There is a range of assumptions that could be adopted in valuing the schemes’ liabilities. Different assumptions could significantly alter the amount of the deficit recognised in the balance sheet and the pension cost charged to the income statement. The assumptions adopted for the Group’s pension schemes are set out in Note 3 on the financial statements. The pension deficit recognised in the balance sheet at 31 December 2005 was £1,235 million (2004 – £2,093 million).
Fair value
Financial instruments classified as held-for-trading or designated as at fair value through profit or loss and financial assets classified as available-for-sale are recognised in the financial statements at fair value. All derivatives are measured at fair value. In the balance sheet, financial assets carried at fair value are included within Treasury and other eligible bills, Loans and advances to banks, Loans and advances to customers, Debt securities and Equity shares as appropriate. Financial liabilities carried at fair value are included within the captions Deposits by banks, Customer accounts, Debt securities in issue and Subordinated liabilities. Derivative assets and Derivative liabilities are shown separately on the face of the balance sheets. Gains or losses arising from changes in fair value of financial instruments classified as held-for-trading or designated as at fair value through profit or loss are included in the income statement. Unrealised gains and losses on available-for-sale financial assets are recognised directly in equity unless an impairment loss is recognised. The carrying value of a financial asset or a financial liability carried at cost or amortised cost that is the hedged item in a qualifying hedge relationship is adjusted by the gain or loss attributable to the hedged risk.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Fair values are determined by reference to observable market prices where available and reliable. Where representative market prices for an instrument are not available or are unreliable because of poor liquidity, the fair value is derived from prices for its components using appropriate pricing or valuation models that are based on independently sourced market parameters, including interest rate yield curves, option volatilities and currency rates.
Financial assets carried at fair value include government, asset backed and corporate debt securities, reverse repos, loans, corporate equity shares and derivatives. Financial liabilities carried at fair value include deposits, repos and short positions in securities. Fair value for a substantial proportion of these instruments is based on observable market prices or derived from observable market parameters. Where observable prices are not available, fair value is based on appropriate valuation techniques or management estimates.
The Group’s derivative products include swaps, forwards, futures and options. Exchange traded instruments are valued using quoted prices. The fair value of over-the-counter instruments is derived from pricing models which take account of contract terms, including maturity, as well as quoted market parameters such as interest rates and volatilities. Most of the Group’s pricing models do not entail material subjectivity because the methodologies utilised do not incorporate significant judgement and the parameters included in the models can be calibrated to actively quoted market prices. Values established from pricing models are adjusted for credit risk, liquidity risk and future operational costs.
A negligible proportion of the Group’s trading derivatives are valued directly from quoted prices, the majority being valued using appropriate valuation techniques. The fair value of substantially all securities positions carried at fair value is determined directly from quoted prices.
Details of financial instruments carried at fair value are given in Note 32 on the financial statements.
Goodwill
The Group capitalises goodwill arising on the acquisition of businesses, as disclosed in the Accounting policies. The carrying value of goodwill as at 31 December 2005 was £760 million (2004 – £739 million).
Goodwill is the excess of the cost of an acquisition over the fair value of its net assets. The determination of the fair value of assets and liabilities of businesses acquired requires the exercise of management judgement; for example those financial assets and liabilities for which there are no quoted prices, and those non-financial assets where valuations reflect estimates of market conditions such as property. Different fair values would result in changes to the goodwill arising and to the post-acquisition performance of the acquisition. Goodwill is not amortised but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
For the purposes of impairment testing goodwill acquired in a business combination is allocated to each of the Group’s cash-generating units or groups of cash-generating units expected to benefit from the combination. Goodwill impairment testing involves the comparison of the carrying value of a cash-
61
generating unit or group of cash generating units with its recoverable amount. The recoverable amount is the higher of the unit's fair value and its value in use. Value in use is the present value of expected future cash flows from the cash-generating unit or group of cash-generating units. Fair value is the amount obtainable for the sale of the cash-generating unit in an arm’s length transaction between knowledgeable, willing parties.
Impairment testing inherently involves a number of judgmental areas: the preparation of cash flow forecasts for periods that are beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the business; estimation of the fair value of cash-generating units; and the valuation of the separable assets of each business whose goodwill is being reviewed.
Accounting developments
The International Accounting Standards Board (“IASB”) issued IFRS 7 ‘Financial Instruments: Disclosures’ in August 2005. The standard replaces IAS 30 ‘Disclosures in the Financial Statements of Banks and Similar Financial Institutions’ and the disclosure provisions in IAS 32 ‘Financial Instruments: Disclosure and Presentation’. IFRS 7 requires disclosure of the significance of financial instruments for an entity’s financial position and performance and of qualitative and quantitative information about exposure to risks arising from financial instruments. The standard is effective for annual periods beginning on or after 1 January 2007. Earlier application is encouraged.
At the same time the IASB issued an amendment ‘Capital Disclosures’ to IAS 1 ‘Presentation of Financial Statements’. It requires disclosures about an entity's capital and the way it is managed. This amendment is also effective for annual periods beginning on or after 1 January 2007. Earlier application is encouraged.
The IASB has also issued three amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’. The first, ‘Cash Flow Hedge Accounting of Forecast Intragroup Transactions’, published in April 2005, amends IAS 39 to permit the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in consolidated financial statements. The amendment is effective for annual periods beginning on or after 1 January 2006.
The second, ‘The Fair Value Option’, published in June 2005, places conditions on the option in IAS 39 to designate on initial recognition a financial asset or financial liability as at fair value through profit or loss. The amendment is effective for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. The Group has adopted this amendment from 1 January 2005 (see accounting policies on page 54).
The third, ‘Financial Guarantee Contracts’, published in August2005, amends IAS 39 and IFRS 4 ‘Insurance Contracts’. The amendments define a financial guarantee contract. They require such contracts to be recorded initially at fair value and subsequently at the higher of the provision determined in accordance with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and the amount initially recognised less amortisation. The amendments are effective for annual periods beginning on or after 1 January 2006.
In December 2005, the IASB issued amendments to IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’ to clarify that a monetary item can form part of the net investment in overseas operations regardless of the currency in which it is denominated and that the net investment in a foreign operation can include a loan from a fellow subsidiary. The amendments are effective immediately but have not been endorsed by the EU.
The Group is reviewing IFRS 7 and the amendments to IAS 1 and IAS 21 and those to IAS 39 that it has not implemented, to determine their effect on its financial reporting.
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Consolidated income statement |
for the year ended 31 December 2005 |
2005 | 2004 | |||||||||||||
Discontinued* | Continuing | Discontinued | Continuing | |||||||||||
Note | £m | £m | £m | £m | ||||||||||
Interest receivable | 203 | 8,289 | 251 | 6,929 | ||||||||||
Interest payable | 9 | (4,040 | ) | 14 | (2,811 | ) | ||||||||
Net interest income | 212 | 4,249 | 265 | 4,118 | ||||||||||
Fees and commissions receivable | 43 | 3,663 | 51 | 3,384 | ||||||||||
Fees and commissions payable | (34 | ) | (926 | ) | (38 | ) | (845 | ) | ||||||
Income from trading activities | 1 | — | 808 | — | 887 | |||||||||
Other operating income | — | 635 | — | 201 | ||||||||||
Non-interest income | 9 | 4,180 | 13 | 3,627 | ||||||||||
Total income | 221 | 8,429 | 278 | 7,745 | ||||||||||
Staff costs | — | 1,477 | — | 1,326 | ||||||||||
Premises and equipment | — | 114 | — | 197 | ||||||||||
Other administrative expenses | 70 | 2,440 | 52 | 2,131 | ||||||||||
Depreciation and amortisation | — | 382 | 1 | 461 | ||||||||||
Operating expenses** | 2 | 70 | 4,413 | 53 | 4,115 | |||||||||
Operating profit before impairment losses | 151 | 4,016 | 225 | 3,630 | ||||||||||
Impairment losses | 4 | 752 | (5 | ) | 630 | |||||||||
Operating profit before tax | 4 | 147 | 3,264 | 230 | 3,000 | |||||||||
Tax | 5 | 44 | 904 | 69 | 797 | |||||||||
Operating profit after tax | 103 | 2,360 | 161 | 2,203 | ||||||||||
Discontinued operations | 103 | 161 | ||||||||||||
Profit for the year | 2,463 | 2,364 | ||||||||||||
Profit attributable to: | ||||||||||||||
Minority interests | 17 | 12 | ||||||||||||
Preference dividends – non equity | — | 36 | ||||||||||||
Ordinary shareholders | 2,446 | 2,316 | ||||||||||||
2,463 | 2,364 | |||||||||||||
* | the Group transferred its home mortgage finance business, National Westminster Home Loans Limited, to The Royal Bank of Scotland plc on 31 December 2005 at neither a profit nor a loss. |
** | includes integration expenditure (see Note 4). |
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Balance sheets |
at 31 December 2005 |
Group | Bank | |||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
Note | £m | £m | £m | £m | ||||||||||||||
Assets | ||||||||||||||||||
Cash and balances at central banks | 1,568 | 1,589 | 894 | 956 | ||||||||||||||
Treasury bills and other eligible bills | 9 | 770 | 172 | — | — | |||||||||||||
Loans and advances to banks | 10 | 55,995 | 29,982 | 20,829 | 15,994 | |||||||||||||
Loans and advances to customers | 11 | 159,943 | 131,679 | 97,569 | 77,619 | |||||||||||||
Debt securities | 12 | 28,745 | 22,426 | 51 | 39 | |||||||||||||
Equity shares | 13 | 823 | 1,338 | — | 587 | |||||||||||||
Investment in Group undertakings | 14 | — | — | 6,633 | 6,253 | |||||||||||||
Intangible assets | 16 | 1,198 | 1,244 | 347 | 434 | |||||||||||||
Property, plant and equipment | 17 | 1,531 | 1,542 | 1,044 | 1,247 | |||||||||||||
Settlement balances | 3,931 | 3,538 | — | — | ||||||||||||||
Derivatives at fair value | 18 | 2,976 | 1,366 | 1,203 | 704 | |||||||||||||
Prepayments, accrued income and other assets | 19 | 3,123 | 2,345 | 1,564 | 1,834 | |||||||||||||
Total assets | 260,603 | 197,221 | 130,134 | 105,667 | ||||||||||||||
Liabilities | ||||||||||||||||||
Deposits by banks | 20 | 46,001 | 23,873 | 5,310 | 3,480 | |||||||||||||
Customer accounts | 21 | 157,924 | 126,119 | 109,942 | 87,925 | |||||||||||||
Debt securities in issue | 22 | 10,801 | 3,597 | 38 | 39 | |||||||||||||
Settlement balances and short positions | 23 | 21,574 | 21,670 | — | — | |||||||||||||
Derivatives at fair value | 18 | 2,657 | 1,105 | 1,129 | 283 | |||||||||||||
Accruals, deferred income and other liabilities | 24 | 3,579 | 4,539 | 1,464 | 2,171 | |||||||||||||
Retirement benefit liabilities | 3 | 1,235 | 2,093 | 1,041 | 1,920 | |||||||||||||
Subordinated liabilities | 26 | 6,648 | 5,808 | 5,501 | 4,747 | |||||||||||||
Total liabilities | 250,419 | 188,804 | 124,425 | 100,565 | ||||||||||||||
Equity* | ||||||||||||||||||
Minority interests | 27 | 744 | 408 | — | — | |||||||||||||
Shareholders’ equity | ||||||||||||||||||
Called up share capital | 28 | 1,678 | 2,102 | 1,678 | 2,102 | |||||||||||||
Reserves | 29 | 7,762 | 5,907 | 4,031 | 3,000 | |||||||||||||
Total equity | 10,184 | 8,417 | 5,709 | 5,102 | ||||||||||||||
Total liabilities and equity | 260,603 | 197,221 | 130,134 | 105,667 | ||||||||||||||
* | includes non-equity minority interests and preference shares in 2004. |
The accounts were approved by the Board of directors on 29 March 2006 and signed on its behalf by: |
Sir George Mathewson | Sir Fred Goodwin | Guy Whittaker | ||
Chairman | Group Chief Executive | Group Finance Director |
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Statements of recognised income and expense |
for the year ended 31 December 2005 |
Group | Bank | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
£m | £m | £m | £m | |||||||||
Available-for-sale investments | ||||||||||||
Net valuation gains taken direct to equity | 38 | 33 | ||||||||||
Net profit taken to income on sales | (324 | ) | (320 | ) | ||||||||
Cash flow hedges | ||||||||||||
Net losses taken direct to equity | (28 | ) | (52 | ) | ||||||||
Exchange differences on translation of foreign operations | 180 | 8 | (5 | ) | — | |||||||
(Expense)/income before tax on items recognised direct in equity | (134 | ) | 8 | (344 | ) | — | ||||||
Tax on items recognised direct in equity | 106 | — | 110 | — | ||||||||
Net (expense)/income recognised direct in equity | (28 | ) | 8 | (234 | ) | — | ||||||
Profit for the year | 2,463 | 2,364 | 1,774 | 1,901 | ||||||||
Total recognised income and expense for the year | 2,435 | 2,372 | 1,540 | 1,901 | ||||||||
Attributable to: | ||||||||||||
Equity holders of the parent | 2,420 | 2,360 | 1,540 | 1,901 | ||||||||
Minority interests | 15 | 12 | — | — | ||||||||
2,435 | 2,372 | 1,540 | 1,901 | |||||||||
Effect of changes in accounting policies on the implementation of IFRS | ||||||||||||
Equity holders of the parent | (1,768 | ) | (1,029 | ) | (4,619 | ) | (3,567 | ) | ||||
Minority interests | (6 | ) | — | — | — | |||||||
(1,774 | ) | (1,029 | ) | (4,619 | ) | (3,567 | ) | |||||
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Cash flow statements |
for the year ended 31 December 2005 |
Group | Bank | |||||||||||||
Restated* | Restated* | Restated* | Restated* | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||
Note | £m | £m | £m | £m | ||||||||||
Operating activities | ||||||||||||||
Operating profit before tax | 3,411 | 3,230 | 2,315 | 2,382 | ||||||||||
Adjustments for: | ||||||||||||||
Depreciation and amortisation | 382 | 462 | 326 | 402 | ||||||||||
Interest on subordinated liabilities | 304 | 202 | 283 | 193 | ||||||||||
Charge for defined benefit pension schemes | 149 | 133 | 97 | 96 | ||||||||||
Cash contribution to defined benefit pension schemes | (1,007 | ) | (53 | ) | (976 | ) | (30 | ) | ||||||
Other non-cash items | (3,185 | ) | 750 | (881 | ) | 66 | ||||||||
Net cash inflow from operating activities | 54 | 4,724 | 1,164 | 3,109 | ||||||||||
Changes in operating assets and liabilities | 24,173 | (4,688 | ) | 6,010 | 137 | |||||||||
Net cash flows from operating activities before tax | 24,227 | 36 | 7,174 | 3,246 | ||||||||||
Income taxes paid | (1,170 | ) | (1,051 | ) | (662 | ) | (546 | ) | ||||||
Net cash flows from operating activities | 34 | 23,057 | (1,015 | ) | 6,512 | 2,700 | ||||||||
Investing activities | ||||||||||||||
Sale and maturity of securities | 1,600 | 771 | 951 | 152 | ||||||||||
Purchase of securities | (1,322 | ) | (1,338 | ) | (80 | ) | (306 | ) | ||||||
Sale of property, plant and equipment | 333 | 106 | 302 | 21 | ||||||||||
Purchase of property, plant and equipment | (281 | ) | (226 | ) | (119 | ) | (153 | ) | ||||||
Net investment in business interests and intangible assets | 35 | (168 | ) | (871 | ) | (167 | ) | (407 | ) | |||||
Net cash flows from investing activities | 162 | (1,558 | ) | 887 | (693 | ) | ||||||||
Financing activities | ||||||||||||||
Issue of subordinated liabilities | 291 | 559 | — | — | ||||||||||
Proceeds of minority interests acquired | 463 | 405 | — | — | ||||||||||
Costs of minority interests redeemed | (121 | ) | (2 | ) | — | — | ||||||||
Repayments of subordinated liabilities | (210 | ) | (455 | ) | (210 | ) | (455 | ) | ||||||
Dividends paid | (365 | ) | (2,346 | ) | (350 | ) | (2,336 | ) | ||||||
Interest paid on subordinated liabilities | (319 | ) | (196 | ) | (297 | ) | (174 | ) | ||||||
Net cash flows from financing activities | (261 | ) | (2,035 | ) | (857 | ) | (2,965 | ) | ||||||
Effects of exchange rate changes on cash and cash equivalents | 2,621 | (1,365 | ) | 135 | (76 | ) | ||||||||
Net increase/(decrease) in cash and cash equivalents | 25,579 | (5,973 | ) | 6,677 | (1,034 | ) | ||||||||
Cash and cash equivalents 1 January | 22,845 | 28,818 | 11,911 | 12,945 | ||||||||||
Cash and cash equivalents 31 December | 48,424 | 22,845 | 18,588 | 11,911 | ||||||||||
*See Note 48.
66
Notes on the accounts |
Introduction
IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ were implemented by the Group on 1 January 2005 and applied prospectively from that date and, as permitted by IFRS, without restating comparatives. Consequently, in the notes on the accounts affected by these standards, comparative data for 2004 in accordance with previous GAAP have been presented.
1 Income from trading activities | Group | ||||
2005 | 2004 | ||||
£m | £m | ||||
Foreign exchange (1) | (45 | ) | 93 | ||
Securities | |||||
– equities (2) | — | 2 | |||
– debt (3) | 773 | 690 | |||
Interest rate derivatives (4) | 80 | 102 | |||
808 | 887 | ||||
Notes: | |
(1) | Includes spot and forward foreign exchange contracts and currency swaps, futures and options and related hedges and funding. |
(2) | Includes equities and equity derivatives and related hedges and funding. |
(3) | Includes debt securities and related hedges and funding. |
(4) | Includes interest rate swaps, forward rate agreements, interest rate options, interest rate futures and credit derivatives and related hedges and funding. |
2 Operating expenses | Group | |||
2005 | 2004 | |||
£m | £m | |||
Administrative expenses | ||||
Staff costs | ||||
Wages, salaries and other staff costs | 1,246 | 1,116 | ||
Social security costs | 70 | 68 | ||
Pension costs (see Note 3) | ||||
– defined benefit schemes | 149 | 133 | ||
– defined contribution schemes | 12 | 9 | ||
1,477 | 1,326 | |||
Premises and equipment | 114 | 197 | ||
Other | 2,510 | 2,183 | ||
4,101 | 3,706 | |||
Depreciation and amortisation | ||||
Property, plant and equipment (see note 17) | 105 | 85 | ||
Intangible assets (see note 16) | 277 | 377 | ||
4,483 | 4,168 | |||
The average number of persons employed by the Group during the year, excluding temporary staff, was 34,600 (2004 – 33,300).
Bank | ||||
2005 | 2004 | |||
£m | £m | |||
Staff costs | ||||
Wages, salaries and other staff costs | 380 | 333 | ||
Social security costs | 27 | 28 | ||
Pension costs (see Note 3) | ||||
– defined benefit schemes | 97 | 96 | ||
– defined contribution schemes | 4 | — | ||
508 | 457 | |||
The average number of persons employed by the Bank during the year, excluding temporary staff, was 18,200 (2004 – 17,600).
67
3 Pension costs
The Group operates a number of pension schemes which are predominantly defined benefit schemes whose assets are independent of the Group’s finances. The Bank is legally the sponsoring employer of The Royal Bank of Scotland Group Pension Scheme (‘Main Scheme’). This scheme operates on the basis that other members of the Group are required to remit contributions to the scheme based on a level of contributions agreed annually with the scheme’s actuaries.
In addition to the Main Scheme, the Group operates a number of other UK and overseas pension schemes. It also provides other post-retirement benefits, principally through subscriptions to private heathcare schemes in the UK and the Republic of Ireland and unfunded post-retirement benefit plans. Provision for the costs of these benefits is charged to the income statement over the average remaining future service lives of the eligible employees. The amounts are not material.
The corridor method of accounting permits the Bank to defer recognition of actuarial gains and losses that are within 10% of the larger of the fair value of plan assets and present value of defined benefit obligations of the schemes, on an individual scheme basis, at the reporting date. Any excess variations are amortised prospectively over the average remaining service lives of current members of the schemes.
Interim valuations of the Group’s schemes were prepared to 31 December by independent actuaries, using the following assumptions:
Group | Bank | |||||||||||
Principal actuarial assumptions at 31 December (weighted average) | 2005 | 2004 | 2005 | 2004 | ||||||||
Discount rate | 4.8 | % | 5.4 | % | 4.8 | % | 5.4 | % | ||||
Expected return on plan assets | 6.5 | % | 6.7 | % | 6.5 | % | 6.7 | % | ||||
Rate of increase in salaries | 3.9 | % | 3.9 | % | 3.9 | % | 3.9 | % | ||||
Rate of increase in pensions in payment | 2.7 | % | 2.7 | % | 2.7 | % | 2.7 | % | ||||
Inflation assumption | 2.7 | % | 2.7 | % | 2.7 | % | 2.7 | % | ||||
The expected return on plan assets at 31 December 2005 is based upon the weighted average of the following assumptions of the returns on the major classes of plan assets: | ||||||||||||
Group | Bank | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
Equities | 7.7 | % | 8.1 | % | 7.7 | % | 8.1 | % | ||||
Index-linked bonds | 4.1 | % | 4.5 | % | 4.1 | % | 4.5 | % | ||||
Government fixed interest bonds | 4.0 | % | 4.5 | % | 4.1 | % | 4.5 | % | ||||
Corporate and other bonds | 4.8 | % | 5.4 | % | 4.8 | % | 5.4 | % | ||||
Property | 5.9 | % | 6.3 | % | 5.9 | % | 6.3 | % | ||||
Cash and other assets | 4.1 | % | 4.6 | % | 4.2 | % | 4.6 | % | ||||
Post-retirement mortality assumptions (Main Scheme) | 2005 | 2004 | 2003 | |||||||||
Longevity at age 60 for current pensioners (years) | ||||||||||||
Males | 25.4 | 25.4 | 23.5 | |||||||||
Females | 28.2 | 28.2 | 25.3 | |||||||||
Longevity at age 60 for future pensioners (years) | ||||||||||||
Males | 26.2 | 26.2 | 24.8 | |||||||||
Females | 29.0 | 29.0 | 26.5 | |||||||||
68
Notes on the accounts continued
3 Pension costs(continued) | Group | Bank | ||||||||||||||||
Changes in value of net pension liability | Fair value of plan assets £m | Present value of defined benefit obligations £m | Net pension liability £m | Fair value of plan assets £m | Present value of defined benefit obligations £m | Net pension liability £m | ||||||||||||
At 1 January 2004 | 12,358 | 14,354 | 1,996 | 11,797 | 13,651 | 1,854 | ||||||||||||
Currency translation and other adjustments | 4 | 8 | 4 | — | — | — | ||||||||||||
Income statement: | ||||||||||||||||||
Expected return | 880 | (880 | ) | 838 | (838 | ) | ||||||||||||
Interest cost | 800 | 800 | 759 | 759 | ||||||||||||||
Current service cost | 430 | 430 | 401 | 401 | ||||||||||||||
Less: direct contributions from other scheme members | (226 | ) | (226 | ) | (226 | ) | (226 | ) | ||||||||||
Past service cost | 9 | 9 | — | — | ||||||||||||||
880 | 1,013 | 133 | 838 | 934 | 96 | |||||||||||||
Statement of recognised income and expense: | ||||||||||||||||||
Actuarial gains and losses | 403 | 1,964 | 1,561 | 392 | 1,825 | 1,433 | ||||||||||||
Acquisitions of subsidiaries | 45 | 62 | 17 | — | — | — | ||||||||||||
Contributions by employer | 53 | (53 | ) | 30 | (30 | ) | ||||||||||||
Contributions by other scheme members | 290 | 290 | 289 | 289 | ||||||||||||||
Advances of contributions by other scheme members | 750 | 750 | 750 | 750 | ||||||||||||||
Contributions by plan participants | 3 | 3 | — | — | ||||||||||||||
Benefits paid | (516 | ) | (516 | ) | (494 | ) | (494 | ) | ||||||||||
Expenses included in service cost | (34 | ) | (34 | ) | (33 | ) | (33 | ) | ||||||||||
At 31 December 2004 | 14,236 | 17,894 | 3,658 | 13,569 | 16,922 | 3,353 | ||||||||||||
Unrecognised actuarial losses | 1,565 | 1,433 | ||||||||||||||||
Post-retirement benefit liabilities at 31 December 2004 | 2,093 | 1,920 | ||||||||||||||||
Unfunded schemes liabilities included in post-retirement benefit liabilities | 18 | 8 | ||||||||||||||||
At 1 January 2005 | 14,236 | 17,894 | 3,658 | 13,569 | 16,922 | 3,353 | ||||||||||||
Currency translation and other adjustments | (9 | ) | (14 | ) | (5 | ) | — | — | — | |||||||||
Income statement: | ||||||||||||||||||
Expected return | 972 | (972 | ) | 930 | (930 | ) | ||||||||||||
Interest cost | 912 | 912 | 865 | 865 | ||||||||||||||
Current service cost | 484 | 484 | 448 | 448 | ||||||||||||||
Less: direct contributions from other scheme members | (280 | ) | (280 | ) | (289 | ) | (289 | ) | ||||||||||
Past service cost | 3 | 3 | 3 | 3 | ||||||||||||||
Amortisation of net unrecognised actuarial losses | 2 | 2 | — | — | ||||||||||||||
972 | 1,121 | 149 | 930 | 1,027 | 97 | |||||||||||||
Statement of recognised income and expense: | ||||||||||||||||||
Actuarial gains and losses | 1,639 | 2,321 | 682 | 1,556 | 2,273 | 717 | ||||||||||||
Acquisitions of subsidiaries | — | 2 | 2 | — | — | — | ||||||||||||
Contributions by employer | 1,007 | (1,007 | ) | 976 | (976 | ) | ||||||||||||
Contributions by other scheme members | 145 | 145 | 154 | 154 | ||||||||||||||
Advances of contributions by other scheme members | (750 | ) | (750 | ) | (750 | ) | (750 | ) | ||||||||||
Contributions by plan participants | 3 | 3 | — | — | ||||||||||||||
Benefits paid | (528 | ) | (528 | ) | (504 | ) | (504 | ) | ||||||||||
Expenses included in service cost | (18 | ) | (18 | ) | (17 | ) | (17 | ) | ||||||||||
Amortisation of net unrecognised actuarial losses | (2 | ) | (2 | ) | — | — | ||||||||||||
At 31 December 2005 | 16,697 | 20,174 | 3,477 | 15,914 | 19,105 | 3,191 | ||||||||||||
Unrecognised actuarial losses | 2,242 | 2,150 | ||||||||||||||||
Post-retirement benefit liabilities at 31 December 2005 | 1,235 | 1,041 | ||||||||||||||||
Unfunded schemes liabilities included in post-retirement benefit liabilities | 21 | 11 | ||||||||||||||||
The Group expects to contribute £417 million (Bank – £386 million) to its defined benefit pension schemes in 2006.
Group | Bank | |||||||||||
Major plan assets as a percentage of total plan assets | 2005 | 2004 | 2005 | 2004 | ||||||||
Equities | 61.4 | % | 57.0 | % | 61.3 | % | 56.7 | % | ||||
Index-linked bonds | 17.5 | % | 15.9 | % | 18.1 | % | 16.5 | % | ||||
Government fixed interest bonds | 2.3 | % | 2.6 | % | 1.8 | % | 2.1 | % | ||||
Corporate and other bonds | 14.4 | % | 12.4 | % | 14.6 | % | 12.5 | % | ||||
Property | 3.8 | % | 3.3 | % | 3.6 | % | 3.1 | % | ||||
Cash and other assets | 0.6 | % | 8.8 | % | 0.6 | % | 9.1 | % | ||||
69
The pension plan assets of the Group and Bank include a holding of The Royal Bank of Scotland Group plc’s ordinary shares with a fair value of £76 million (2004 – £71 million) and holdings of financial instruments of the Group with a value of £299 million (2004 – £726 million).
Group | Bank | ||||||||||||||||
History of defined benefits schemes | 2005 £m | 2004 £m | 2003 £m | 2005 £m | 2004 £m | 2003 £m | |||||||||||
Present value of defined benefit obligations | 20,174 | 17,894 | 14,354 | 19,105 | 16,922 | 13,651 | |||||||||||
Fair value of plan assets | 16,697 | 14,236 | 12,358 | 15,914 | 13,569 | 11,797 | |||||||||||
Net deficit | 3,477 | 3,658 | 1,996 | 3,191 | 3,353 | 1,854 | |||||||||||
Experience losses on plan liabilities | (55 | ) | (611 | ) | (41 | ) | (624 | ) | |||||||||
Experience gains on plan assets | 1,639 | 403 | 1,556 | 392 | |||||||||||||
Actual return on pension scheme assets | 2,611 | 1,283 | 2,486 | 1,230 | |||||||||||||
4 Operating profit before tax | ||||||||
Operating profit before tax is stated after taking account of the following: | Group | |||||||
2005 £m | 2004 £m | |||||||
Income | Sales of available-for-sale securities | |||||||
– Gross gains | 328 | |||||||
– Gross losses | (1 | ) | ||||||
– Net profit | 327 | |||||||
Sales of investment securities | ||||||||
– Gross gains | 13 | |||||||
– Gross losses | (1 | ) | ||||||
– Net profit | 12 | |||||||
Dividend income | 48 | 50 | ||||||
Share of associated undertakings’ net profit | 17 | 2 | ||||||
Net gains on financial assets and liabilities designated | ||||||||
as at fair value through profit or loss | 26 | |||||||
Expenses | Interest on subordinated liabilities | 304 | 202 | |||||
Integration expenditure* | 163 | 297 | ||||||
* Integration and restructuring costs comprise | ||||||||
Staff costs | 17 | 15 | ||||||
Premises and equipment | 1 | 1 | ||||||
Other administrative expenses | 14 | 10 | ||||||
Depreciation and amortisation | 131 | 271 | ||||||
163 | 297 | |||||||
Auditors’ remuneration | ||||||||
Amounts paid to the auditors for statutory audit and other services were as follows: | Group | |||||||
2005 £m | 2004 £m | |||||||
Audit services | ||||||||
– Statutory audit | 2.0 | 1.8 | ||||||
– Audit related including regulatory reporting* | 1.2 | 0.3 | ||||||
3.2 | 2.1 | |||||||
Further assurance services | 1.5 | 0.8 | ||||||
Other services | — | 0.1 | ||||||
Total | 4.7 | 3.0 | ||||||
* includes fees relating to the transition to IFRS and work in respect of US Sarbanes-Oxley Act Section 404 reporting requirements.
The auditors’ remuneration for statutory audit work for the Bank was £0.6 million (2004 – £0.6 million). Non-audit fees paid to the auditors and their associates in the UK was £1.3 million (2004 – £0.2 million).
70
Notes on the accounts continued
5 Tax | Group | |||||
2005 £m | 2004 £m | |||||
Current taxation: | ||||||
UK corporation tax charge for the year at 30% | 1,142 | 1,063 | ||||
Over provision in respect ofprior periods | (68 | ) | (70 | ) | ||
Relief for overseas taxation | (24 | ) | (33 | ) | ||
1,050 | 960 | |||||
Deferred taxation: | ||||||
Credit for the year | (81 | ) | (51 | ) | ||
Over provision in respect ofprior periods | (21 | ) | (43 | ) | ||
948 | 866 | |||||
The actual tax charge differs from the expected tax charge computed by applying the standard rate of UK corporation | ||||||
tax of 30% as follows: | ||||||
2005 £m | 2004 £m | |||||
Expected tax charge | 1,023 | 969 | ||||
Non-deductible items | 70 | 54 | ||||
Non-taxable items | (71 | ) | (27 | ) | ||
Taxable foreign exchange movements | 35 | (1 | ) | |||
Foreign profits taxed at other rates | (21 | ) | (12 | ) | ||
Unutilised losses brought forward and carried forward | 1 | (4 | ) | |||
Adjustments in respect of prior periods | (89 | ) | (113 | ) | ||
Actual tax charge | 948 | 866 | ||||
Deferred tax assets of £5 million (2004 – £67 million) resulting from tax losses carried forward have not been recognised as there is insufficient evidence that the asset will be recoverable. These assets may be recoverable if the losses can be offset against suitable future taxable profits arising in the same tax jurisdiction. |
6 Profit attributable to preference shareholders | Group | |||||
Finance cost included in interest payable 2005 £m | Finance cost of non-equity shares 2004 £m | |||||
9% non-cumulative sterling preference shares, Series A | 13 | 13 | ||||
Non-cumulative dollar preference shares, Series B | 11 | 11 | ||||
Non-cumulative dollar preference shares, Series C | 12 | 12 | ||||
Total | 36 | 36 | ||||
Notes: | |
(1) | Following the implementation of IAS 32 on 1 January 2005, the Group’s preference shares are now included in subordinated liabilities and the finance cost thereon is included in interest payable. |
7 Ordinary dividends | Group | |||||||
2005 p per share | 2004 p per share | 2005 £m | 2004 £m | |||||
Dividends paid on ordinary equity shares | 20.9 | 137.1 | 350 | 2,300 | ||||
8 Profit dealt with in the accounts of the company
As permitted by section 230(3) of the Companies Act 1985, no income statement for the Bank has been presented as a primary financial statement. Of the profit attributable to ordinary shareholders £1,774 million (2004 – £1,865 million) has been dealt with in the accounts of the Bank.
71
9 Treasury bills and other eligible bills | Group | Bank | ||||||
2005 £m | 2004 £m | 2005 £m | 2004 £m | |||||
Treasury bills and similar securities | 634 | 16 | — | — | ||||
Other eligible bills | 136 | 156 | — | — | ||||
770 | 172 | — | — | |||||
Held-for-trading | 724 | — | ||||||
Available-for-sale | 46 | — | ||||||
770 | — | |||||||
10 Loans and advances to banks | ||||||||
Group | Bank | |||||||
2005 £m | 2004 £m | 2005 £m | 2004 £m | |||||
Held-for-trading | 17,411 | 110 | ||||||
Designated as at fair value through profit and loss | 825 | — | ||||||
Loans and receivables | 37,759 | 20,719 | ||||||
55,995 | 29,982 | 20,829 | 15,994 | |||||
Amounts above include: | ||||||||
Items in the course of collection from other banks | 2,071 | 2,308 | 1,929 | 2,161 | ||||
Due from holding company | 35,714 | 17,293 | 16,617 | 11,903 | ||||
Due from fellow subsidiaries | 10 | — | 7 | — | ||||
Due from subsidiaries | — | — | 1,027 | 1,112 | ||||
11 Loans and advances to customers | ||||||||
Group | Bank | |||||||
2005 £m | 2004 £m | 2005 £m | 2004 £m | |||||
Held-for-trading | 15,897 | 30 | ||||||
Loans and receivables | 143,235 | 97,539 | ||||||
Finance leases | 811 | — | — | — | ||||
159,943 | 131,679 | 97,569 | 77,619 | |||||
Amounts above include: | ||||||||
Due from ultimate holding company | 842 | — | 842 | — | ||||
Due from holding company | 1,432 | — | 707 | — | ||||
Due from fellow subsidiaries | 30,406 | 35 | 28,620 | 183 | ||||
Due from subsidiaries | — | — | 1,878 | 26,851 | ||||
72
Notes on the accounts continued
11 Loans and advances to customers(continued)
Securitisations
The Group engages in securitisation transactions of its financial assets including commercial and residential mortgage loans, commercial and residential mortgage related securities, US Government agency collateralised mortgage obligations, and other types of financial assets. In such transactions, the assets, or interests in the assets, are transferred generally to a special purpose entity which then issues liabilities to third party investors.
Securitisations may, depending on the individual arrangement, result in continued recognition of the securitised assets; continued recognition of the assets to the extent of the Group’s continuing involvement in those assets; or derecognition of the assets and the separate recognition, as assets or liabilities, of any rights and obligations created or retained in the transfer. The Group has securitisations in each of these categories:
Continued recognition – The table below sets out the asset categories together with the carrying amounts of the assets and associated liabilities.
Group | ||||||||
2005 | 2004 | |||||||
Asset type | Assets £m | Liabilities £m | Assets £m | Liabilities £m | ||||
Residential mortgages (1, 2) | 2,388 | 2,366 | 1,519 | 1,479 | ||||
Credit card receivables (3, 4) | 1,232 | 1,232 | — | — | ||||
(1) | At 31 December 2004, in accordance with previous GAAP, the financial assets in these categories were derecognised to the extent of non-recourse finance as the arrangements qualified for the linked presentation. |
(2) | Mortgages have been transferred to special purpose vehicles, held ultimately by charitable trusts, funded principally through the issue of floating rate notes. The Group has entered into arm’s length fixed/floating interest rate swaps with the securitisation vehicles and provides mortgage management and agency services to the vehicles. On repayment of the financing, any further amounts generated by the mortgages will be paid to the Group. In 2004, the Group recognised net income of £26 million. |
(3) | Credit card receivables in the UK have been securitised. Notes have been issued by a special purpose vehicle. The note holders have a proportionate interest in a pool of credit card receivables that have been equitably assigned by the Group to a receivables trust. The Group continues to be exposed to the risks and rewards of the transferred receivables through its right to excess spread (after charge offs). |
(4) | Bank and Group. |
Continuing involvement – In certain US securitisations of residential mortgages substantially all the risks and rewards have been neither tranferred nor retained, but the Group has retained control, of the assets and continues to recognise the assets to the extent of its continuing involvement. Securitised assets were £39.8 billion; retained interests £863 million; subordination assets £609 million and related liabilities £609 million.
Derecognition
Other securitisations of the Group’s financial assets in the US qualify for derecognition as substantially all the risks and rewards of the assets have been transferred. The Group continues to recognise any retained interests in the securitisation vehicles.
Disclosures are given below about those securitisations of financial assets undertaken by the Group that resulted in derecognition or recognition to the extent of continuing involvement. The Group has classified these securitisations into three broad categories: US Agency, consumer, and commercial securitisations. During 2005, the Group received proceeds of approximately £46.3 billion from securitisation trusts in connection with new securitisations of Group assets and £9.6 billion in connection with securitisation of third-party assets.
The Group recognised net pre-tax gains of approximately £182 million (2004 – £111 million) relating to these securitisations. Net pre-tax gains are based on the difference between the sales prices and previous carrying values of assets prior to date of sale, are net of transaction costs, and exclude any results attributable to hedging activities, interest income, funding costs, and changes in asset values prior to, and in retained interest values subsequent to, the securitisation date.
At 31 December 2005, the fair value of the Group’s retained interests was approximately £2.1 billion (2004 – £1.4 billion). These retained interests comprise approximately £1,179 million in US Agency based retained interests, £764 million in consumer based retained interests and £128 million in commercial based retained interests. These retained interests primarily relate to mortgage loans and securities and arose from securitisations that have taken place in current and prior years. Cash flows received in 2005 from retained interests held at 31 December 2005 in connection with securitisations that took place in current and prior years amounted to approximately £481 million (2004 – £383 million).
73
11 Loans and advances to customers(continued)
Key economic assumptions used in measuring the value of retained interests at the date of securitisation resulting from securitisations completed during the year were as follows:
Assumptions | U.S. Agency retained interests | Consumer retained interests | Commercial retained interests | ||||
Prepayment speed | 139 – 690 PSA | 16 – 44% CPR | (1) | 0 – 100 CPY(1) | |||
Weighted average life | 1 – 20 years | 1 – 10 years | 1 – 20 years | ||||
Cash flow discount rate | 0 – 26% | 4 – 90% | 5 – 81% | ||||
Credit losses | N/A | (3) | 0 – 2% CDR | (4) | N/A | (5) | |
Key economic assumptions and the sensitivity of the current fair value of retained interests at 31 December 2005 to immediate adverse changes, as indicated below, in those assumptions are as follows:
Assumptions/impact on fair value | U.S. Agency retained interests | Consumer retained interests | Commercial retained interests | ||||
Fair value of retained interests at 31 December 2004 | £1,179 million | £764 million | £128 million | ||||
Prepayment speed(6) | 9 – 25% CPR | (1) | 16 – 80% CPR | (1) | 0 – 75 CPY | (2) | |
Impact on fair value of 10% adverse change | £0.5 million | £26.1 million | — | ||||
Impact on fair value of 20% adverse change | £0.6 million | £47.1 million | — | ||||
Weighted average life | 0 – 19 years | 1 – 10 years | 1 – 20 years | ||||
Cash flow discount rate | 0 – 26% | 4 – 96% | 5 – 81% | ||||
Impact on fair value of 10% adverse change | £33.5 million | £23.8 million | £4.7 million | ||||
Impact on fair value of 20% adverse change | £65.1 million | £46.0 million | £9.1 million | ||||
Credit losses | N/A | (3) | 0 – 2% CDR | (4) | N/A | (5) | |
Impact on fair value of 10% adverse change | N/A | £10.9 million | N/A | ||||
Impact on fair value of 20% adverse change | N/A | £19.8 million | N/A | ||||
Notes:
(1) | Constant prepayment rate – the CPR range represents the low and high points of a dynamic CPR curve. |
(2) | CPR with yield maintenance provision and thus prepayment risk is limited. |
(3) | Population consists of securities whose collateral is guaranteed by US Government sponsored entities and therefore, no credit loss has been assumed. |
(4) | Constant default rate. |
(5) | Population consists of only investment grade senior tranches; therefore, no credit losses are included in the assumptions. |
(6) | Prepayment speed has been stressed on an overall portfolio basis for US Agency retained interests due to the overall homogeneous nature of the collateral. Consumer and commercial retained interests have been stressed on a security level basis. |
The sensitivities depicted in the preceding table are hypothetical and should be used with caution. The likelihood of those percent variations selected for sensitivity testing is not necessarily indicative of expected market movements because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of a retained interest is calculated without changing any other assumptions. This might not be the case in actual market conditions since changes in one factor might result in changes to other factors. Further, the sensitivities depicted above do not consider any corrective actions that the Group might take to mitigate the effect of any adverse changes in one or more key assumptions.
74
12 Debt securities | Group | |||||||||||||||||
UK government | Other government | Other public sector body | Bank and building society | Other issuers | Total | |||||||||||||
2005 | £m | £m | £m | £m | £m | £m | ||||||||||||
Held-for-trading | — | 5,829 | 50 | — | 19,595 | 25,474 | ||||||||||||
Designated as at fair value through profit or loss | 4 | — | — | 5 | 394 | 403 | ||||||||||||
Available-for-sale | — | 869 | — | 1,105 | 894 | 2,868 | ||||||||||||
At 31 December 2005 | 4 | 6,698 | 50 | 1,110 | 20,883 | 28,745 | ||||||||||||
Available-for-sale | ||||||||||||||||||
Gross unrealised gains | — | 2 | — | 2 | — | 4 | ||||||||||||
Gross unrealised losses | — | (8 | ) | — | (3 | ) | — | (11 | ) | |||||||||
2004 | ||||||||||||||||||
Investment securities | — | 440 | — | 60 | 1,299 | 1,799 | ||||||||||||
Other securities | 4 | 6,177 | 37 | 363 | 14,046 | 20,627 | ||||||||||||
At 31 December 2004 | 4 | 6,617 | 37 | 423 | 15,345 | 22,426 | ||||||||||||
Investment securities | ||||||||||||||||||
Book value | — | 440 | — | 60 | 1,299 | 1,799 | ||||||||||||
Gross unrecognised gains | — | 1 | — | — | 1 | 2 | ||||||||||||
Gross unrecognised losses | — | (1 | ) | — | — | (2 | ) | (3 | ) | |||||||||
Valuation 31 December 2004 | — | 440 | — | 60 | 1,298 | 1,798 | ||||||||||||
Group | ||||||||||||||||||
2005 | Listed £m | Unlisted £m | Total £m | |||||||||||||||
Held-for-trading | — | 25,474 | 25,474 | |||||||||||||||
Designated as at fair value through profit or loss | 403 | — | 403 | |||||||||||||||
Available-for-sale | 2,712 | 156 | 2,868 | |||||||||||||||
At 31 December 2005 | 3,115 | 25,630 | 28,745 | |||||||||||||||
2004 | Listed £m | Unlisted £m | Total £m | |||||||||||||||
Investment securities | 1,650 | 149 | 1,799 | |||||||||||||||
Other securities | 502 | 20,125 | 20,627 | |||||||||||||||
At 31 December 2004 | 2,152 | 20,274 | 22,426 | |||||||||||||||
The following table shows the Group’s available-for-sale debt securities by remaining maturity and the related yield (based on weighted averages) as at 31 December 2005.
Within 1 year | After 1 but within 5 years | After 5 but within 10 years | After 10 years | Total | ||||||||||||||||
Amount £m | Yield % | Amount £m | Yield % | Amount £m | Yield % | Amount £m | Yield % | Amount £m | Yield % | |||||||||||
Other government | 78 | 4.4 | 789 | 4.0 | 1 | 4.2 | - | - | 868 | 4.1 | ||||||||||
Corporate debt securities | - | - | - | - | 5 | 4.4 | - | - | 5 | 4.4 | ||||||||||
Mortgage-backed securities | 23 | 5.3 | 5 | 4.8 | - | - | 81 | 4.8 | 109 | 4.9 | ||||||||||
Bank and building society | 291 | 3.5 | 791 | 3.3 | 22 | 3.0 | - | - | 1,104 | 3.4 | ||||||||||
Other | 765 | 3.2 | 13 | 5.4 | 3 | 6.8 | 1 | 4.6 | 782 | 3.3 | ||||||||||
Total fair value | 1,157 | 3.4 | 1,598 | 3.7 | 31 | 3.6 | 82 | 4.8 | 2,868 | 3.6 | ||||||||||
75
Bank | ||||
2005 | Other issuers £m | Total £m | ||
Held-for-trading | 3 | 3 | ||
Available-for-sale | 48 | 48 | ||
At 31 December 2005 | 51 | 51 | ||
2004 | ||||
Investment securities | 36 | 36 | ||
Other securities | 3 | 3 | ||
At 31 December 2004 | 39 | 39 | ||
Investment securities | ||||
Book value and valuation at 31 December 2004 | 36 | 36 | ||
Bank | ||||
2005 | Unlisted £m | Total £m | ||
Held-for-trading | 3 | 3 | ||
Available-for-sale | 48 | 48 | ||
At 31 December 2005 | 51 | 51 | ||
2004 | Unlisted £m | Total £m | ||
Investment securities | 36 | 36 | ||
Other securities | 3 | 3 | ||
At 31 December 2004 | 39 | 39 | ||
76
13 Equity shares | Group | |||||||||||
2005 | 2004 | |||||||||||
Listed £m | Unlisted £m | Total £m | Listed £m | Unlisted £m | Total £m | |||||||
Held-for-trading | 25 | 1 | 26 | |||||||||
Designated as at fair value through profit or loss | 39 | — | 39 | |||||||||
Available-for-sale | 17 | 741 | 758 | |||||||||
81 | 742 | 823 | ||||||||||
Investment securities | 583 | 698 | 1,281 | |||||||||
Other securities | 56 | 1 | 57 | |||||||||
At 31 December | 639 | 699 | 1,338 | |||||||||
Available-for-sale | ||||||||||||
Gross unrealised gains | 1 | 11 | 12 | |||||||||
Investment securities | ||||||||||||
Book value | 583 | 698 | 1,281 | |||||||||
Gross unrecognised gains | 287 | — | 287 | |||||||||
870 | 698 | 1,568 | ||||||||||
The Group’s unquoted equity investments at cost include an investment in a fellow subsidiary of £634 million. The remaining investments at cost cannot be measured reliably and comprised numerous shareholdings. Disposals in the year generated gains of £4 million.
Bank | ||||||
2004 | Listed £m | Unlisted £m | 2004 Total £m | |||
Investment securities | 582 | 4 | 586 | |||
Other securities | — | 1 | 1 | |||
582 | 5 | 587 | ||||
Investment securities | ||||||
Book value | 582 | 4 | 586 | |||
Gross unrecognised gains | 287 | — | 287 | |||
869 | 4 | 873 | ||||
The unlisted equity shares are held at cost.
77
14 Investment in Group undertakings | ||||||
Movements in investment in Group undertakings during the year were as follows: | Bank | |||||
2005 £m | 2004 £m | |||||
At 1 January | 6,253 | 6,180 | ||||
Implementation of IAS 32 and IAS 39 on 1 January 2005 | 31 | — | ||||
Currency translation and other adjustments | 140 | (150 | ) | |||
Additions | 218 | 239 | ||||
Disposals | (9 | ) | (16 | ) | ||
At 31 December | 6,633 | 6,253 | ||||
The principal subsidiary undertakings of the Bank are shown below. Their capital consists of ordinary and preference shares, which are unlisted. All of the subsidiary undertakings are owned directly or indirectly through intermediate holding companies and are all wholly-owned. All of these subsidiary undertakings are included in the Group’s consolidated financial statements and have an accounting reference date of 31 December.
Nature of business | Country of incorporation and principal area of operations | |||
Coutts & Co (1) | Private banking | Great Britain | ||
Greenwich Capital Markets, Inc. (2) | Broker dealer | US | ||
Ulster Bank Limited (3) | Banking | Northern Ireland | ||
Notes: | |
(1) | Coutts & Co is incorporated with unlimited liability. Its registered office is 440 Strand, London WC2R 0QS. |
(2) | Shares are not directly held by the Bank. |
(3) | Ulster Bank Limited and its subsidiary undertakings also operate in the Republic of Ireland. |
The above information is provided in relation to the principal related undertakings as permitted by section 231(5) of the Companies Act 1985. Full information on all related undertakings will be included in the Annual Return filed with the UK Companies House.
78
15 Impaired and past-due financial assets | Group | |||||
2005 | Cost £m | Provision £m | Net book value £m | |||
Impaired financial assets | ||||||
Loans and receivables and finance leases | 2,798 | 1,829 | 969 | |||
Available-for-sale | 10 | 4 | 6 | |||
2,808 | 1,833 | 975 | ||||
Group | ||||||
2005 £m | 2004 £m | |||||
Impairment losses charged to the income statement | ||||||
Loans and receivables and finance leases (see table below) | 753 | |||||
Available-for-sale | 3 | |||||
Loans and advances (see table below) | 625 | |||||
Total | 756 | 625 | ||||
The following table shows impairment losses for loans and receivables and finance leases (2004 – loans and advances).
Group | ||||||||||||
2005 £m | Specific £m | General £m | 2004 Total £m | |||||||||
At 1 January | 1,940 | 1,535 | 370 | 1,905 | ||||||||
Implementation of IAS 39 | 185 | |||||||||||
Currency translation and other adjustments | (2 | ) | 75 | (102 | ) | (27 | ) | |||||
(Disposals)/acquisitions of subsidiaries | (7 | ) | 19 | 16 | 35 | |||||||
Amounts written-off | (818 | ) | (595 | ) | — | (595 | ) | |||||
Recoveries of amounts previously written-off | 56 | 45 | — | 45 | ||||||||
Transfer to immediate parent company | — | (47 | ) | (1 | ) | (48 | ) | |||||
Charged to the income statement | 753 | 625 | — | 625 | ||||||||
Unwind of discount | (76 | ) | ||||||||||
At 31 December | 2,031 | 1,657 | 283 | 1,940 | ||||||||
Bank | ||||||||||||
2005 | Cost £m | Provision £m | Net book value £m | |||||||||
Impaired financial assets | ||||||||||||
Loans and receivables and finance leases | 2,311 | 1,537 | 774 | |||||||||
Bank | ||||||||||||
2005 | 2004 | |||||||||||
£m | £m | |||||||||||
Impairment losses charged to the income statement | ||||||||||||
Loans and receivables and finance leases (see table below) | 651 | |||||||||||
Loans and advances (see table below) | 531 | |||||||||||
Total | 651 | 531 | ||||||||||
The following table shows impairment losses for loans and receivables and finance leases (2004 – loans and advances).
Bank | ||||||||||||
2004 | ||||||||||||
2005 £m | Specific £m | General £m | Total £m | |||||||||
At 1 January | 1,633 | 1,295 | 323 | 1,618 | ||||||||
Implementation of IAS 39 | 177 | |||||||||||
Currency translation and other adjustments | 5 | 76 | (103 | ) | (27 | ) | ||||||
Disposals of subsidiaries | (17 | ) | — | — | — | |||||||
Amounts written-off | (758 | ) | (528 | ) | — | (528 | ) | |||||
Recoveries of amounts previously written-off | 43 | 39 | — | 39 | ||||||||
Charged to the income statement | 651 | 531 | — | 531 | ||||||||
Unwind of discount | (61 | ) | ||||||||||
At 31 December | 1,673 | 1,413 | 220 | 1,633 | ||||||||
79
Notes on the accounts continued
16 Intangible assets | Group | ||||||||||||||
2005 | Goodwill £m | Core deposit intangibles £m | Other purchased intangibles £m | Internally generated software £m | Total £m | ||||||||||
Cost: | |||||||||||||||
At 1 January 2005 | 739 | 24 | 30 | 1,472 | 2,265 | ||||||||||
Currency translation and other adjustments | (7 | ) | 1 | (1 | ) | — | (7 | ) | |||||||
Acquisitions of subsidiaries | 40 | — | — | — | 40 | ||||||||||
Additions | — | — | — | 227 | 227 | ||||||||||
Disposals and write-off of fully amortised assets | (12 | ) | — | — | (17 | ) | (29 | ) | |||||||
At 31 December 2005 | 760 | 25 | 29 | 1,682 | 2,496 | ||||||||||
Accumulated amortisation: | |||||||||||||||
At 1 January 2005 | — | 3 | 3 | 1,015 | 1,021 | ||||||||||
Currency translation and other adjustments | — | 1 | (1 | ) | — | — | |||||||||
Charge for the year | — | 3 | 3 | 271 | 277 | ||||||||||
At 31 December 2005 | — | 7 | 5 | 1,286 | 1,298 | ||||||||||
Net book value at 31 December 2005 | 760 | 18 | 24 | 396 | 1,198 | ||||||||||
2004 | |||||||||||||||
Cost: | |||||||||||||||
At 1 January 2004 | 257 | — | — | 1,303 | 1,560 | ||||||||||
Currency translation and other adjustments | (2 | ) | — | — | — | (2 | ) | ||||||||
Acquisition of subsidiaries | 484 | 24 | 30 | — | 538 | ||||||||||
Additions | — | — | — | 184 | 184 | ||||||||||
Disposals and write-off of fully amortised assets | — | — | — | (15 | ) | (15 | ) | ||||||||
At 31 December 2004 | 739 | 24 | 30 | 1,472 | 2,265 | ||||||||||
Accumulated amortisation: | |||||||||||||||
At 1 January 2004 | — | — | — | 657 | 657 | ||||||||||
Currency translation and other adjustments | — | — | 1 | — | 1 | ||||||||||
Disposals and write-off of fully amortised assets | — | — | — | (14 | ) | (14 | ) | ||||||||
Charge for the year | — | 3 | 2 | 372 | 377 | ||||||||||
At 31 December 2004 | — | 3 | 3 | 1,015 | 1,021 | ||||||||||
Net book value at 31 December 2004 | 739 | 21 | 27 | 457 | 1,244 | ||||||||||
80
Bank | ||
Software | 2005 £m | |
Cost: | ||
At 1 January 2005 | 1,442 | |
Additions | 180 | |
At 31 December 2005 | 1,622 | |
Accumulated amortisation: | ||
At 1 January 2005 | 1,008 | |
Depreciation charge for the year | 267 | |
At 31 December 2005 | 1,275 | |
Net book value at 31 December 2005 | 347 | |
2004 £m | ||
Cost: | ||
At 1 January 2004 | 1,259 | |
Additions | 183 | |
At 31 December 2004 | 1,442 | |
Accumulated amortisation: | ||
At 1 January 2004 | 655 | |
Depreciation charge for the year | 353 | |
At 31 December 2004 | 1,008 | |
Net book value at 31 December 2004 | 434 | |
The weighted average amortisation period of purchased intangible assets, other than goodwill, subject to amortisation are:
Years | ||
Core deposit intangibles | 8 | |
Other purchased intangibles | 10 | |
The amortisation expense for each of the next five years is currently estimated to be:
£m | ||
2006 | 6 | |
2007 | 6 | |
2008 | 6 | |
2009 | 6 | |
2010 | 6 | |
Impairment review
Goodwill | ||||||||||||
2005 | (1) | 2004 | (2) | Basis of | Key | |||||||
Significant Business Unit | Acquisition and cash generating unit | £m | £m | valuation | assumptions | |||||||
Ulster Bank | First Active | 406 | — | Value-in-use: | Terminal growth | |||||||
cash flow | after year 8 | |||||||||||
Wealth Management | Bank Von Ernst | 142 | 144 | Sales value | Sales of banks | |||||||
of business | in same market | |||||||||||
NatWest | Greenwich | 106 | 105 | Earnings | ||||||||
(1) As at 30 September.
(2) As at 1 January.
* The key valuation parameters are the same as those used to support the Group’s decision to purchase the business.
81
Notes on the accounts continued
17 Property, plant and equipment | Group | ||||||||||||||||||
2005 | Investment properties £m | Freehold premises £m | Long leasehold premises £m | Short leasehold premises £m | Computers and other equipment £m | Operating lease assets £m | Total £m | ||||||||||||
Cost or valuation: | |||||||||||||||||||
At 1 January 2005 | — | 1,209 | 301 | 351 | 264 | — | 2,125 | ||||||||||||
Currency translation and other adjustments | — | (15 | ) | 11 | 1 | 1 | — | (2 | ) | ||||||||||
Additions | 69 | 28 | 6 | 127 | 40 | 11 | 281 | ||||||||||||
Disposals and write-off of fully depreciated assets | — | (276 | ) | (49 | ) | (31 | ) | (25 | ) | — | (381 | ) | |||||||
Transfer from fellow subsidiary | — | 162 | — | — | — | — | 162 | ||||||||||||
At 31 December 2005 | 69 | 1,108 | 269 | 448 | 280 | 11 | 2,185 | ||||||||||||
Accumulated depreciation and amortisation: | |||||||||||||||||||
At 1 January 2005 | — | 183 | 101 | 131 | 168 | — | 583 | ||||||||||||
Disposals and write-off of fully depreciated assets | — | (43 | ) | (10 | ) | (16 | ) | (30 | ) | — | (99 | ) | |||||||
Currency translation and other adjustments | — | 2 | 2 | — | 5 | — | 9 | ||||||||||||
Transfer from fellow subsidiary | — | 56 | — | — | — | — | 56 | ||||||||||||
Depreciation charge for the year | — | 34 | 5 | 27 | 38 | 1 | 105 | ||||||||||||
At 31 December 2005 | — | 232 | 98 | 142 | 181 | 1 | 654 | ||||||||||||
Net book value at 31 December 2005 | 69 | 876 | 171 | 306 | 99 | 10 | 1,531 | ||||||||||||
2004 | |||||||||||||||||||
Cost or valuation: | |||||||||||||||||||
At 1 January 2004 | — | 1,194 | 274 | 268 | 257 | — | 1,993 | ||||||||||||
Currency translation and other adjustments | — | (1 | ) | — | — | (1 | ) | — | (2 | ) | |||||||||
Reclassifications | — | 4 | (3 | ) | — | (1 | ) | — | — | ||||||||||
Acquisition of subsidiaries | — | 1 | 32 | 8 | 12 | — | 53 | ||||||||||||
Additions | — | 95 | 13 | 77 | 41 | — | 226 | ||||||||||||
Disposals and write-off of fully depreciated assets | — | (84 | ) | (15 | ) | (2 | ) | (39 | ) | — | (140 | ) | |||||||
Transfer to fellow subsidiary | — | — | — | — | (5 | ) | — | (5 | ) | ||||||||||
At 31 December 2004 | — | 1,209 | 301 | 351 | 264 | — | 2,125 | ||||||||||||
Accumulated depreciation and amortisation: | |||||||||||||||||||
At 1 January 2004 | — | 163 | 88 | 113 | 165 | — | 529 | ||||||||||||
Currency translation and other adjustments | — | — | 4 | — | (1 | ) | — | 3 | |||||||||||
Reclassifications | — | 1 | — | — | (1 | ) | — | — | |||||||||||
Acquisition of subsidiaries | — | — | 5 | — | 11 | — | 16 | ||||||||||||
Disposals and write-off of fully depreciated assets | — | (15 | ) | (2 | ) | (1 | ) | (27 | ) | — | (45 | ) | |||||||
Transfer to fellow subsidiary | — | — | — | — | (5 | ) | — | (5 | ) | ||||||||||
Depreciation charge for the year | — | 34 | 6 | 19 | 26 | — | 85 | ||||||||||||
At 31 December 2004 | — | 183 | 101 | 131 | 168 | — | 583 | ||||||||||||
Net book value at 31 December 2004 | — | 1,026 | 200 | 220 | 96 | — | 1,542 | ||||||||||||
Investment properties are valued to reflect fair market value. Valuations are carried out by qualified surveyors who are members of the Royal Institution of Chartered Surveyors, or an equivalent overseas body. The 31 December 2005 valuation for a significant majority of the Group’s investment properties was undertaken by external valuers.
The fair value of investment properties does not include any appreciation since purchase. Premises include £51 million (2004 – £105 million) assets in the course of construction.
82
Bank | |||||||||||||||
Freehold premises | Long leasehold premises | Short leasehold premises | Computers and other equipment | Total | |||||||||||
2005 | £m | £m | £m | £m | £m | ||||||||||
Cost or valuation: | |||||||||||||||
At 1 January 2005 | 1,186 | 137 | 297 | 10 | 1,630 | ||||||||||
Additions | 10 | 2 | 107 | — | 119 | ||||||||||
Disposals and write-off of fully depreciated assets | (266 | ) | (34 | ) | (21 | ) | (3 | ) | (324 | ) | |||||
At 31 December 2005 | 930 | 105 | 383 | 7 | 1,425 | ||||||||||
Accumulated depreciation and amortisation: | |||||||||||||||
At 1 January 2005 | 228 | 48 | 104 | 3 | 383 | ||||||||||
Disposals and write-off of fully depreciated assets | (42 | ) | (6 | ) | (10 | ) | (3 | ) | (61 | ) | |||||
Charge for year | 31 | 3 | 22 | 3 | 59 | ||||||||||
At 31 December 2005 | 217 | 45 | 116 | 3 | 381 | ||||||||||
Net book value at 31 December 2005 | 713 | 60 | 267 | 4 | 1,044 | ||||||||||
2004 | |||||||||||||||
Cost or valuation: | |||||||||||||||
At 1 January 2004 | 1,125 | 131 | 226 | 15 | 1,497 | ||||||||||
Currency translation and other adjustments | — | — | — | (1 | ) | (1 | ) | ||||||||
Additions | 70 | 9 | 73 | 1 | 153 | ||||||||||
Disposals and write-off of fully depreciated assets | (9 | ) | (3 | ) | (2 | ) | (5 | ) | (19 | ) | |||||
At 31 December 2004 | 1,186 | 137 | 297 | 10 | 1,630 | ||||||||||
Accumulated depreciation and amortisation: | |||||||||||||||
At 1 January 2004 | 199 | 45 | 91 | 7 | 342 | ||||||||||
Disposals and write-off of fully depreciated assets | (1 | ) | — | (2 | ) | (5 | ) | (8 | ) | ||||||
Charge for year | 30 | 3 | 15 | 1 | 49 | ||||||||||
At 31 December 2004 | 228 | 48 | 104 | 3 | 383 | ||||||||||
Net book value at 31 December 2004 | 958 | 89 | 193 | 7 | 1,247 | ||||||||||
83
Notes on the accountscontinued
18 Derivatives at fair value
Companies in the Group enter into various off-balance sheet financial instruments (derivatives) as principal either as a trading activity or to manage balance sheet foreign exchange and interest rate risk. Derivatives include swaps, forwards, futures and options. They may be traded on an organised exchange (exchange-traded) or over-the-counter (OTC). Holders of exchange traded derivatives are generally required to provide margin daily in the form of cash or other collateral.
Swaps include currency swaps, interest rate swaps, credit default swaps, total return swaps and equity and equity index swaps. A swap is an agreement to exchange cash flows in the future in accordance with a pre-arranged formula. In currency swap transactions, interest payment obligations are exchanged on assets and liabilities denominated in different currencies; the exchange of principal may be notional or actual. Interest rate swap contracts generally involve exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts.
Forwards include forward foreign exchange contracts and forward rate agreements. A forward contract is a contract to buy (or sell) a specified amount of a physical or financial commodity, at agreed price, on an agreed future date. Forward foreign exchange contracts are contracts for the delayed delivery of currency on a specified future date. Forward rate agreements are contracts under which two counterparties agree on the interest to be paid on a notional deposit of a specified maturity at a specific future date; there is no exchange of principal.
Futures are exchange-traded forward contracts to buy (or sell) standardised amounts of underlying physical or financial commodities. The Group buys and sells currency, interest rate and equity futures.
Options include exchange-traded options on currencies, interest rates and equities and equity indices and OTC currency and equity options, interest rate caps and floors and swaptions. They are contracts that give the holder the right but not the obligation to buy (or sell) a specified amount of the underlying physical or financial commodity at an agreed price on an agreed date or over an agreed period.
Group | ||||||
Total derivatives | ||||||
Notional amounts | Assets | Liabilities | ||||
2005 | £bn | £m | £m | |||
Exchange rate contracts | ||||||
Spot, forwards and futures | 14 | 238 | 220 | |||
Currency swaps | 9 | 225 | 217 | |||
Options purchased | 4 | 128 | — | |||
Options written | 3 | — | 83 | |||
Interest rate contracts | ||||||
Interest rate swaps | 340 | 1,871 | 1,729 | |||
Options purchased | 66 | 420 | — | |||
Options written | 71 | — | 392 | |||
Futures and forwards | 157 | — | — | |||
Credit derivatives | 4 | 6 | 15 | |||
Equity and commodity contracts | 1 | 88 | 1 | |||
2,976 | 2,657 | |||||
Amounts above include: | ||||||
Due from/to fellow subsidiaries | 728 | 751 | ||||
Due from/to holding company | 630 | 626 | ||||
84
Bank | |||||||||
Total derivatives | |||||||||
Notional amounts | Assets | Liabilities | |||||||
2005 | £bn | £m | £m | ||||||
Exchange rate contracts | |||||||||
Spot, forwards and futures | 10 | 138 | 141 | ||||||
Currency swaps | 1 | 115 | 21 | ||||||
Options purchased | 3 | 80 | — | ||||||
Options written | 2 | — | 80 | ||||||
Interest rate contracts | |||||||||
Interest rate swaps | 63 | 840 | 877 | ||||||
Options purchased | 2 | 29 | — | ||||||
Options written | 2 | — | 10 | ||||||
Credit derivatives | 1 | 1 | — | ||||||
1,203 | 1,129 | ||||||||
Included in the above are cash flow hedging derivatives as follows | |||||||||
Interest rate swaps | — | 42 | |||||||
Amounts above include: | |||||||||
Due from/to holding company | 626 | 626 | |||||||
Due from/to subsidiaries | 54 | 262 | |||||||
Group | |||||||||
Trading derivatives Fair value | |||||||||
Notional amounts | Assets | Liabilities | |||||||
2004 | £bn | £m | £m | ||||||
Exchange rate contracts | |||||||||
Spot, forwards and futures | 16 | 433 | 538 | ||||||
Currency swaps | 8 | 331 | 187 | ||||||
Options purchased | 85 | — | |||||||
Options written | — | 84 | |||||||
Interest rate contracts | |||||||||
Interest rate swaps | 165 | 2,099 | 1,920 | ||||||
Options purchased | 55 | 308 | — | ||||||
Options written | 45 | — | 247 | ||||||
Futures and forwards | 291 | 110 | 125 | ||||||
Credit derivatives | 2 | 3 | 7 | ||||||
3,369 | 3,108 | ||||||||
Effect of netting | (2,003 | ) | (2,003 | ) | |||||
1,366 | 1,105 | ||||||||
Non-trading derivatives
Under previous GAAP, hedging derivatives were accounted for in accordance with the treatment of the hedged transaction. As a result any gains or losses on the hedging instrument arising from changes in fair values were not recognised in the profit and loss account immediately but accounted for in the same manner as the hedged item. The Group established such non-trading derivative positions externally with third party and also internally. The tables below include the components of the internal hedging programme that transferred risks to the trading portfolio or to external third party participants in the derivatives market.
The following table summarises the fair values and book values of derivatives held for non-trading activities and includes internal trades.
Group | ||||||||||
Fair value | Book value | |||||||||
Notional amounts | Positive | Negative | Assets | Liabilities | ||||||
2004 | £bn | £m | £m | £m | £m | |||||
Exchange rate contracts | ||||||||||
Spot, forwards and futures | 1.5 | — | 54 | — | — | |||||
Currency swaps and options | 0.3 | 4 | 10 | — | 3 | |||||
Interest rate contracts | ||||||||||
Interest rate swaps | 12.0 | 351 | 299 | 80 | 60 | |||||
Futures, forwards and options | 0.2 | 3 | 4 | — | — | |||||
358 | 367 | 80 | 63 | |||||||
85
Notes on the accountscontinued
18 Derivatives at fair value(continued)
Group | ||||||
Unrecognised gains and losses | Deferred gains and losses | |||||
2004 | £m | £m | ||||
As at 1 January 2004 – gains | 889 | 109 | ||||
As at 1 January 2004– losses | (601 | ) | (5 | ) | ||
288 | 104 | |||||
Recognised gains that arose in previous periods | (229 | ) | (42 | ) | ||
Recognised losses that arose in previous periods | 123 | 4 | ||||
Unrecognised gains and losses arising in the year | (7 | ) | — | |||
Unrecognised gains and losses deferred in the year | (201 | ) | 201 | |||
Unrecognised gains and losses deferred and taken to profit or loss in the year | — | (50 | ) | |||
At 31 December 2004 | (26 | ) | 217 | |||
Of which – gains | 351 | 272 | ||||
– losses | (377 | ) | (55 | ) | ||
(26 | ) | 217 | ||||
Maturity of replacement cost of over-the-counter contracts (trading and non-trading)
Replacement cost indicates the Group's derivatives credit exposure. The following table sets forth the gross positive fair values by maturity. The replacement cost of internal trades is not included as there is no credit risk associated with them.
Group | ||||||||
Within one year | One to five years | Over five years | Total | |||||
2004 | £m | £m | £m | £m | ||||
Before netting | ||||||||
Exchange rate contracts | 448 | 237 | 165 | 850 | ||||
Interest rate contracts | 275 | 813 | 1,476 | 2,564 | ||||
Credit derivatives | — | 2 | — | 2 | ||||
723 | 1,052 | 1,641 | 3,416 | |||||
Financial institutions | 2,731 | |||||||
Others | 685 | |||||||
3,416 | ||||||||
86
19 Prepayments, accrued income and other assets
Group | Bank | |||||||
2005 | 2004 | 2005 | 2004 | |||||
£m | £m | £m | £m | |||||
Prepayments | 76 | 134 | 45 | 77 | ||||
Accrued income | 366 | 1,292 | 275 | 799 | ||||
Deferred taxation (see Note 25) | 393 | 322 | 318 | 365 | ||||
Deferred expenses | 5 | 34 | — | 33 | ||||
Other assets | 2,283 | 563 | 926 | 560 | ||||
3,123 | 2,345 | 1,564 | 1,834 | |||||
Amounts above include: | ||||||||
Due from fellow subsidiaries | 25 | 17 | — | — | ||||
20 Deposits by banks | ||||||||
Group | Bank | |||||||
2005 | 2004 | 2005 | 2004 | |||||
£m | £m | £m | £m | |||||
Held-for-trading | 6,589 | 1,237 | ||||||
Amortised cost | 39,412 | 4,073 | ||||||
46,001 | 23,873 | 5,310 | 3,480 | |||||
Amounts above include: | ||||||||
Items in the course of transmission to other banks | 705 | 791 | 761 | 852 | ||||
Due to holding company | 18,885 | 2,218 | 1,865 | 537 | ||||
Due to fellow subsidiaries | 35 | — | 9 | — | ||||
Due to subsidiaries | 950 | 874 | ||||||
21 Customer accounts | ||||||||
Group | Bank | |||||||
2005 | 2004 | 2005 | 2004 | |||||
£m | £m | £m | £m | |||||
Held-for-trading | 10,372 | 1,560 | ||||||
Designated as at fair value through profit or loss | 1,339 | 63 | ||||||
Amortised cost | 146,213 | 108,319 | ||||||
157,924 | 126,119 | 109,942 | 87,925 | |||||
Amounts above include: | ||||||||
Due to ultimate holding company | 3 | — | — | — | ||||
Due to holding company | 668 | — | 487 | — | ||||
Due to fellow subsidiaries | 4,086 | 664 | 3,912 | 794 | ||||
Due to subsidiaries | — | — | 5,696 | 3,928 | ||||
22 Debt securities in issue | ||||||||
Group | Bank | |||||||
2005 | 2004 | 2005 | 2004 | |||||
£m | £m | £m | £m | |||||
Amortised cost | 10,801 | 38 | ||||||
10,801 | 3,597 | 38 | 39 | |||||
Amounts above include: | ||||||||
Bonds and medium term notes | 1,070 | 344 | 38 | 39 | ||||
Certificates of deposit and other commercial paper | 9,731 | 3,253 | — | — | ||||
23 Settlement balances and short positions | ||||||||
Group | ||||||||
2005 | 2004 | |||||||
£m | £m | |||||||
Settlement balances – Amortised cost | 3,075 | 2,103 | ||||||
Short positions – held-for-trading: | ||||||||
Debt securities – Government | 16,846 | 18,508 | ||||||
– Other issuers | 1,347 | 968 | ||||||
Treasury bills and other eligible bills | 288 | 91 | ||||||
Equity shares | 18 | — | ||||||
21,574 | 21,670 | |||||||
87
Notes on the accounts continued
24 Accruals, deferred income and other liabilities
Group | Bank | |||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
£m | £m | £m | £m | |||||||||||||||
Notes in circulation | 376 | 346 | — | — | ||||||||||||||
Current taxation | 393 | 481 | 289 | 357 | ||||||||||||||
Accruals | 888 | 1,846 | 260 | 914 | ||||||||||||||
Deferred income | 131 | 462 | 105 | 309 | ||||||||||||||
Provisions for liabilities and charges (see table below) | 108 | 122 | 83 | 94 | ||||||||||||||
Deferred tax liability (see Note 25) | 33 | — | — | — | ||||||||||||||
Other liabilities | 1,650 | 1,282 | 727 | 497 | ||||||||||||||
3,579 | 4,539 | 1,464 | 2,171 | |||||||||||||||
Amounts above include: | ||||||||||||||||||
Due to fellow subsidiaries | 15 | 23 | — | — | ||||||||||||||
Group | Bank | |||||||||||||||||
Property(1) | Other(2 | ) | Total | Property(1) | Other(2 | ) | Total | |||||||||||
Provisions for liabilities and charges | £m | £m | £m | £m | £m | £m | ||||||||||||
At 1 January | 91 | 31 | 122 | 91 | 3 | 94 | ||||||||||||
Currency translation and other movements | 1 | (2 | ) | (1 | ) | 1 | — | 1 | ||||||||||
Charge to income statement | 9 | 4 | 13 | 9 | 2 | 11 | ||||||||||||
Unused provisions credited to income statement | (7 | ) | (1 | ) | (8 | ) | (7 | ) | — | (7 | ) | |||||||
Provisions utilised | (14 | ) | (4 | ) | (18 | ) | (14 | ) | (2 | ) | (16 | ) | ||||||
At 31 December 2005 | 80 | 28 | 108 | 80 | 3 | 83 | ||||||||||||
Notes: | |
(1) | The Group has a number of leasehold properties where rents payable and other unavoidable costs exceed the value to the Group. Such costs arise over the period of the lease or to the expected termination date, and the provision has been discounted due to the long-term nature of certain of these obligations. |
(2) | Other provisions arise in the normal course of business. |
88
25 Deferred taxation | ||||||||||||
Provision for deferred taxation has been made as follows: | ||||||||||||
Group | Bank | |||||||||||
2005 £m | 2004 £m | 2005 £m | 2004 £m | |||||||||
Deferred tax liability (included in Accruals, deferred income and other liabilities, Note 24) | 33 | — | — | — | ||||||||
Deferred tax asset (included in Prepayments, accrued income and other assets, Note 19) | (393 | ) | (322 | ) | (318 | ) | (365 | ) | ||||
Net deferred tax | (360 | ) | (322 | ) | (318 | ) | (365 | ) | ||||
Group | |||||||||||||||||||||||||||||
Pension £m | Accelerated capital allowances £m | Provisions £m | Deferred gains £m | Other transition £m | Fair value on financial instruments £m | Intangibles £m | Hedging £m | Other £m | Total £m | ||||||||||||||||||||
At 1 January 2004 under UK GAAP | 2 | 264 | (200 | ) | — | — | — | — | — | 10 | 76 | ||||||||||||||||||
Implementation of IFRS | |||||||||||||||||||||||||||||
(excluding IAS 32 and IAS 39) | (582 | ) | (7 | ) | — | 120 | — | — | 176 | — | — | (293 | ) | ||||||||||||||||
At 1 January 2004 restated | (580 | ) | 257 | (200 | ) | 120 | — | — | 176 | — | 10 | (217 | ) | ||||||||||||||||
Charge to income statement | (14 | ) | (24 | ) | 24 | — | — | — | (73 | ) | — | (7 | ) | (94 | ) | ||||||||||||||
Charge to equity directly | — | (1 | ) | — | — | — | — | — | — | — | (1 | ) | |||||||||||||||||
Acquisitions/(disposals) of subsidiaries | 2 | — | (1 | ) | — | — | — | — | — | 8 | 9 | ||||||||||||||||||
Other | (9 | ) | (14 | ) | — | — | — | — | — | — | 4 | (19 | ) | ||||||||||||||||
At 1 January 2005 | (601 | ) | 218 | (177 | ) | 120 | — | — | 103 | — | 15 | (322 | ) | ||||||||||||||||
Implementation of IAS 32 and IAS 39 | — | — | (55 | ) | — | (131 | ) | 86 | ��� | 50 | — | (50 | ) | ||||||||||||||||
At 1 January 2005 restated | (601 | ) | 218 | (232 | ) | 120 | (131 | ) | 86 | 103 | 50 | 15 | (372 | ) | |||||||||||||||
Charge to income statement | (5 | ) | (18 | ) | 20 | (28 | ) | 4 | (1 | ) | (72 | ) | — | (2 | ) | (102 | ) | ||||||||||||
Charge to equity directly | — | — | — | — | — | (78 | ) | — | (20 | ) | — | (98 | ) | ||||||||||||||||
Acquisitions/(disposals) of subsidiaries | — | — | — | — | (7 | ) | — | — | — | — | (7 | ) | |||||||||||||||||
Other | 266 | 2 | (8 | ) | — | — | — | — | — | (41 | ) | 219 | |||||||||||||||||
At 31 December 2005 | (340 | ) | 202 | (220 | ) | 92 | (134 | ) | 7 | 31 | 30 | (28 | ) | (360 | ) | ||||||||||||||
Bank | |||||||||||||||||||||||||||||
Pension £m | Accelerated capital allowances £m | Provisions £m | Deferred gains £m | Other transition £m | Fair value on financial instruments £m | Intangibles £m | Hedging £m | Other £m | Total £m | ||||||||||||||||||||
At 1 January 2004 under UK GAAP | — | 113 | (162 | ) | — | — | — | — | — | 1 | (48 | ) | |||||||||||||||||
Implementation of IFRS | |||||||||||||||||||||||||||||
(excluding IAS 32 and IAS 39) | (552 | ) | — | — | 66 | — | — | 181 | — | — | (305 | ) | |||||||||||||||||
At 1 January 2004 restated | (552 | ) | 113 | (162 | ) | 66 | — | — | 181 | — | 1 | (353 | ) | ||||||||||||||||
Charge to income statement | (20 | ) | 9 | 49 | — | — | — | (68 | ) | — | — | (30 | ) | ||||||||||||||||
Currency translation and other adjustments | — | (1 | ) | — | — | — | — | 20 | — | (1 | ) | 18 | |||||||||||||||||
At 1 January 2005 | (572 | ) | 121 | (113 | ) | 66 | — | — | 133 | — | — | (365 | ) | ||||||||||||||||
Implementation of IAS 32 and IAS 39 | — | — | (23 | ) | — | (134 | ) | 86 | — | 34 | — | (37 | ) | ||||||||||||||||
At 1 January 2005 restated | (572 | ) | 121 | (136 | ) | 66 | (134 | ) | 86 | 133 | 34 | — | (402 | ) | |||||||||||||||
Charge to income statement | 4 | (1 | ) | 17 | 10 | — | — | (67 | ) | — | — | (37 | ) | ||||||||||||||||
Charge to equity directly | — | — | — | — | — | (86 | ) | — | (24 | ) | — | (110 | ) | ||||||||||||||||
Other | 266 | — | — | — | — | — | (35 | ) | — | — | 231 | ||||||||||||||||||
At 31 December 2005 | (302 | ) | 120 | (119 | ) | 76 | (134 | ) | — | 31 | 10 | — | (318 | ) | |||||||||||||||
89
Notes on the accountscontinued
26 Subordinated liabilities | ||||||||
Group | Bank | |||||||
2005 £m | 2004 £m | 2005 £m | 2004 £m | |||||
Amortised cost | 6,648 | 5,501 | ||||||
6,648 | 5,808 | 5,501 | 4,747 | |||||
Dated loan capital | 3,418 | 3,074 | 2,414 | 2,383 | ||||
Undated loan capital | 2,765 | 2,734 | 2,622 | 2,364 | ||||
Preference shares | 465 | — | 465 | — | ||||
6,648 | 5,808 | 5,501 | 4,747 | |||||
Amounts above include: | ||||||||
Due to holding company | 277 | 550 | ||||||
Due to fellow subsidiaries | 369 | — | — | — | ||||
On implementation of IAS 32, all of the Group’s preference shares were re-classified as liabilities; these securities remain subject to the capital maintenance rules of the Companies Act 1985.
The following tables analyse the remaining maturity of subordinated liabilities by (1) the final redemption date; and (2) the next callable date.
Group | ||||||||||||||
2005 – final redemption | 2006 £m | 2007 £m | 2008-2010 £m | 2011-2015 £m | thereafter £m | perpetual £m | Total £m | |||||||
– Sterling | 14 | — | 37 | 597 | 461 | 1,109 | ||||||||
– US$ | 364 | — | 579 | 121 | 276 | 1,340 | ||||||||
– Euro | 32 | — | 410 | 340 | 187 | 969 | ||||||||
Dated loan capital | 410 | — | 1,026 | 1,058 | 924 | 3,418 | ||||||||
– Sterling | 792 | 792 | ||||||||||||
– US$ | 1,483 | 1,483 | ||||||||||||
– Euro | 490 | 490 | ||||||||||||
Undated loan capital | 2,765 | 2,765 | ||||||||||||
– Sterling | 140 | 140 | ||||||||||||
– US$ | 325 | 325 | ||||||||||||
Preference shares | 465 | 465 | ||||||||||||
410 | — | 1,026 | 1,058 | 924 | 3,230 | 6,648 | ||||||||
Group | ||||||||||||||||
2005 – call date | Currently £m | 2006 £m | 2007 £m | 2008 – 2010 £m | 2011– 2015 £m | thereafter £m | perpetual £m | Total £m | ||||||||
– Sterling | — | 14 | — | 37 | 762 | 296 | 1,109 | |||||||||
– US$ | — | 596 | — | 601 | 143 | — | 1,340 | |||||||||
– Euro | — | 32 | — | 410 | 464 | 63 | 969 | |||||||||
Dated loan capital | — | 642 | — | 1,048 | 1,369 | 359 | 3,418 | |||||||||
– Sterling | — | 28 | — | 539 | — | 118 | 107 | 792 | ||||||||
– US$ | 1,160 | 17 | 290 | — | — | 16 | — | 1,483 | ||||||||
– Euro | — | 5 | — | 366 | — | 82 | 37 | 490 | ||||||||
Undated loan capital | 1,160 | 50 | 290 | 905 | — | 216 | 144 | 2,765 | ||||||||
– Sterling | 140 | — | — | — | — | — | — | 140 | ||||||||
– US$ | 146 | 5 | 174 | — | — | — | — | 325 | ||||||||
Preference shares | 286 | 5 | 174 | — | — | — | — | 465 | ||||||||
1,446 | 697 | 464 | 1,953 | 1,369 | 575 | 144 | 6,648 | |||||||||
90
Group | ||||||||||||||
2004 – final redemption | 2005 £m | 2006 £m | 2007-2009 £m | 2010-2014 £m | thereafter £m | perpetual £m | Total £m | |||||||
– Sterling | — | — | — | 299 | 758 | 1,057 | ||||||||
– US$ | 207 | 54 | 514 | 22 | 285 | 1,082 | ||||||||
– Euro | — | — | — | 770 | 165 | 935 | ||||||||
Dated loan capital | 207 | 54 | 514 | 1,091 | 1,208 | 3,074 | ||||||||
– Sterling | 748 | 748 | ||||||||||||
– US$ | 1,290 | 1,290 | ||||||||||||
– Euro | 658 | 658 | ||||||||||||
– Other | 38 | 38 | ||||||||||||
Undated loan capital | 2,734 | 2,734 | ||||||||||||
207 | 54 | 514 | 1,091 | 1,208 | 2,734 | 5,808 | ||||||||
Group | ||||||||||||||||
2004 – call date | Currently £m | 2005 £m | 2006 £m | 2007– 2009 £m | 2010– 2014 £m | thereafter £m | perpetual £m | Total £m | ||||||||
– Sterling | — | — | 299 | 100 | 65 | 593 | 1,057 | |||||||||
– US$ | 207 | 207 | 54 | 614 | — | — | 1,082 | |||||||||
– Euro | — | — | — | 99 | 770 | 66 | 935 | |||||||||
Dated loan capital | 207 | 207 | 353 | 813 | 835 | 659 | 3,074 | |||||||||
– Sterling | — | — | — | — | 324 | 398 | 26 | 748 | ||||||||
– US$ | 1,032 | — | — | 258 | — | — | — | 1,290 | ||||||||
– Euro | — | — | — | 352 | — | — | 306 | 658 | ||||||||
– Other | — | — | — | — | — | — | 38 | 38 | ||||||||
Undated loan capital | 1,032 | — | — | 610 | 324 | 398 | 370 | 2,734 | ||||||||
1,239 | 207 | 353 | 1,423 | 1,159 | 1,057 | 370 | 5,808 | |||||||||
Bank | ||||||||||||||
2005 – final redemption | 2006 £m | 2007 £m | 2008-2010 £m | 2011-2015 £m | thereafter £m | perpetual £m | Total £m | |||||||
– Sterling | 14 | — | 37 | 597 | 296 | 944 | ||||||||
– US$ | 10 | — | 579 | 99 | — | 688 | ||||||||
– Euro | 32 | — | 410 | 340 | — | 782 | ||||||||
Dated loan capital | 56 | — | 1,026 | 1,036 | 296 | 2,414 | ||||||||
– Sterling | 767 | 767 | ||||||||||||
– US$ | 1,484 | 1,484 | ||||||||||||
– Euro | 371 | 371 | ||||||||||||
Undated loan capital | 2,622 | 2,622 | ||||||||||||
– Sterling | 140 | 140 | ||||||||||||
– US$ | 325 | 325 | ||||||||||||
Preference shares | 465 | 465 | ||||||||||||
56 | — | 1,026 | 1,036 | 296 | 3,087 | 5,501 | ||||||||
Bank | ||||||||||||||||
2005– call date | Currently £m | 2006 £m | 2007 £m | 2008– 2010 £m | 2011– 2015 £m | thereafter £m | perpetual £m | Total £m | ||||||||
– Sterling | — | 14 | — | 37 | 597 | 296 | 944 | |||||||||
– US$ | — | 10 | — | 579 | 99 | — | 688 | |||||||||
– Euro | — | 32 | — | 410 | 340 | — | 782 | |||||||||
Dated loan capital | — | 56 | — | 1,026 | 1,036 | 296 | 2,414 | |||||||||
– Sterling | — | 28 | — | 539 | — | 200 | — | 767 | ||||||||
– US$ | 1,160 | 17 | 290 | — | — | 17 | — | 1,484 | ||||||||
– Euro | — | 5 | — | 366 | — | — | — | 371 | ||||||||
Undated loan capital | 1,160 | 50 | 290 | 905 | — | 217 | — | 2,622 | ||||||||
– Sterling | 140 | — | — | — | — | — | — | 140 | ||||||||
– US$ | 146 | 5 | 174 | — | — | — | — | 325 | ||||||||
Preference shares | 286 | 5 | 174 | — | — | — | — | 465 | ||||||||
1,446 | �� | 111 | 464 | 1,931 | 1,036 | 513 | — | 5,501 | ||||||||
91
Notes on the accountscontinued
26 Subordinated liabilities(continued) | ||||||||||||||||
Bank | ||||||||||||||||
2004 – final redemption | 2005 £m | 2006 £m | 2007-2009 £m | 2010-2014 £m | thereafter £m | perpetual £m | Total £m | |||||||||
– Sterling | — | — | — | 299 | 593 | 892 | ||||||||||
– US$ | 207 | — | 514 | — | — | 721 | ||||||||||
– Euro | — | — | — | 770 | — | 770 | ||||||||||
Dated loan capital | 207 | — | 514 | 1,069 | 593 | 2,383 | ||||||||||
– Sterling | 722 | 722 | ||||||||||||||
– US$ | 1,290 | 1,290 | ||||||||||||||
– Euro | 352 | 352 | ||||||||||||||
Undated loan capital | 2,364 | 2,364 | ||||||||||||||
207 | — | 514 | 1,069 | 593 | 2,364 | 4,747 | ||||||||||
Bank | ||||||||||||||||
Currently | 2005 | 2006 | 2007– 2009 | 2010– 2014 | thereafter | perpetual | Total | |||||||||
2004 – call date | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||
– Sterling | — | — | 299 | — | — | 593 | 892 | |||||||||
– US$ | — | 207 | — | 514 | — | — | 721 | |||||||||
– Euro | — | — | — | — | 770 | — | 770 | |||||||||
Dated loan capital | — | 207 | 299 | 514 | 770 | 593 | 2,383 | |||||||||
– Sterling | — | — | — | — | 324 | 398 | — | 722 | ||||||||
– US$ | 1,032 | — | — | 258 | — | — | — | 1,290 | ||||||||
– Euro | — | — | — | 352 | — | — | — | 352 | ||||||||
Undated loan capital | 1,032 | — | — | 610 | 324 | 398 | — | 2,364 | ||||||||
1,032 | 207 | 299 | 1,124 | 1,094 | 991 | — | 4,747 | |||||||||
Notes: | |
(1) | In the event of certain changes in tax laws, dated and undated loan capital issues may be redeemed in whole, but not in part, at the option of the Group, at the principal amount thereof plus accrued interest, subject to prior regulatory approval. |
(2) | At 31 December 2004 the principal amounts payable to dated and undated loan note holders would not have been materially different from the carrying amount. |
(3) | On 15 December 2005, the Bank gave notice of redemption of 20 million Exchangeble Capital Securities, Series A, of US$25 each on 16 January 2006. |
27 Minority interests | ||||||
Group | ||||||
2005 £m | 2004 £m | |||||
At 1 January | 408 | 3 | ||||
Implementation of IAS 32 and IAS 39 on 1 January 2005 | (6 | ) | ||||
Currency translation adjustments and other movements | (2 | ) | — | |||
Profit attributable to minority interests | 17 | 12 | ||||
Dividends paid | (15 | ) | (10 | ) | ||
Equity raised | 463 | 405 | ||||
Equity withdrawn | (121 | ) | (2 | ) | ||
At 31 December | 744 | 408 | ||||
92
28 Share capital | ||||||||
Group and Bank | ||||||||
Allotted, called up and fully paid | Authorised | |||||||
2005 | 2004 | 2005 | 2004 | |||||
£m | £m | £m | £m | |||||
Equity shares | ||||||||
Ordinary shares of £1 each | 1,678 | 1,678 | 2,250 | 2,250 | ||||
Total equity share capital | 1,678 | 1,678 | 2,250 | 2,250 | ||||
Non-equity shares | ||||||||
Non-cumulative preference shares of US$25 | 320 | 284 | 1,162 | 1,034 | ||||
Non-cumulative preference shares of £1 | 140 | 140 | 1,000 | 1,000 | ||||
Total non-equity share capital | 460 | 424 | 2,162 | 2,034 | ||||
Total share capital | 2,138 | 2,102 | 4,412 | 4,284 | ||||
Allotted, called up and fully paid | Authorised | |||||||
Number of shares – millions | 2005 | 2004 | 2005 | 2004 | ||||
Equity shares | ||||||||
Ordinary shares of £1 each | 1,678 | 1,678 | 2,250 | 2,250 | ||||
Non-equity shares | ||||||||
Non-cumulative preference shares of US$25 | 22 | 22 | 80 | 80 | ||||
Non-cumulative preference shares of £1 | 140 | 140 | 1,000 | 1,000 | ||||
The non-cumulative preference shares, Series B, of US$25 each which carry the right to a gross dividend of 8.75% inclusive of associated tax credit, are redeemable at the option of the Bank at US$25 per share.
The non-cumulative preference shares, Series C, of US$25 each carry the right to a gross dividend of 8.625% inclusive of associated tax credit. They are redeemable at the option of the Bank from 9 April 2002 to 8 April 2008 inclusive, at a premium per share of US$0.60 until 8 April 2006 and US$0.30 from 9 April 2006 until 8 April 2007. There is no redemption premium if the date of redemption falls after 8 April 2007.
The 9% non-cumulative preference shares, Series A, of £1 each are non-redeemable.
The holders of sterling and dollar preference shares are entitled, on the winding-up of the Bank, to priority over the ordinary shareholders as regards payment of capital. Otherwise the holders of preference shares are not entitled to any further participation in the profits or assets of the Bank and accordingly these shares are classified as non-equity shares.
The holders of sterling and dollar preference shares are not entitled to receive notice of, attend, or vote at any general meeting unless the business of the meeting includes the consideration of a resolution for the winding-up of the Bank or the sale of the whole of the business of the Bank or any resolution directly affecting any of the special rights or privileges attached to any of the classes of preference shares.
Under IFRS, the Group’s preference shares are classified as debt and are now included in subordinated liabilities on the balance sheet (see Note 26).
93
Notes on the accountscontinued
29 Reserves | ||||||||||||
Group | Bank | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
£m | £m | £m | £m | |||||||||
Share premium account | ||||||||||||
At 1 January | 1,286 | 1,286 | 1,286 | 1,286 | ||||||||
Reclassification of preference shares on implementation of IAS 32 on 1 January 2005 | 5 | 5 | ||||||||||
At 31 December | 1,291 | 1,286 | 1,291 | 1,286 | ||||||||
Available-for-sale reserve | ||||||||||||
Implementation of IAS 32 and IAS 39 on 1 January 2005 | 200 | 201 | ||||||||||
Unrealised gains in the year | 38 | 33 | ||||||||||
Realised gains in the year | (324 | ) | (320 | ) | ||||||||
Taxation | 86 | 86 | ||||||||||
At 31 December | — | — | ||||||||||
Cash flow hedging reserve | ||||||||||||
Implementation of IAS 32 and IAS 39 on 1 January 2005 | 156 | 122 | ||||||||||
Unrealised losses in the year | (28 | ) | (52 | ) | ||||||||
Taxation | 20 | 24 | ||||||||||
At 31 December | 148 | 94 | ||||||||||
Foreign exchange reserve | ||||||||||||
At 1 January | (19 | ) | (33 | ) | — | — | ||||||
Implementation of IAS 32 and IAS 39 on 1 January 2005 | 6 | — | ||||||||||
Retranslation of net assets | 182 | 14 | (5 | ) | — | |||||||
At 31 December | 169 | (19 | ) | (5 | ) | — | ||||||
Other reserves | ||||||||||||
At 1 January and 31 December | 298 | 298 | 298 | 298 | ||||||||
Retained earnings | ||||||||||||
At 1 January | 4,342 | 4,332 | 1,416 | 1,851 | ||||||||
Implementation of IAS 32 and IAS 39 on 1 January 2005 | (582 | ) | (487 | ) | ||||||||
Currency translation adjustments and other movements | — | (6 | ) | — | — | |||||||
Profit attributable to ordinary and equity preference shareholders | 2,446 | 2,352 | 1,774 | 1,901 | ||||||||
Ordinary dividends paid | (350 | ) | (2,300 | ) | (350 | ) | (2,300 | ) | ||||
Preference dividends – non-equity | — | (36 | ) | — | (36 | ) | ||||||
At 31 December | 5,856 | 4,342 | 2,353 | 1,416 | ||||||||
Reserves at 31 December | 7,762 | 5,907 | 4,031 | 3,000 | ||||||||
UK law prescribes that only reserves of the Bank are taken into account for the purpose of making distributions and the permissible applications of the share premium account.
The Group optimises capital efficiency by maintaining reserves in subsidiaries, including regulated entities. Certain preference shares and subordinated debt are also included within regulatory capital. The remittance of reserves to the parent or the redemption of shares or subordinated capital by regulated entities may be subject to maintaining the capital resources required by the relevant regulator.
30 Leases | ||||||||||||||||||||||||
Minimum amounts receivable and payable under non-cancellable leases | ||||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||||
Year in which receipt or payment will occur | Year in which receipt or payment will occur | |||||||||||||||||||||||
Group | Within 1 year £m | After 1 year but within 5 years £m | After 5 years £m | Total £m | Within 1 year £m | After 1 year but within 5 years £m | After 5 years £m | Total £m | ||||||||||||||||
Finance lease assets: | ||||||||||||||||||||||||
Amounts receivable | 99 | 605 | 381 | 1,085 | 78 | 424 | 634 | 1,136 | ||||||||||||||||
Present value adjustment | (27 | ) | (136 | ) | (110 | ) | (273 | ) | (31 | ) | (159 | ) | (261 | ) | (451 | ) | ||||||||
Other movements | (3 | ) | (60 | ) | (25 | ) | (88 | ) | (1 | ) | (34 | ) | (10 | ) | (45 | ) | ||||||||
Present value amounts receivable | 69 | 409 | 246 | 724 | 46 | 231 | 363 | 640 | ||||||||||||||||
Operating lease obligations: | ||||||||||||||||||||||||
Amounts payable: | ||||||||||||||||||||||||
Premises | 84 | 302 | 655 | 1,041 | 98 | 358 | 788 | 1,244 | ||||||||||||||||
Equipment | 2 | 1 | — | 3 | 2 | 1 | — | 3 | ||||||||||||||||
86 | 303 | 655 | 1,044 | 100 | 359 | 788 | 1,247 | |||||||||||||||||
Bank | ||||||||||||||||||||||||
Operating lease obligations: | ||||||||||||||||||||||||
Amounts payable: | ||||||||||||||||||||||||
Premises | 66 | 242 | 452 | 760 | 72 | 271 | 562 | 905 | ||||||||||||||||
Group | Bank | |||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||
Amounts recognised as income and expense | £m | £m | £m | £m | ||||||||||||||||||||
Operating lease payables – minimum payments | 100 | 106 | 75 | 83 | ||||||||||||||||||||
Finance lease receivables – unearned finance income | 273 | 451 | — | — | ||||||||||||||||||||
95
Notes on the accountscontinued
31 Collateral
Securities repurchase agreements and lending transactions
The Group enters into securities repurchase agreements as securities lending transactions under which it receives or transfers cash or securities as collateral in accordance with normal market practice. Under standard terms for repurchase transactions in the UK and US markets, the recipient of collateral has an unrestricted right to sell or repledge it, subject to returning equivalent securities on settlement of the transaction.
Securities transferred under repurchase transactions included within securities on the balance sheet were as follows:
Group | |||
2005 £m | 2004 £m | ||
Treasury and other eligible bills | 724 | 133 | |
Debt securities | 26,607 | 20,202 | |
27,331 | 20,335 | ||
All of the above securities could be sold or repledged by the holder. Securities received as collateral under reverse repurchase agreements amounted to £34.8 billion (2004 – £34.3 billion), of which £33.1 billion (2004 – £31.7 billion) has been resold or repledged as collateral for the Group’s own transactions.
Other collateral given | Group | Bank | ||||||
Assets charged as security for liabilities | 2005 £m | 2004 £m | 2005 £m | 2004 £m | ||||
Loans and advances to customers | 351 | 342 | — | — | ||||
Other | 11 | 4 | — | — | ||||
362 | 346 | — | — | |||||
Liabilities secured by charges to assets | 2005 £m | 2004 £m | 2005 £m | 2004 £m | ||||
Customer accounts | 8 | — | 9 | — | ||||
Debt securities in issue | 349 | 342 | — | — | ||||
Other liabilities | 17 | — | — | — | ||||
374 | 342 | 9 | — | |||||
32 Financial instruments
Risk management
Risk Management is conducted on an overall basis within the RBS Group. Therefore in the discussion on risk management (pages 96 to 101) references to “the Group” or “Group” Board and committees are to the RBS Group.
Governance framework
The Board sets the overall risk appetite and philosophy for the Group. Various Board sub-committees support these goals, as follows:
- Group Audit Committee is a non-executive committee thatsupports the Board in carrying out its responsibilities forfinancial reporting including accounting policies and in respect of internal control and risk assessment. The Group Audit Committee monitors the ongoing process of the identification, evaluation and management of all significantrisks throughout the Group. The Committee is supported byGroup Internal Audit which provides an independent assessment of the design, adequacy and effectiveness of the Group’s internal controls.
- Advances Committee is an executive committee that dealswith all transactions that exceed the Group CreditCommittee's delegated authority.
In addition to the responsibilities at Board level, operational authority and oversight is delegated to the Group Executive Management Committee (“GEMC”), which is responsible for implementing a risk management framework consistent with the Board's risk appetite. The GEMC, in turn, is supported by the following committees:
- Group Risk Committee (“GRC”) is an executive riskgovernance committee which recommends and approveslimits, processes and policies in respect of the effectivemanagement of all material non-balance sheet risks acrossthe Group.
- Group Credit Committee (“GCC”) is a credit approvalcommittee which deals with all transactions that exceed thedelegated authority of divisional credit committees.
- Group Asset and Liability Management Committee(“GALCO”), is an executive committee which is responsiblefor reviewing the balance sheet, funding, liquidity, structuralforex, intra-group limits, capital adequacy and capital raisingacross the Group as well as interest rate risk in the bankingbook. In addition, GALCO monitors and reviews external,economic and environmental changes affecting such risks.
These Committees are further supported by two dedicated group level functions, Group Risk Management, which has responsibility for credit, market, regulatory and enterprise risk
and Group Treasury which is responsible for the management of the Group's balance sheet, capital raising, intra group credit exposure, liquidity and hedging policies. Both functions report to GEMC and the Group Board through the Group Finance Director and play an active role in assessing and monitoring the effectiveness of the divisional risk management functions.
Financial risk management policies and objectives
The Board establishes the overall governance framework for risk management and sets the risk appetite and philosophy for the Group.
The principal financial risks that the Group manages are as follows:
- Credit risk: credit risk is the risk arising from the possibilitythat the Group will incur losses from the failure of customersto meet their obligations.
- Liquidity risk: the risk that the Group is unable to meet its’obligations as they fall due.
- Market risk: the Group is exposed to market risk because of positions held in its trading portfolios and its non-trading businesses.
- Insurance underwriting risk: the Group is exposed to insurance risk through using insurance as a tool to mitigate other risk exposures.
Credit risk
The objective of credit risk management is to enable the Group to achieve sustainable and superior risk versus reward performance whilst maintaining credit risk exposure in line with approved risk appetite.
The key principles for credit risk management are set out in the Group’s Credit Risk Management Framework and include:
- Approval of all credit exposure must be granted prior to anyadvance or extension of credit.
- An appropriate credit risk assessment of the customer andrelated credit facilities must be undertaken prior to approvalof credit exposure. This must include an assessment of, amongst others, the purpose of the credit and sources of repayment, compliance with affordability tests, repayment history, capacity to repay, sensitivity to economic and market developments and risk-adjusted return.
- The Board delegates authority to Executive AdvancesCommittee, Group Credit Committee and divisional creditcommittees. A divisional CEO may delegate a subset ofthe divisional credit risk authority to sub-committees orto individuals.
- Credit risk authority must be specifically granted in writing toall individuals involved in the granting of credit approval,whether this is exercised personally or collectively as part ofa credit committee. These individuals must act independentlyand with balanced commercial judgement in exercising creditauthority.
- Where credit authority is exercised personally, the individualmust not have any responsibility or accountability forbusiness revenue origination.
- All credit exposures, once approved, must be effectivelymonitored and managed and reviewed periodically againstapproved limits. Review occurs at least annually, with lowerquality exposures being subject to a greater frequency ofanalysis and assessment.
- Customers with emerging credit problems must be identifiedearly and classified accordingly. Remedial actions must beimplemented promptly to minimise the potential loss to theGroup and consideration should be given whether to transfercustomers with credit problems to a specialised problemmanagement or recovery unit.
- Portfolio analysis and reporting must be used to identify andmanage credit risk concentrations and credit risk qualitymigration.
Credit grading models
In order to support the analytical elements of the credit riskmanagement framework, in particular the risk assessment partofthe credit approval process, ongoing monitoring and portfolioanalysis, the Group employs a range of credit risk models.These models can be broadly grouped into four categories.
- Probability of default (“PD”)/customer credit grade – these models assess the probability that the customer will fail to make full and timely repayment of credit obligations over a one year time horizon. Each customer is assigned an internal credit grade which corresponds to a probability of default. There are a number of different credit grading models in use across the Group, each of which considers particular characteristics of customer types in that portfolio. The credit grading models use a combination of quantitativeinputs, such as recent financial performance and customerbehaviour, and qualitative inputs, such as company management performance or sector outlook.
Every customer credit grade across all grading scales in the Group can be mapped to a Group level credit grade which uses a five band scale from AQ1 to AQ5.
- Loss given default (“LGD”) – these models estimate theeconomic loss that may be suffered by the Group on a creditfacility in the event of default. The LGD of a facility representsthe amount of debt which cannot be recovered and istypically expressed as a percentage of the EAD. The Group'sLGD models take into account the type of borrower, facilityand any risk mitigation such as the presence of any securityor collateral held. The LGD may also be affected by theindustry sector of the borrower, the legal jurisdiction in whichthe borrower operates as well as general economic conditionswhich may impact the value of any assets held as security.
97
Notes on the accountscontinued
32 Financial instruments(continued)
- Exposure at default (“EAD”) – these models estimate theexpected level of utilisation of a credit facility at the time ofa borrower’s default. The EAD will typically be higher thanthe current utilisation (e.g. in the case where furtherdrawings are made on a revolving credit facility prior todefault) but will not typically exceed the total facility limit.The methodologies used in EAD modelling recognise thatcustomers may make more use of their existing creditfacilities in the run up to a default.
- Credit risk exposure measurement – these models calculatethe credit risk exposure for products where the exposure isnot 100% of the gross nominal amount of the creditobligation. These models are most commonly used forderivative and other traded instruments where the amount ofcredit risk exposure may be dependent on external variablessuch as interest rates or foreign exchange rates.
Risk assets
The Group’s portfolio consists of loans (including overdraft facilities), instalment credit, finance lease receivables, debt securities and other traded instruments. In order to encompass the entire range of products in the Group’s credit portfolios exposure is monitored using risk assets, which cover exposures to all these asset and customer types.
Risk asset quality
Internal reporting and oversight of risk assets is principally differentiated by credit ratings. Internal ratings are used to assess the credit quality of borrowers. Customers are assigned credit ratings, based on various credit grading models that reflect the probability of default. All credit ratings across the Group map to a Group level asset quality scale.
Provision analysis
The Group’s consumer portfolios, which consist of small value, high volume credits, have highly efficient largely automated processes for identifying problem credits and very short timescales, typically three months, before resolution or adoption of various recovery methods.
Corporate portfolios consist of higher value, lower volume credits, which tend to be structured to meet individual customer requirements. Provisions are assessed on a case by case basis.
Early and proactive management of problem exposures ensures that credit losses are minimised. Specialised units are used for different customer types to ensure that the appropriate risk mitigation is taken in a timely manner.
Portfolio provisions are reassessed regularly as part of the Group’s ongoing monitoring process.
Provisions methodology
Under IAS 39 provisions are assessed under three categories as described below:
Individually assessed provisions are the provisions required for individually significant impaired assets which are assessed on a case by case basis, taking into account the financial condition of the counterparty and any guarantor. This incorporates an estimate of the discounted value of any recoveries and realisation of security or collateral. The asset continues to be assessed on an individual basis until it is repaid in full, transferred to the performing portfolio or written off.
Collectively assessed provisions are the provisions on impaired credits below an agreed value threshold which are assessed on a portfolio basis, to reflect the homogenous nature of the assets, such as credit cards or personal loans. The provision is determined from a quantitative review of the relevant portfolio, taking account of the level of arrears, security and average loss experience over the recovery period.
Latent loss provisions are the provisions held against the estimated impairment in the performing portfolio which has yet to be identified and reported as at the balance sheet date. To assess the latent loss within the portfolio, the Group has developed methodologies to estimate the time that an asset can remain impaired within a performing portfolio before it is identified and reported as such.
Liquidity risk
Liquidity management within the Group focuses on both overall balance sheet structure and the control, within prudent limits, of risk arising from the mismatch of maturities across the balance sheet and from undrawn commitments and other contingent obligations. It is undertaken within limits and other policy parameters set by Group Asset and Liability Management Committee (GALCO).
The structure of the Group’s balance sheet is managed to maintain substantial diversification, to minimise concentration across its various deposit sources, and to contain the level of reliance on total and net short-term wholesale sources of funds within prudent levels.
The degree of maturity mismatch within the overall long-term structure of the Group’s assets and liabilities is also managed within internal policy limits, to ensure that term asset commitments may be funded on an economic basis over their life. In managing its overall term structure, the Group analyses and takes into account the effect of retail and corporate customer behaviour on actual asset and liability maturities where they differ materially from the underlying contractual maturities. The short-term maturity structure of the Group’s assets and liabilities is managed on a daily basis to ensure that contractual cash flow obligations, and potential cash flows arising from undrawn commitments and other contingent obligations, can be met as they arise from day to day, either from cash inflows from maturing assets, new borrowing or the sale or repurchase of debt securities held.
Short-term liquidity risk is managed on a consolidated basis for the whole Group excluding the activities of Citizens and insurance businesses, which are subject to regulatory regimes that necessitate local management of liquidity.
Internal liquidity mismatch limits are set for all other subsidiaries and non-UK branches which have material local treasury activities in external markets, to ensure those activities do not compromise daily maintenance of the Group’s overall liquidity risk position within the Group’s policy parameters.
The level of large deposits taken from banks, corporate customers, non-bank financial institutions and other customers and significant cash outflows therefrom are also reviewed to monitor concentrations and identify any adverse trends.
Market risk
The Group is exposed to market risk because of positions held in its trading portfolios and its non-trading business including the Group’s treasury operations. The Group manages the market risk in its trading and treasury portfolios through its market risk management framework, which is based on value-at-risk (“VaR”) limits, together with, but not limited to, stress testing, scenario analysis, and position and sensitivity limits. Stress testing measures the impact of abnormal changes in market rates and prices on the fair value of the Group’s trading portfolios. GEMC approves the high-level VaR and stress limits for the Group. The Group Market Risk function, independent from the Group’s trading businesses, is responsible for setting and monitoring the adequacy and effectiveness of the Group’s market risk management processes.
Value-at-risk (“VaR”)
VaR is a technique that produces estimates of the potential negative change in the market value of a portfolio over a specified time horizon at given confidence levels. For internal risk management purposes, the Group’s VaR assumes a time horizon of one day and a confidence level of 95%. The Group uses historical simulation models in computing VaR. This approach, in common with many other VaR models, assumes that risk factor changes observed in the past are a good estimate of those likely to occur in the future and is, therefore, limited by the relevance of the historical data used. The Group’s method, however, does not make any assumption about the nature or type of underlying loss distribution.
The Group typically uses the previous two years of market data. The Group’s VaR should be interpreted in light of the limitations of the methodology used. These limitations include:
- Historical data may not provide the best estimate of the jointdistribution of risk factor changes in the future and may failto capture the risk of possible extreme adverse marketmovements which have not occurred in the historical windowused in the calculations.
- VaR using a one-day time horizon does not fully capture themarket risk of positions that cannot be liquidated or hedgedwithin one day.
- VaR using a 95% confidence level does not reflect the extentof potential losses beyond that percentile.
The Group largely computes the VaR of trading portfolios at the close of business and positions may change substantially during the course of the trading day. Controls are in place to limit the Group’s intra-day exposure; such as the calculation of the VaR for selected portfolios. These limitations and the nature of the VaR measure mean that the Group cannot guarantee that losses will not exceed the VaR amounts indicated.
Trading
The principal focus of the Group’s trading activities is client facilitation – providing products to the Group’s client base at competitive prices. The Group also undertakes: market making –quoting firm bid (buy) and offer (sell) prices with the intention of profiting from the spread between the quotes; arbitrage –entering into offsetting positions in different but closely related markets in order to profit from market imperfections; and proprietary activity – taking positions in financial instruments as principal in order to take advantage of anticipated market conditions. The main risk factors are interest rates, credit spreads and foreign exchange. Financial instruments held in the Group’s trading portfolios include, but are not limited to, debt securities, loans, deposits, securities sale and repurchase agreements and derivative financial instruments (futures, forwards, swaps and options). For a discussion of the Group’s accounting policies for derivative financial instruments, see Accounting policies.
The VaR for the Group’s trading portfolios segregated by type of market risk exposure, including idiosyncratic risk, is presented in the table below.
2005 | 2004 | |||||||||||||||||
Average | Period end | Maximum | Minimum | Average | Period end | Maximum | Minimum | |||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||||
Trading | ||||||||||||||||||
Interest rate | 6.0 | 5.5 | 10.8 | 4.1 | 5.5 | 5.0 | 8.5 | 4.0 | ||||||||||
Credit spread | 6.0 | 5.2 | 8.6 | 3.6 | 3.8 | 4.9 | 6.6 | 1.5 | ||||||||||
Currency | 0.4 | 0.4 | 0.8 | — | 0.4 | 0.8 | 1.2 | 0.1 | ||||||||||
Equity and commodity | 0.2 | 0.3 | 1.3 | — | — | 0.3 | 0.6 | — | ||||||||||
Diversification | (3.5 | ) | (4.4 | ) | ||||||||||||||
Total trading VaR | 8.1 | 7.9 | 12.3 | 5.5 | 7.0 | 6.6 | 10.3 | 4.8 | ||||||||||
99
Notes on the accountscontinued
32 Financial instruments(continued)
Non-trading
The principal market risks arising from the Group’s non-trading activities are interest rate risk, currency risk and equity risk. Treasury activity and mismatches between the repricing of assets and liabilities in its retail and corporate banking operations account for most of the non-trading interest rate risk. Non-trading currency risk derives from the Group’s investments in overseas subsidiaries, associates and branches. The Group’s venture capital portfolio and investments held by its general insurance business are the principal sources of non-trading equity price risk. The Group’s portfolios of non-trading financial instruments mainly comprise loans (including finance leases), debt securities, equity shares, deposits, certificates of deposits and other debt securities issued, loan capital and derivatives. To reflect their distinct nature, the Group’s long-term assurance assets and liabilities attributable to policyholders have been excluded from these market risk disclosures.
• Interest rate risk
Non-trading interest rate risk arises from the Group’s treasury activities and retail and corporate banking businesses.
Treasury
The Group’s treasury activities include its money market business and the management of internal funds flow within the Group’s businesses. Money market portfolios include cash instruments (principally debt securities, loans and deposits) and related hedging derivatives.
Retail and corporate banking
Structural interest rate risk arises in these activities where assets and liabilities have different repricing dates. It is the Group’s policy to minimise the sensitivity of net interest income to changes in interest rates and where interest rate risk is retained to ensure that appropriate resources, measures and limits are applied.
Structural interest rate risk is calculated in each division on the basis of establishing the repricing behaviour of each asset and liability product. For many products, the actual interest rate repricing characteristics differ from the contractual repricing. In most cases, the repricing maturity is determined by the market interest rate that most closely fits the historical behaviour of the product interest rate. For non-interest bearing current accounts, the repricing maturity is determined by the stability of the portfolio. The repricing maturities used are approved by Group Treasury and divisional asset and liability committees at least annually. Key conventions are reviewed annually by GALCO.
A static maturity gap report is produced as at the month-end for each division, in each functional currency based on the behaviouralised repricing for each product. It is Group policy to include in the gap report, non-financial assets and liabilities, mainly property, plant and equipment and the Group’s capital and reserves, spread over medium and longer term maturities. This report also includes hedge transactions, principally derivatives.
Any residual non-trading interest rate exposures are controlled by limiting repricing mismatches in the individual balance sheets. Potential exposures to interest rate movements in the medium to long term are measured and controlled using a version of the same VaR methodology that is used for the Group’s trading portfolios but without discount factors. Net accrual income exposures are measured and controlled in terms of sensitivity over time to movements in interest rates.
Risk is managed within limits approved by GALCO through the execution of cash and derivative instruments. Execution of the hedging is carried out by the relevant division through the Group’s treasury function. The residual risk position is reported to divisional asset and liability committees, GALCO and Board.
• Currency risk
The Group does not maintain material non-trading open currency positions other than the structural foreign currency translation exposures arising from its investments in foreign subsidiaries and associated undertakings and their related currency funding. The Group’s policy in relation to structural positions is to match fund the structural foreign currency exposure arising from net asset value, including goodwill, in foreign subsidiaries, equity accounted investments and branches, except where doing so would materially increase the sensitivity of either the Group’s or the subsidiary’s regulatory capital ratios to currency movements. The policy requires structural foreign exchange positions to be reviewed regularly by GALCO. Gains or losses on foreign currency investments net of any gains or losses on related foreign currency funding or hedges are recognised in the statement of recognised income and expense.
The tables below set out the Group’s structural foreign currency exposures. | ||||||
2005 | Net investments in foreign operations £m | Foreign currency borrowings hedging net investments £m | Structural foreign currency exposures £m | |||
US dollar | 3,022 | 2,806 | 216 | |||
Euro | 1,934 | 284 | 1,650 | |||
Swiss franc | 431 | 430 | 1 | |||
Other non-sterling | 4 | 4 | — | |||
5,391 | 3,524 | 1,867 | ||||
2004 | ||||||
US dollar | 2,142 | 2,092 | 50 | |||
Euro | 1,822 | 1,125 | 697 | |||
Swiss franc | 392 | 388 | 4 | |||
Other non-sterling | 4 | 4 | — | |||
4,360 | 3,609 | 751 | ||||
The structural foreign currency exposure in euros is principally due to Ulster Bank running an open structural foreign exchange position to minimise the sensitivity of its capital ratios to possible movements in the Euro exchange rate against Sterling and the exclusion from the table of preference shares classified as equity under IFRS. These instruments continue to be considered part of the currency funding of foreign operations for asset and liability management purposes.
101
Notes on the accountscontinued
32 Financial instruments(continued) | ||||||||||||||
Remaining maturity | Group | |||||||||||||
2005 | 1 month or less £m | Within 3 months £m | 3-12 months £m | 1-5 years £m | Over 5 years £m | Equity shares £m | Total £m | |||||||
Assets | ||||||||||||||
Cash and balances at central banks | 1,568 | — | — | — | — | — | 1,568 | |||||||
Treasury bills and other eligible bills | 23 | 39 | 708 | — | — | — | 770 | |||||||
Loans and advances to banks | 47,521 | 6,001 | 1,400 | 780 | 293 | — | 55,995 | |||||||
Loans and advances to customers | 73,218 | 12,591 | 17,165 | 21,447 | 35,522 | — | 159,943 | |||||||
Debt securities | 399 | 179 | 1,323 | 6,894 | 19,950 | — | 28,745 | |||||||
Equity shares | — | — | — | — | — | 823 | 823 | |||||||
Settlement balances | 3,931 | — | — | — | — | — | 3,931 | |||||||
Derivatives at fair value | 213 | 210 | 368 | 875 | 1,310 | — | 2,976 | |||||||
Liabilities | ||||||||||||||
Deposits by banks | 29,351 | 5,147 | 7,915 | 2,784 | 804 | — | 46,001 | |||||||
Customer accounts | 141,464 | 10,170 | 2,795 | 3,110 | 385 | — | 157,924 | |||||||
Debt securities in issue | 3,040 | 2,277 | 4,949 | 141 | 394 | — | 10,801 | |||||||
Settlement balances and short positions | 3,061 | 223 | 705 | 15,079 | 2,506 | — | 21,574 | |||||||
Derivatives at fair value | 251 | 192 | 289 | 652 | 1,273 | — | 2,657 | |||||||
Subordinated liabilities | 326 | 6 | 1,811 | 2,417 | 2,088 | — | 6,648 | |||||||
2004 | ||||||||||||||
Assets | ||||||||||||||
Cash and balances at central banks | 1,589 | — | — | — | — | — | 1,589 | |||||||
Treasury bills and other eligible bills | 74 | 84 | 14 | — | — | — | 172 | |||||||
Loans and advances to banks | 19,404 | 7,750 | 1,477 | 561 | 790 | — | 29,982 | |||||||
Loans and advances to customers | 30,101 | 14,927 | 11,163 | 21,953 | 53,535 | — | 131,679 | |||||||
Debt securities | 272 | 298 | 395 | 5,381 | 16,080 | — | 22,426 | |||||||
Equity shares | — | — | — | — | — | 1,338 | 1,338 | |||||||
Settlement balances | 3,538 | — | — | — | — | — | 3,538 | |||||||
Derivatives at fair value | 29 | 15 | 243 | 423 | 656 | — | 1,366 | |||||||
Liabilities | ||||||||||||||
Deposits by banks | 14,412 | 7,195 | 2,038 | 185 | 43 | — | 23,873 | |||||||
Customer accounts | 103,462 | 18,741 | 2,121 | 1,655 | 140 | — | 126,119 | |||||||
Debt securities in issue | 892 | 1,784 | 443 | 102 | 376 | — | 3,597 | |||||||
Settlement balances and short positions | 3,112 | 379 | 185 | 12,800 | 5,194 | — | 21,670 | |||||||
Derivatives at fair value | 16 | 21 | 195 | 342 | 531 | — | 1,105 | |||||||
Subordinated liabilities | 207 | 1,032 | 207 | 1,776 | 2,586 | — | 5,808 | |||||||
102
Remaining maturity | Bank | |||||||||||||
2005 | 1 month or less £m | Within 3 months £m | 3-12 months £m | 1-5 years £m | Over 5 years £m | Equity shares £m | Total £m | |||||||
Assets | ||||||||||||||
Cash and balances at central banks | 894 | — | — | — | — | — | 894 | |||||||
Loans and advances to banks | 18,112 | 1,733 | 754 | 190 | 40 | — | 20,829 | |||||||
Loans and advances to customers | 52,290 | 6,921 | 9,680 | 13,530 | 15,148 | — | 97,569 | |||||||
Debt securities | 8 | 11 | 17 | 12 | 3 | — | 51 | |||||||
Derivatives at fair value | 43 | 61 | 128 | 424 | 547 | — | 1,203 | |||||||
Liabilities | ||||||||||||||
Deposits by banks | 3,413 | 808 | 604 | 261 | 224 | — | 5,310 | |||||||
Customer accounts | 98,683 | 7,005 | 1,755 | 1,923 | 576 | — | 109,942 | |||||||
Debt securities in issue | — | — | 5 | 33 | — | — | 38 | |||||||
Derivatives at fair value | 42 | 55 | 117 | 208 | 707 | — | 1,129 | |||||||
Subordinated liabilities | 326 | 6 | 1,225 | 2,395 | 1,549 | — | 5,501 | |||||||
2004 | ||||||||||||||
Assets | ||||||||||||||
Cash and balances at central banks | 956 | — | — | — | — | — | 956 | |||||||
Loans and advances to banks | 12,136 | 1,964 | 1,193 | 20 | 681 | — | 15,994 | |||||||
Loans and advances to customers | 28,215 | 8,052 | 10,688 | 15,581 | 15,083 | — | 77,619 | |||||||
Debt securities | — | — | 26 | 13 | — | — | 39 | |||||||
Equity shares | — | — | — | — | — | 587 | 587 | |||||||
Derivatives at fair value | — | 14 | 133 | 218 | 339 | — | 704 | |||||||
Liabilities | ||||||||||||||
Deposits by banks | 2,513 | 881 | 74 | 12 | — | — | 3,480 | |||||||
Customer accounts | 76,103 | 8,862 | 1,040 | 1,391 | 529 | — | 87,925 | |||||||
Debt securities in issue | — | — | — | 5 | 34 | — | 39 | |||||||
Derivatives at fair value | 3 | 6 | 50 | 88 | 136 | — | 283 | |||||||
Subordinated liabilities | — | 1,032 | 207 | 1,423 | 2,085 | — | 4,747 | |||||||
103
Notes on the accountscontinued
32 Financial instruments(continued)
Interest rate sensitivity
The tables below summarise the interest rate sensitivity gap for the Group and the Bank at 31 December 2005 and the Group at 31 December 2004. The tables show the contractual repricing for each category of asset, liability and off-balance sheet items in the banking book. A liability (or negative) gap position exists when liabilities reprice more quickly or in greater proportion than assets during a given period and tends to benefit net interest income in a declining interest rateenvironment. An asset (or positive) gap position exists when assets reprice more quickly or in greater proportion than liabilities during a given period and tends to benefit net interest income in a rising interest rate environment. Contractual repricing terms do not reflect the potential impact of early repayment or withdrawal. Positions may not be reflective of those in subsequent periods. Major changes in positions can be made promptly as market outlooks change. In addition, significant variations in interest rate sensitivity may exist within the re-pricing periods presented and among the currencies in which the Group has interest rate positions.
Group | ||||||||||||||||||||||||||||||
2005 | 3 months or less £m | After 3 months but less than 6 months £m | After 6 months but less than 1 year £m | After 1 year but less than 5 years £m | Over 5 years £m | Total interest earning /bearing £m | Yield % | Non interest earning /bearing £m | Fair value through profit or loss £m | Banking book £m | Trading book £m | Total £m | ||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||
Loans and advances to banks | 38,052 | 580 | 884 | 521 | 25 | 40,062 | 2.19 | 2,467 | 825 | 43,354 | 12,641 | 55,995 | ||||||||||||||||||
Loans and advances | ||||||||||||||||||||||||||||||
to customers | 99,057 | 2,624 | 2,492 | 12,027 | 4,650 | 120,850 | 4.26 | 16,253 | — | 137,103 | 22,840 | 159,943 | ||||||||||||||||||
Debt securities and | ||||||||||||||||||||||||||||||
treasury bills | 2,290 | 155 | 152 | 238 | 82 | 2,917 | 3.39 | — | 403 | 3,320 | 26,195 | 29,515 | ||||||||||||||||||
Other assets | — | — | — | — | — | — | 8,421 | 39 | 8,460 | 6,690 | 15,150 | |||||||||||||||||||
Total assets | 139,399 | 3,359 | 3,528 | 12,786 | 4,757 | 163,829 | 3.74 | 27,141 | 1,267 | 192,237 | 68,366 | 260,603 | ||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||||||||
Deposits by banks | 18,486 | 4,007 | 1,517 | 2,470 | 517 | 26,997 | 1.60 | 2,040 | — | 29,037 | 16,964 | 46,001 | ||||||||||||||||||
Customer accounts | 113,329 | 1,153 | 1,369 | 1,588 | 367 | 117,806 | 2.09 | 18,012 | 1,339 | 137,157 | 20,767 | 157,924 | ||||||||||||||||||
Debt securities in issue | 4,090 | 2,221 | 1,025 | 140 | 394 | 7,870 | 1.77 | 6 | — | 7,876 | 2,925 | 10,801 | ||||||||||||||||||
Subordinated liabilities | 2,146 | — | — | 2,535 | 1,614 | 6,295 | 5.83 | — | — | 6,295 | 353 | 6,648 | ||||||||||||||||||
Other liabilites | — | — | — | — | — | — | 5,202 | — | 5,202 | 24,587 | 29,789 | |||||||||||||||||||
Shareholders’ equity | — | — | — | — | — | — | 7,825 | — | 7,825 | 1,615 | 9,440 | |||||||||||||||||||
Internal funding of trading book | (1,268 | ) | — | — | — | — | (1,268 | ) | 3.71 | 113 | — | (1,155 | ) | 1,155 | — | |||||||||||||||
Total liabilities and equity | 136,783 | 7,381 | 3,911 | 6,733 | 2,892 | 157,700 | 2.12 | 33,198 | 1,339 | 192,237 | 68,366 | 260,603 | ||||||||||||||||||
Off-balance sheet items | (1,231 | ) | 147 | 194 | 264 | 626 | — | — | — | |||||||||||||||||||||
Interest rate sensitivity gap | 1,385 | (3,875 | ) | (189 | ) | 6,317 | 2,491 | 6,129 | (6,057 | ) | (72 | ) | ||||||||||||||||||
Cumulative interest rate | ||||||||||||||||||||||||||||||
sensitivity gap | 1,385 | (2,490 | ) | (2,679 | ) | 3,638 | 6,129 | 6,129 | 72 | |||||||||||||||||||||
Trading book
The table below sets out by time band the net effect on the profit or loss of a basis point (0.01%) increase in interest rates, assuming all trading positions remain unchanged.
2005 | |||||||||||||||
Group | 3 months or less £000 | After 3 months but less than 6 months £000 | After 6 months but less than 1 year £000 | After 1 year but less than 5 years £000 | Over 5 years £000 | Total £000 | |||||||||
Gain/(loss) per basis point increase | 51 | (14 | ) | 471 | (959 | ) | 499 | 48 | |||||||
Bank | |||||||||||||||
Gain/(loss) per bonus point increase | 4 | (61 | ) | 16 | 106 | (13 | ) | 52 | |||||||
104
Group | ||||||||||||||||||||||
2004 | 3 months or less £m | After 3 months but less than 6 months £m | After 6 months but less than 1 year £m | After 1 year but less than 5 years £m | Over 5 years £m | Non interest earning /bearing £m | Banking book £m | Trading book £m | Total £m | |||||||||||||
Assets | ||||||||||||||||||||||
Loans and advances to banks | 18,086 | 503 | 697 | 490 | 523 | 2,362 | 22,661 | 7,321 | 29,982 | |||||||||||||
Loans and advances to customers | 77,730 | 3,411 | 4,293 | 12,681 | 9,021 | 215 | 107,351 | 24,328 | 131,679 | |||||||||||||
Debt securities and treasury bills | 887 | 268 | 145 | 1,216 | 11 | 134 | 2,661 | 19,937 | 22,598 | |||||||||||||
Other assets | — | — | — | — | — | 7,682 | 7,682 | 5,280 | 12,962 | |||||||||||||
Total assets | 96,703 | 4,182 | 5,135 | 14,387 | 9,555 | 10,393 | 140,355 | 56,866 | 197,221 | |||||||||||||
Liabilities and equity | ||||||||||||||||||||||
Deposits by banks | 7,658 | 613 | 129 | 72 | 17 | 861 | 9,350 | 14,523 | 23,873 | |||||||||||||
Customer accounts | 87,614 | 1,100 | 887 | 1,667 | 140 | 19,090 | 110,498 | 15,621 | 126,119 | |||||||||||||
Debt securities in issue | 1,243 | 175 | 14 | 63 | 342 | — | 1,837 | 1,760 | 3,597 | |||||||||||||
Subordinated liabilities | 1,701 | 208 | 258 | 1,070 | 2,517 | — | 5,754 | 54 | 5,808 | |||||||||||||
Other liabilites | — | — | — | 4 | — | 6,103 | 6,107 | 23,708 | 29,815 | |||||||||||||
Shareholders’ equity | — | — | — | — | — | 6,931 | 6,931 | 1,078 | 8,009 | |||||||||||||
Internal funding of trading book | (122 | ) | — | — | — | — | — | (122 | ) | 122 | — | |||||||||||
Total liabilities and equity | 98,094 | 2,096 | 1,288 | 2,876 | 3,016 | 32,985 | 140,355 | 56,866 | 197,221 | |||||||||||||
Off-balance sheet items | (10 | ) | 103 | 246 | 115 | (454 | ) | — | ||||||||||||||
Interest rate sensitivity gap | (1,401 | ) | 2,189 | 4,093 | 11,626 | 6,085 | (22,592 | ) | ||||||||||||||
Cumulative interest rate sensitivity gap | (1,401 | ) | 788 | 4,881 | 16,507 | 22,592 | ||||||||||||||||
Bank | |||||||||||||||||||||||||||||||||
2005 | 3 months or less £m | After 3 months but less than 6 months £m | After 6 months but less than 1 year £m | After 1 year but less than 5 years £m | Over 5 years £m | Total interest earning /bearing £m | Yield % | Non interest earning /bearing £m | Fair value through profit or loss £m | Banking book £m | Trading book £m | Total £m | |||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||
Loans and advances to banks | 17,593 | 102 | 628 | 191 | — | 18,514 | 4.17 | 2,302 | — | 20,816 | 13 | 20,829 | |||||||||||||||||||||
Loans and advances | |||||||||||||||||||||||||||||||||
to customers | 67,487 | 1,320 | 1,163 | 9,078 | 2,866 | 81,914 | 4.43 | 15,624 | — | 97,538 | 31 | 97,569 | |||||||||||||||||||||
Debt securities and | |||||||||||||||||||||||||||||||||
treasury bills | 19 | 14 | 3 | 9 | 6 | 51 | 5.88 | — | — | 51 | — | 51 | |||||||||||||||||||||
Other assets | — | — | — | — | — | — | 11,163 | — | 11,163 | 522 | 11,685 | ||||||||||||||||||||||
Total assets | 85,099 | 1,436 | 1,794 | 9,278 | 2,872 | 100,479 | 4.38 | 29,089 | — | 129,568 | 566 | 130,134 | |||||||||||||||||||||
Liabilities and equity | |||||||||||||||||||||||||||||||||
Deposits by banks | 3,534 | 282 | 164 | 249 | — | 4,229 | 2.22 | 1,081 | — | 5,310 | — | 5,310 | |||||||||||||||||||||
Customer accounts | 88,425 | 517 | 1,064 | 399 | 132 | 90,537 | 2.09 | 19,285 | 63 | 109,885 | 57 | 109,942 | |||||||||||||||||||||
Debt securities in issue | — | — | 5 | 33 | — | 38 | 2.63 | — | — | 38 | — | 38 | |||||||||||||||||||||
Subordinated liabilities | 1,501 | — | — | 2,535 | 1,465 | 5,501 | 6.45 | — | — | 5,501 | — | 5,501 | |||||||||||||||||||||
Other liabilites | — | — | — | — | — | — | 3,390 | — | 3,390 | 244 | 3,634 | ||||||||||||||||||||||
Shareholders’ equity | — | — | — | — | — | — | 5,710 | — | 5,710 | (1 | ) | 5,709 | |||||||||||||||||||||
Internal funding of trading book | (312 | ) | — | — | — | — | (312 | ) | 0.32 | 46 | — | (266 | ) | 266 | — | ||||||||||||||||||
Total liabilities and equity | 93,148 | 799 | 1,233 | 3,216 | 1,597 | 99,993 | 2.33 | 29,512 | 63 | 129,568 | 566 | 130,134 | |||||||||||||||||||||
Off-balance sheet items | (1,231 | ) | 147 | 194 | 264 | 626 | — | — | — | ||||||||||||||||||||||||
Interest rate sensitivity gap | (9,280 | ) | 784 | 755 | 6,326 | 1,901 | 486 | (423 | ) | (63 | ) | ||||||||||||||||||||||
Cumulative interest rate | |||||||||||||||||||||||||||||||||
sensitivity gap | (9,280 | ) | (8,496 | ) | (7,741 | ) | (1,415 | ) | 486 | 486 | 63 | ||||||||||||||||||||||
105
Notes on the accountscontinued
32 Financial instruments(continued)
The following table shows the carrying values and the fair values of financial instruments on the balance sheet.
Group | Bank | |||||||||||||||
2005 Carrying value £m | 2005 Fair value £m | 2004 Carrying value £m | 2004 Fair value £m | 2005 Carrying value £m | 2005 Fair value £m | 2004 Carrying value £m | 2004 Fair value £m | |||||||||
Financial assets | ||||||||||||||||
Cash and balances at central banks | 1,568 | 1,568 | 1,589 | 1,589 | 894 | 894 | 956 | 956 | ||||||||
Treasury bills and other eligible bills | ||||||||||||||||
Held-for-trading | 724 | 724 | — | — | ||||||||||||
Available-for-sale | 46 | 46 | — | — | ||||||||||||
Banking business | 38 | 38 | — | — | ||||||||||||
Trading business | 134 | 134 | — | — | ||||||||||||
770 | 770 | 172 | 172 | — | — | — | — | |||||||||
Loans and advance to banks | ||||||||||||||||
Held-for-trading | 17,411 | 17,411 | 110 | 110 | ||||||||||||
Designated as at fair value through profit or loss | 825 | 825 | — | — | ||||||||||||
Loans and receivables | 37,759 | 37,761 | 20,719 | 20,719 | ||||||||||||
Banking business | 22,661 | 22,662 | 15,901 | 15,901 | ||||||||||||
Trading business | 7,321 | 7,321 | 93 | 93 | ||||||||||||
55,995 | 55,997 | 29,982 | 29,983 | 20,829 | 20,829 | 15,994 | 15,994 | |||||||||
Loans and advance to customers | ||||||||||||||||
Held-for-trading | 15,896 | 15,896 | 30 | 30 | ||||||||||||
Loans and receivables | 144,047 | 144,628 | 97,539 | 98,006 | ||||||||||||
Banking business | 107,351 | 107,447 | 77,587 | 77,837 | ||||||||||||
Trading business | 24,328 | 24,328 | 32 | 32 | ||||||||||||
159,943 | 160,524 | 131,679 | 131,775 | 97,569 | 98,036 | 77,619 | 77,869 | |||||||||
Debt securities | ||||||||||||||||
Held-for-trading | 25,474 | 25,474 | 3 | 3 | ||||||||||||
Designated as at fair value through profit or loss | 403 | 403 | — | — | ||||||||||||
Available-for-sale | 2,868 | 2,868 | 48 | 48 | ||||||||||||
Banking business | 2,623 | 2,622 | 39 | 39 | ||||||||||||
Trading business | 19,803 | 19,803 | — | — | ||||||||||||
28,745 | 28,745 | 22,426 | 22,425 | 51 | 51 | 39 | 39 | |||||||||
Equity shares | ||||||||||||||||
Held-for-trading | 26 | 26 | — | — | ||||||||||||
Designated as at fair value through profit or loss | 39 | 39 | — | — | ||||||||||||
Available-for-sale | 758 | 758 | — | — | ||||||||||||
Banking business | 1,323 | 1,610 | 574 | 861 | ||||||||||||
Trading business | 15 | 15 | 13 | 13 | ||||||||||||
823 | 823 | 1,338 | 1,625 | — | — | 587 | 874 | |||||||||
Settlement balances | 3,931 | 3,931 | 3,538 | 3,538 | — | — | — | — | ||||||||
Derivatives at fair value | 2,976 | 2,976 | 1,366 | 1,366 | 1,203 | 1,203 | 704 | 704 | ||||||||
106
Group | Bank | |||||||||||||||
2005 Carrying value £m | 2005 Fair value £m | 2004 Carrying value £m | 2004 Fair value £m | 2005 Carrying value £m | 2005 Fair value £m | 2004 Carrying value £m | 2004 Fair value £m | |||||||||
Financial liabilities | ||||||||||||||||
Deposits by banks | ||||||||||||||||
Held-for-trading | 6,589 | 6,589 | 1,237 | 1,237 | ||||||||||||
Amortised cost | 39,412 | 39,417 | 4,073 | 4,073 | ||||||||||||
Banking business | 9,350 | 9,360 | 3,076 | 3,076 | ||||||||||||
Trading business | 14,523 | 14,523 | 404 | 404 | ||||||||||||
46,001 | 46,006 | 23,873 | 23,883 | 5,310 | 5,310 | 3,480 | 3,480 | |||||||||
Customer accounts | ||||||||||||||||
Held-for-trading | 10,372 | 10,372 | 1,560 | 1,560 | ||||||||||||
Designated as at fair value through profit or loss | 1,339 | 1,339 | 63 | 63 | ||||||||||||
Amortised cost | 146,213 | 147,313 | 108,319 | 108,541 | ||||||||||||
Banking business | 110,498 | 110,504 | 87,910 | 87,912 | ||||||||||||
Trading business | 15,621 | 15,621 | 15 | 15 | ||||||||||||
157,924 | 159,024 | 126,119 | 126,125 | 109,942 | 110,164 | 87,925 | 87,927 | |||||||||
Debt securities in issue | ||||||||||||||||
Amortised cost | 10,801 | 10,872 | 38 | 38 | ||||||||||||
Banking business | 1,837 | 1,836 | 39 | 39 | ||||||||||||
Trading business | 1,760 | 1,760 | — | — | ||||||||||||
10,801 | 10,872 | 3,597 | 3,596 | 38 | 38 | 39 | 39 | |||||||||
Subordinated liabilities | ||||||||||||||||
Amortised cost | 6,648 | 6,773 | 5,501 | 5,626 | ||||||||||||
Banking business | 5,754 | 6,020 | 4,747 | 5,276 | ||||||||||||
Trading business | 54 | 54 | — | — | ||||||||||||
6,648 | 6,773 | 5,808 | 6,074 | 5,501 | 5,626 | 4,747 | 5,276 | |||||||||
Settlement balances and short positions | 21,574 | 21,574 | 21,670 | 21,670 | — | — | — | — | ||||||||
Derivatives at fair value | 2,657 | 2,657 | 1,105 | 1,105 | 1,129 | 1,129 | 283 | 283 | ||||||||
107
Notes on the accountscontinued
32 Financial instruments(continued)
Industry risk – geographical analysis
Group | ||||||||||||
2005 | Loans and advances to banks and customers £m | Treasury bills, debt securities and equity shares £m | Derivatives £m | Settlement balances £m | Total £m | Netting(1) offset £m | ||||||
UK | ||||||||||||
Central and local government | 1,690 | 4 | 7 | — | 1,701 | 1,137 | ||||||
Manufacturing | 6,887 | 1 | 78 | — | 6,966 | 2,406 | ||||||
Construction | 4,479 | — | 28 | — | 4,507 | 1,258 | ||||||
Finance | 74,742 | 1,671 | 1,428 | — | 77,841 | 6,250 | ||||||
Service industry and business activities | 24,031 | 135 | 249 | — | 24,415 | 4,356 | ||||||
Agriculture, forestry and fishing | 1,884 | — | 2 | — | 1,886 | 209 | ||||||
Property | 15,316 | 10 | 96 | — | 15,422 | 1,613 | ||||||
Individuals | ||||||||||||
Home mortgages | 2,746 | — | 1 | — | 2,747 | 1,178 | ||||||
Other | 15,283 | — | — | — | 15,283 | 506 | ||||||
Finance leases and instalment credit | 319 | — | — | — | 319 | — | ||||||
Interest accruals | 208 | — | — | — | 208 | — | ||||||
Total UK | 147,585 | 1,821 | 1,889 | — | 151,295 | 18,913 | ||||||
US | ||||||||||||
Central and local government | — | 7,599 | — | 112 | 7,711 | — | ||||||
Manufacturing | 44 | 84 | — | — | 128 | — | ||||||
Construction | 5 | 27 | — | — | 32 | — | ||||||
Finance | 28,258 | 18,121 | 609 | 3,809 | 50,797 | 4,323 | ||||||
Service industry and business activities | 484 | 302 | — | — | 786 | — | ||||||
Agriculture, forestry and fishing | 13 | — | — | — | 13 | — | ||||||
Property | 2,252 | — | — | — | 2,252 | — | ||||||
Individuals | ||||||||||||
Home mortgages | 5,107 | — | — | — | 5,107 | — | ||||||
Other | 9 | — | — | — | 9 | — | ||||||
Finance leases and instalment credit | 439 | — | — | — | 439 | — | ||||||
Interest accruals | 79 | 160 | — | — | 239 | 2 | ||||||
Total US | 36,690 | 26,293 | 609 | 3,921 | 67,513 | 4,325 | ||||||
Europe | ||||||||||||
Central and local government | 287 | 234 | — | — | 521 | 111 | ||||||
Manufacturing | 3,060 | — | — | — | 3,060 | 889 | ||||||
Construction | 2,257 | — | — | — | 2,257 | 1,931 | ||||||
Finance | 6,776 | 1,802 | 450 | 8 | 9,036 | 4,986 | ||||||
Service industry and business activities | 4,758 | 10 | 11 | — | 4,779 | 3,726 | ||||||
Agriculture, forestry and fishing | 513 | — | — | — | 513 | 577 | ||||||
Property | 2,576 | 49 | — | — | 2,625 | 2,670 | ||||||
Individuals | ||||||||||||
Home mortgages | 8,802 | — | — | — | 8,802 | 11,264 | ||||||
Other | 3,412 | 105 | — | — | 3,517 | 1,577 | ||||||
Finance leases and instalment credit | 96 | — | — | — | 96 | — | ||||||
Interest accruals | 110 | 26 | — | — | 136 | — | ||||||
Total Europe | 32,647 | 2,226 | 461 | 8 | 35,342 | 27,731 | ||||||
Rest of the World | ||||||||||||
Central and local government | — | 2 | — | — | 2 | — | ||||||
Finance | 169 | — | 3 | 2 | 174 | — | ||||||
Service industry and business activities | — | — | 14 | — | 14 | — | ||||||
Property | 2 | — | — | — | 2 | — | ||||||
Individuals | ||||||||||||
Home mortgages | 75 | — | — | — | 75 | — | ||||||
Other | 792 | — | — | — | 792 | — | ||||||
Interest accruals | 9 | — | — | — | 9 | — | ||||||
Total Rest of the World | 1,047 | 2 | 17 | 2 | 1,068 | — | ||||||
(1) | This column shows the amount by which exposures to counterparties are reduced by the existence of a legal right of set off (on the basis that the financial asset will be collected in accordance with its terms) and under master netting arrangements. The credit risk of financial assets subject to a master netting arrangement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled after the assets are realised. The extent to which the Group’s credit risk is reduced throught a master netting arrangement may change substantially within a short period following the balance sheet date because the exposure is affected by each transaction subject to the arrangement. |
108
Group | ||||||||||||
2005 | Loans and advances to banks and customers £m | Treasury bills, debt securities and equity shares £m | Derivatives £m | Settlement balances £m | Total £m | Netting(1) offset £m | ||||||
Total | ||||||||||||
Central and local government | 1,977 | 7,839 | 7 | 112 | 9,935 | 1,248 | ||||||
Manufacturing | 9,991 | 85 | 78 | — | 10,154 | 3,295 | ||||||
Construction | 6,741 | 27 | 28 | — | 6,796 | 3,189 | ||||||
Finance | 109,945 | 21,594 | 2,490 | 3,819 | 137,848 | 15,559 | ||||||
Service industry and business activities | 29,273 | 447 | 274 | — | 29,994 | 8,082 | ||||||
Agriculture, forestry and fishing | 2,410 | — | 2 | — | 2,412 | 786 | ||||||
Property | 20,146 | 59 | 96 | — | 20,301 | 4,283 | ||||||
Individuals | ||||||||||||
Home mortgages | 16,730 | — | 1 | — | 16,731 | 12,442 | ||||||
Other | 19,496 | 105 | — | — | 19,601 | 2,083 | ||||||
Finance leases and instalment credit | 854 | — | — | — | 854 | — | ||||||
Interest accruals | 406 | 186 | — | — | 592 | 2 | ||||||
217,969 | 30,342 | 2,976 | 3,931 | 255,218 | 50,969 | |||||||
(1) | This column shows the amount by which exposures to counterparties are reduced by the existence of a legal right of set off (on the basis that the financial asset will be collected in accordance with its terms) and under master netting arrangements. The credit risk of financial assets subject to a master netting arrangement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled after the assets are realised. The extent to which the Group’s credit risk is reduced throught a master netting arrangement may change substantially within a short period following the balance sheet date because the exposure is affected by each transaction subject to the arrangement. |
109
Notes on the accountscontinued
32 Financial instruments(continued)
Industry risk – geographical analysis(continued)
Bank | ||||||||||
2005 | Loans and advances to banks and customers £m | Treasury bills, debt securities and equity shares £m | Derivatives £m | Total £m | Netting(1) offset £m | |||||
UK | ||||||||||
Central and local government | 1,689 | — | 7 | 1,696 | 1,137 | |||||
Manufacturing | 6,737 | — | 78 | 6,815 | 2,249 | |||||
Construction | 4,108 | — | 28 | 4,136 | 842 | |||||
Finance | 53,440 | 48 | 742 | 54,230 | 219 | |||||
Service industry and business activities | 23,140 | — | 249 | 23,389 | 3,626 | |||||
Agriculture, forestry and fishing | 1,700 | — | 2 | 1,702 | 12 | |||||
Property | 14,397 | — | 96 | 14,493 | 981 | |||||
Individuals | ||||||||||
Home mortgages | 40 | — | 1 | 41 | — | |||||
Other | 13,434 | — | — | 13,434 | 2 | |||||
Interest accruals | 172 | — | — | 172 | — | |||||
Total UK | 118,857 | 48 | 1,203 | 120,108 | 9,068 | |||||
US | ||||||||||
Finance | 54 | — | — | 54 | — | |||||
Service industry and business activities | — | 3 | — | 3 | — | |||||
Interest accruals | 21 | — | — | 21 | — | |||||
Total US | 75 | 3 | — | 78 | — | |||||
Europe | ||||||||||
Finance | 1,133 | — | — | 1,133 | — | |||||
Interest accruals | 6 | — | — | 6 | — | |||||
Total Europe | 1,139 | — | — | 1,139 | — | |||||
Total | ||||||||||
Central and local government | 1,689 | — | 7 | 1,696 | 1,137 | |||||
Manufacturing | 6,737 | — | 78 | 6,815 | 2,249 | |||||
Construction | 4,108 | — | 28 | 4,136 | 842 | |||||
Finance | 54,627 | 48 | 742 | 55,417 | 219 | |||||
Service industry and business activities | 23,140 | 3 | 249 | 23,392 | 3,626 | |||||
Agriculture, forestry and fishing | 1,700 | — | 2 | 1,702 | 12 | |||||
Property | 14,397 | — | 96 | 14,493 | 981 | |||||
Individuals | ||||||||||
Home mortgages | 40 | — | 1 | 41 | — | |||||
Other | 13,434 | — | — | 13,434 | 2 | |||||
Interest accruals | 199 | — | — | 199 | — | |||||
120,071 | 51 | 1,203 | 121,325 | 9,068 | ||||||
(1) | This column shows the amount by which exposures to counterparties are reduced by the existence of a legal right of set off (on the basis that the financial asset will be collected in accordance with its terms) and under master netting arrangements. The credit risk of financial assets subject to a master netting arrangement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled after the assets are realised. The extent to which the Group’s credit risk is reduced throught a master netting arrangement may change substantially within a short period following the balance sheet date because the exposure is affected by each transaction subject to the arrangement. |
110
33 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December. Although the Group is exposed to credit risk in the event of non-performance of the obligations undertaken by customers, the amounts shown do not, and are not intended to, provide any indication of the Group’s expectation of future losses.
Group | Bank | |||||||
2005 £m | 2004 £m | 2005 £m | 2004 £m | |||||
Contingent liabilities: | ||||||||
Guarantees and assets pledged as collateral security | 2,768 | 2,800 | 2,295 | 2,437 | ||||
Other contingent liabilities | 2,967 | 2,900 | 2,248 | 2,445 | ||||
5,735 | 5,700 | 4,543 | 4,882 | |||||
Commitments: | ||||||||
Undrawn formal standby facilities, credit lines and other commitments to lend | ||||||||
– less than one year | 55,973 | 53,238 | 38,604 | 40,014 | ||||
– one year and over | 11,543 | 13,212 | 10,509 | 11,525 | ||||
Other commitments | 182 | 137 | 100 | 96 | ||||
67,698 | 66,587 | 49,213 | 51,635 | |||||
Banking commitments and contingent obligations, which have been entered into on behalf of customers and for which there are corresponding obligations from customers, are not included in assets and liabilities. The Group’s maximum exposure to credit loss, in the event of non-performance by the other party and where all counterclaims, collateral or security proves valueless, is represented by the contractual nominal amount of these instruments included in the table above. These commitments and contingent obligations are subject to the Group’s normal credit approval processes and any potential loss is taken into account in assessing provisions for bad and doubtful debts in accordance with the Group’s provisioning policy.
Contingent liabilities
Guarantees – the Group gives guarantees on behalf of customers. A financial guarantee represents an irrevocable undertaking that the Group will meet a customer’s obligations to third parties if the customer fails to do so. The maximum amount that the Group could be required to pay under a guarantee is its principal amount as disclosed in the table above. The Group expects most guarantees it provides to expire unused.
Other contingent liabilities – these include standby letters of credit, supporting customer debt issues and contingent liabilities relating to customer trading activities such as those arising from performance and customs bonds, warranties, indemnities and acceptances.
Commitments
Commitments to lend – under a loan commitment the Group agrees to make funds available to a customer in the future. Loan commitments, which are usually for a specified term may be unconditionally cancellable or may persist, provided all conditions in the loan facility are satisfied or waived. Commitments to lend include commercial standby facilities and credit lines, liquidity facilities to commercial paper conduits and unutilised overdraft facilities.
Other commitments – these include forward asset purchases, forward forward deposits placed and undrawn note issuance, revolving underwriting facilities, documentary credits and other short-term trade related transactions.
Regulatory enquiries and investigations – in the normal course of business the Group and its subsidiaries co-operate with regulatory authorities in various jurisdictions in their enquiries or investigations into alleged or possible breaches of regulations.
Additional contingent liabilities arise in the normal course of the Group’s business. It is not anticipated that any material loss will arise from these transactions.
Litigation
Proceedings, including a consolidated class action, have been brought in the United States against a large number of defendants, including the Group, following the collapse of Enron. The claims against the Group could be significant but are largely unquantified. The Group considers that it has substantial and credible legal and factual defences to these claims and it continues to defend them vigorously. A court ordered mediation commenced in September 2003 but no material progress has been made towards a resolution of the claims, although a number of other defendants have reached settlements in the principal class action. The Group is unable reliably to estimate the possible loss in relation to these matters or the effect that the possible loss might have on the Group’s consolidated net assets or its operating results or cash flows in any particular period. In addition, pursuant to requests received from the US Securities and Exchange Commission and the Department of Justice, the Group has provided copies of Enron-related materials to these authorities and has co-operated fully with them.
Members of the Group are engaged in other litigation in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against them arising in the ordinary course of business. The Group has reviewed these other actual, threatened and known potential claims and proceedings and, after consulting with its legal advisers, is satisfied that the outcome of these other claims and proceedings will not have a material adverse effect on its consolidated net assets, operating results or cash flows in any particular period.
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, the Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in the Group’s financial statements.
111
Notes on the accountscontinued
34 Net cash flows from operating activities
Group | Bank | |||||||||||
2005 | * | 2004 | * | 2005 | * | 2004 | * | |||||
£m | £m | £m | £m | |||||||||
Profit for the year | 3,411 | 3,230 | 2,315 | 2,382 | ||||||||
Decrease/(increase) in prepayments and accrued income | 988 | (11 | ) | 557 | (184 | ) | ||||||
Interest on subordinated liabilities | 304 | 202 | 283 | 193 | ||||||||
(Decrease)/increase in accruals and deferred income | (1,278 | ) | (776 | ) | (846 | ) | 261 | |||||
Provisions for impairment losses | 756 | 625 | 651 | 531 | ||||||||
Unwind of discount on impairment losses | (76 | ) | — | (61 | ) | — | ||||||
Loans and advances written-off net of recoveries | (762 | ) | (550 | ) | (715 | ) | (489 | ) | ||||
Profit on sale of property, plant and equipment | (51 | ) | (11 | ) | (39 | ) | (10 | ) | ||||
Profit on sale of subsidiaries and associates | (12 | ) | — | (221 | ) | — | ||||||
Profit on sale of investment securities | (327 | ) | (12 | ) | (320 | ) | (1 | ) | ||||
Charge for pensions | 149 | 133 | 97 | 96 | ||||||||
Pension contributions | (1,007 | ) | (53 | ) | (976 | ) | (30 | ) | ||||
Provisions utilised | (18 | ) | (25 | ) | (16 | ) | (19 | ) | ||||
Depreciation and amortisation | 382 | 462 | 326 | 402 | ||||||||
Other non-cash items | (2,405 | ) | 1,510 | 129 | (23 | ) | ||||||
Net cash inflow from trading activities | 54 | 4,724 | 1,164 | 3,109 | ||||||||
Increase in loans and advances to banks and customers | (24,532 | ) | (22,788 | ) | (4,182 | ) | (5,414 | ) | ||||
(Increase)/decrease in securities | (5,565 | ) | 44 | 1 | 329 | |||||||
(Increase)/decrease in other assets | (1,469 | ) | 72 | (625 | ) | (349 | ) | |||||
Decrease in derivative assets | 797 | 986 | 335 | 257 | ||||||||
Changes in operating assets | (30,769 | ) | (21,686 | ) | (4,471 | ) | (5,177 | ) | ||||
Increase in deposits by banks and customers | 49,683 | 10,497 | 9,815 | 6,244 | ||||||||
Increase/(decrease) in debt securities in issue | 5,724 | 450 | (1 | ) | (9 | ) | ||||||
Increase/(decrease) in other liabilities | 1,138 | 1,378 | 953 | (630 | ) | |||||||
Decrease in derivative liabilities | (951 | ) | (1,131 | ) | (286 | ) | (291 | ) | ||||
(Decrease)/increase in settlement balances and short positions | (652 | ) | 5,804 | — | — | |||||||
Changes in operating liabilities | 54,942 | 16,998 | 10,481 | 5,314 | ||||||||
Total income taxes paid | (1,170 | ) | (1,051 | ) | (662 | ) | (546 | ) | ||||
Net cash inflow/(outflow) from operating activities | 23,057 | (1,015 | ) | 6,512 | 2,700 | |||||||
35 Analysis of the net outflow of cash in respect of the purchase and sales of business interests and intangible assets
Group | Bank | |||||||||||
2005 £m | 2004 £m | 2005 £m | 2004 £m | |||||||||
Fair value given for business acquired | (238 | ) | (739 | ) | (217 | ) | (239 | ) | ||||
Cash and cash equivalents acquired | 25 | 15 | — | — | ||||||||
Non-cash consideration | 3 | — | — | — | ||||||||
Net outflow of cash in respect of purchases | (210 | ) | (724 | ) | (217 | ) | (239 | ) | ||||
Cash and cash equivalents in businesses sold | (2 | ) | — | — | — | |||||||
Other assets sold | 260 | 37 | 9 | 16 | ||||||||
Non-cash consideration | (25 | ) | — | — | — | |||||||
Profit on disposal | 12 | — | 221 | — | ||||||||
Net cash inflow on disposals | 245 | 37 | 230 | 16 | ||||||||
Dividends received from joint ventures | 7 | — | — | — | ||||||||
Net cash expenditure on other intangible assets | (210 | ) | (184 | ) | (180 | ) | (184 | ) | ||||
Net outflow | (168 | ) | (871 | ) | (167 | ) | (407 | ) | ||||
112
36 Interest received and paid
Group | Bank | ||||||||||
2005 £m | 2004 £m | 2005 £m | 2004 £m | ||||||||
Interest received | 8,475 | 7,322 | 5,621 | 5,265 | |||||||
Interest paid | (4,164 | ) | (2,970 | ) | (2,683 | ) | (2,313 | ) | |||
4,311 | 4,352 | 2,938 | 2,952 | ||||||||
37 Analysis of changes in financing during the year
Group | Bank | ||||||||||||||||||||||
Share capital | Subordinated liabilities | Share capital | Subordinated liabilities | ||||||||||||||||||||
2005 £m | 2004 £m | 2005 £m | 2004 £m | 2005 £m | 2004 £m | 2005 £m | 2004 £m | ||||||||||||||||
At 1 January | 3,388 | 3,412 | 5,808 | 5,743 | 3,388 | 3,412 | 4,747 | 5,376 | |||||||||||||||
Implementation of IAS 32 | (419 | ) | — | 530 | — | (419 | ) | — | 530 | — | |||||||||||||
At 1 January restated | 2,969 | 3,412 | 6,338 | 5,743 | 2,969 | 3,412 | 5,277 | 5,376 | |||||||||||||||
Net proceeds from issue of | |||||||||||||||||||||||
subordinated liabilities | — | — | 291 | 559 | — | — | — | — | |||||||||||||||
Repayment of subordinated liabilities | — | — | (210 | ) | (455 | ) | — | — | (210 | ) | (455 | ) | |||||||||||
Net cash (outflow)/inflow from financing | — | — | 81 | 104 | — | — | (210 | ) | (455 | ) | |||||||||||||
Acquisitions of subsidiaries | — | — | — | 153 | — | — | — | — | |||||||||||||||
Currency translation and other movements | — | (24 | ) | 229 | (192 | ) | — | (24 | ) | 434 | (174 | ) | |||||||||||
At 31 December | 2,969 | 3,388 | 6,648 | 5,808 | 2,969 | 3,388 | 5,501 | 4,747 | |||||||||||||||
38 Analysis of cash and cash equivalents
Group | Bank | ||||||||
2005 £m | 2004 £m | 2005 £m | 2004 £m | ||||||
At 1 January | |||||||||
– cash | 14,816 | 17,779 | 9,952 | 9,777 | |||||
– cash equivalents | 8,029 | 11,039 | 1,959 | 3,168 | |||||
Net cash inflow/(outflow) | 25,579 | (5,973 | ) | 6,677 | (1,034 | ) | |||
At 31 December | 48,424 | 22,845 | 18,588 | 11,911 | |||||
Comprising: | |||||||||
Cash and balances at central banks | 1,446 | 1,480 | 779 | 853 | |||||
Treasury bills and debt securities | 1 | — | — | — | |||||
Loans and advances to banks repayable on demand | 46,977 | 21,365 | 17,809 | 11,058 | |||||
Cash and cash equivalents | 48,424 | 22,845 | 18,588 | 11,911 | |||||
The Bank and certain subsidiary undertakings are required to maintain balances with the Central banks which, at 31 December 2005, amounted to £122 million (2004 – £111 million).
39 Net cashflow on discontinued operations
Group | |||||
2005 £m | 2004 £m | ||||
Net cashflow from operating activities | 194 | (66 | ) | ||
Net cashflow from investing activities | — | (1 | ) | ||
Net cashflow from financing activities | (194 | ) | 67 | ||
Cash and cash equivalents at 1 January and 31 December | — | — | |||
113
Notes on the accountscontinued
40 Segmental analysis
The directors manage the Group primarily by class of business and present the segmental analysis on that basis. Segments charge market prices for services rendered to other parts of the Group with the exception of Manufacturing and central resources. The expenditure incurred by Manufacturing relates to shared costs principally in respect of the Group's UK and Ireland banking operations. These costs reflect activities that are shared between the various customer-facing divisions and consequently cannot be directly attributed to individual divisions. Funding charges between segments are determined by Group Treasury, having regard to commercial demands.
(a) Classes of business
Group | |||||||||||||||||||||||||||||
Revenue | Total Income | ||||||||||||||||||||||||||||
2005 | External £m | Inter segment £m | Total £m | External £m | Inter segment £m | Total £m | Operating expenses £m | Depreciation and amortisation £m | Provisions £m | Operating profit before tax £m | |||||||||||||||||||
Corporate Markets | 4,135 | 1,003 | 5,138 | 3,124 | (259 | ) | 2,865 | (797 | ) | (7 | ) | (8 | ) | 2,053 | |||||||||||||||
Retail Banking | 4,038 | 1,301 | 5,339 | 3,243 | (40 | ) | 3,203 | (580 | ) | (5 | ) | (452 | ) | 2,166 | |||||||||||||||
Retail Direct | 1,916 | — | 1,916 | 982 | (22 | ) | 960 | (296 | ) | (2 | ) | (209 | ) | 453 | |||||||||||||||
Wealth Management | 1,102 | 2 | 1,104 | 508 | (1 | ) | 507 | (276 | ) | (13 | ) | (6 | ) | 212 | |||||||||||||||
Ulster Bank | 1,763 | 25 | 1,788 | 860 | (2 | ) | 858 | (246 | ) | (24 | ) | (58 | ) | 530 | |||||||||||||||
Manufacturing | 45 | 6 | 51 | 26 | (30 | ) | (4 | ) | (1,550 | ) | (57 | ) | — | (1,611 | ) | ||||||||||||||
Central items | 64 | 438 | 502 | (646 | ) | 354 | (292 | ) | (254 | ) | (137 | ) | (19 | ) | (702 | ) | |||||||||||||
Eliminations | — | (2,775 | ) | (2,775 | ) | — | — | — | — | — | — | — | |||||||||||||||||
Continuing operations | 13,063 | — | 13,063 | 8,097 | — | 8,097 | (3,999 | ) | (245 | ) | (752 | ) | 3,101 | ||||||||||||||||
Discontinued operations | 246 | — | 246 | 221 | — | 221 | (70 | ) | — | (4 | ) | 147 | |||||||||||||||||
Amortisation of | |||||||||||||||||||||||||||||
intangibles | — | — | — | — | — | — | — | (6 | ) | — | (6 | ) | |||||||||||||||||
Integration costs | — | — | — | — | — | — | (32 | ) | (131 | ) | — | (163 | ) | ||||||||||||||||
Net gain on sale of | |||||||||||||||||||||||||||||
strategic investments | 332 | — | 332 | 332 | — | 332 | — | — | — | 332 | |||||||||||||||||||
Operating profit before tax | 13,641 | — | 13,641 | 8,650 | — | 8,650 | (4,101 | ) | (382 | ) | (756 | ) | 3,411 | ||||||||||||||||
2004 | |||||||||||||||||||||||||||||
Corporate Markets | 3,822 | 913 | 4,735 | 2,949 | (366 | ) | 2,583 | (647 | ) | (5 | ) | (140 | ) | 1,791 | |||||||||||||||
Retail Banking | 3,457 | 1,263 | 4,720 | 2,805 | 136 | 2,941 | (627 | ) | (3 | ) | (287 | ) | 2,024 | ||||||||||||||||
Retail Direct | 1,817 | 1 | 1,818 | 962 | (19 | ) | 943 | (257 | ) | (1 | ) | (160 | ) | 525 | |||||||||||||||
Wealth Management | 865 | 1 | 866 | 465 | (2 | ) | 463 | (268 | ) | (29 | ) | (2 | ) | 164 | |||||||||||||||
Ulster Bank | 1,315 | 19 | 1,334 | 747 | (4 | ) | 743 | (207 | ) | (22 | ) | (40 | ) | 474 | |||||||||||||||
Manufacturing | 16 | 8 | 24 | 22 | (25 | ) | (3 | ) | (1,401 | ) | (119 | ) | — | (1,523 | ) | ||||||||||||||
Central items | 109 | 356 | 465 | (205 | ) | 280 | 75 | (221 | ) | (6 | ) | (1 | ) | (153 | ) | ||||||||||||||
Eliminations | — | (2,561 | ) | (2,561 | ) | — | — | — | — | — | — | — | |||||||||||||||||
Continuing operations | 11,401 | — | 11,401 | 7,745 | — | 7,745 | (3,628 | ) | (185 | ) | (630 | ) | 3,302 | ||||||||||||||||
Discontinued operations | 302 | — | 302 | 278 | — | 278 | (52 | ) | (1 | ) | 5 | 230 | |||||||||||||||||
Amortisation of intangibles | — | — | — | — | — | — | — | (5 | ) | — | (5 | ) | |||||||||||||||||
Integration costs | — | — | — | — | — | — | (26 | ) | (271 | ) | — | (297 | ) | ||||||||||||||||
Operating profit before tax | 11,703 | — | 11,703 | 8,023 | — | 8,023 | (3,706 | ) | (462 | ) | (625 | ) | 3,230 | ||||||||||||||||
2005 | 2004 | |||||||||||
Group | Assets £m | Liabilities £m | Cost to acquire fixed assets and intangible assets £m | Assets £m | Liabilities £m | Cost to acquire fixed assets and intangible assets £m | ||||||
Corporate Markets | 143,814 | 128,214 | 80 | 101,948 | 88,541 | 8 | ||||||
Retail Banking | 48,282 | 56,967 | — | 46,619 | 51,649 | 1 | ||||||
Retail Direct | 5,551 | 749 | 46 | 4,974 | 958 | 63 | ||||||
Wealth Management | 19,585 | 18,802 | 17 | 12,219 | 15,787 | 9 | ||||||
Ulster Bank | 39,249 | 37,026 | 77 | 28,273 | 26,831 | 564 | ||||||
Manufacturing | 1,876 | 509 | 328 | 1,915 | 202 | 356 | ||||||
Central items | 2,246 | 8,152 | — | 1,273 | 4,836 | — | ||||||
Group | 260,603 | 250,419 | 548 | 197,221 | 188,804 | 1,001 | ||||||
Segmental analysis of goodwill is as follows:
Group | |||||||||||
Corporate Markets £m | Retail Direct £m | Wealth Management £m | Ulster Bank £m | Total £m | |||||||
At 1 January 2005 | 98 | 69 | 147 | 425 | 739 | ||||||
Currency translation and other adjustments | 10 | (2 | ) | (4 | ) | (11 | ) | (7 | ) | ||
Arising on acquisitions during the year | - | 40 | - | - | 40 | ||||||
Disposals | - | - | (12 | ) | - | (12 | ) | ||||
At 31 December 2005 | 108 | 107 | 131 | 414 | 760 | ||||||
Note: Accumulated amortisation and impairment at 31 December 2005 and 2004 was nil. |
(b) Geographical segments
The geographical analyses in the tables below have been compiled on the basis of location of office where the transactions are recorded
Group | ||||||||||
2005 | UK £m | USA £m | Europe £m | Rest of the world £m | Total £m | |||||
Net interest income | 3,858 | 12 | 578 | 13 | 4,461 | |||||
Fees and commissions (net) | 2,308 | 157 | 208 | 73 | 2,746 | |||||
Income from trading activities | (5 | ) | 777 | 33 | 3 | 808 | ||||
Other operating income | 493 | 45 | 97 | — | 635 | |||||
Total income | 6,654 | 991 | 916 | 89 | 8,650 | |||||
Operating profit before tax | 2,522 | 560 | 297 | 32 | 3,411 | |||||
Total assets | 138,574 | 74,162 | 44,673 | 3,194 | 260,603 | |||||
Total liabilities | 133,341 | 72,218 | 41,787 | 3,073 | 250,419 | |||||
Net assets attributable to equity shareholders and minority interests | 5,233 | 1,944 | 2,886 | 121 | 10,184 | |||||
Contingent liabilities and commitments | 58,025 | 6,231 | 9,177 | — | 73,433 | |||||
Cost to acquire property, plant and equipment and intangible assets | 368 | 29 | 144 | 7 | 548 | |||||
2004 | ||||||||||
Net interest income | 3,790 | 12 | 568 | 13 | 4,383 | |||||
Fees and commissions (net) | 2,175 | 94 | 225 | 58 | 2,552 | |||||
Income from trading activities | 148 | 720 | 15 | 4 | 887 | |||||
Other operating income | 149 | 29 | 22 | 1 | 201 | |||||
Total income | 6,262 | 855 | 830 | 76 | 8,023 | |||||
Operating profit before tax | 2,443 | 450 | 309 | 28 | 3,230 | |||||
Total assets | 107,089 | 58,481 | 29,722 | 1,929 | 197,221 | |||||
Total liabilities | 101,451 | 57,369 | 28,069 | 1,915 | 188,804 | |||||
Net assets attributable to equity shareholders and minority interests | 5,638 | 1,112 | 1,653 | 14 | 8,417 | |||||
Contingent liabilities and commitments | 60,174 | 4,190 | 7,923 | — | 72,287 | |||||
Cost to acquire property, plant and equipment and intangible assets | 367 | 8 | 626 | — | 1,001 | |||||
Notes on the accountscontinued
41 Directors’ and key management remuneration
The current directors of the Bank are also directors of the ultimate holding company and are remunerated for their services to the RBS Group as a whole. The remuneration of the directors is disclosed in the Report and Accounts of the RBS Group. Pensions paid to former directors of the Bank and their dependents amounted to £308,000 (2004 – £294,000).
Compensation of key management
The aggregate remuneration of directors and other members of key management during the year was as follows:
RBS Group | |||
2005 £000 | 2004 £000 | ||
Short-term benefits | 26,180 | 23,652 | |
Post-employment benefits | 9,383 | 5,298 | |
Other long-term | 4,215 | — | |
Share-based payments | 1,568 | 5,200 | |
41,346 | 34,150 | ||
42 Transactions with directors, officers and others
(a) | At 31 December 2005, the amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in the Group, as defined by UK Law, were £17,917 in respect of loans to five persons who were directors of the company (or persons connected with them) at any time during the financial period and £9,549,650 to 48 people who were officers of the company at any time during the financial period. |
(b) | For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the Bank and members of the RBS Group’s Group Executive Management Committee. The captions in the primary financial statements include the following amounts attributable, in aggregate, to key management: |
2005 £000 | 2004 £000 | ||
Loans and advances to customers | 1,035 | 899 | |
Customer accounts | 378 | 493 | |
Key management have banking relationships with Group entities which are entered into in the normal course of business. |
Key management had no reportable transactions or balances with the company except for dividends. |
43 Related parties
(a) | Group companies provide development and other types of capital support to businesses in their roles as providers of finance. These investments are made in the normal course of business and on arm’s-length terms. In some instances, the investment may extend to ownership or control over 20% or more of the voting rights of the investee company. However, these investments are not considered to give rise to transactions of a materiality requiring disclosure under IAS 24. |
(b) | The Group recharges The Royal Bank of Scotland Group Pension Fund with the cost of administration services incurred by it. The amounts involved are not material to the Group. |
(c) | In accordance with IAS 24, transactions or balances between Group entities that have been eliminated on consolidation are not reported. |
(d) | The captions in the primary financial statements of the Bank include amounts attributable to subsidiaries. These amounts have been disclosed in aggregate in the relevant notes to the financial statements. The table below discloses items included in income and operating expenses on transactions between the Group and fellow subsidiaries of the RBS Group. |
2005 £000 | 2004 £000 | ||
Income | |||
Interest receivable | 1,112 | 901 | |
Interest payable | 367 | 248 | |
Fees and commissions receivable | 94 | 102 | |
Fees and commissions payable | 100 | 76 | |
Expenses | |||
Other administrative expenses | 1,529 | 1,384 | |
116
44 Transition to IFRS
(1) Significant differences between the Group’s UK GAAP accounting policies applied in its 2004 financial statements and its IFRS accounting policies
UK GAAP | IFRS | |
(a) Goodwill | ||
Goodwill arising on acquisitions is capitalised and amortised over its estimated useful economic life. Goodwill is reviewed for impairment at the end of the first full year following an acquisition and subsequently if events or changes in circumstances indicated that its carrying value might not be recoverable, | Goodwill is recorded at cost less any accumulated impairment losses. Goodwill is tested annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. The carrying amount of goodwill in the Group's opening IFRS balance sheet (as at 1 January 2004) was £273 million, its carrying value under UK GAAP as at 31 December 2003. | |
(b) Intangibles other than goodwill | ||
Computer software development costs | ||
Most computer software development costs are written off as incurred. | Computer software development costs are capitalised if they create an identifiable intangible asset. They are amortised over their estimated useful life of three years. Net computer software development costs of £587 million were recognised on transition to IFRS. | |
Other intangibles | ||
An intangible asset acquired in a business combination is capitalised separately from goodwill only if it can be disposed of separately from the revenue-earning activity to which it contributes and its value can be measured reliably. | An intangible asset is recognised as an asset separately from goodwill if it is separable or if it arises from contractual or other legal rights regardless of whether these rights are transferable or separable. Core deposit intangibles of £24 million and other intangibles of £30 million were recognised in business combinations that took place in 2004. | |
(c) Leasing | ||
Finance lease income is recognised so as to give a level rate of return on the net cash investment in the lease; tax cash flows are taken into account in allocating income. | IFRS requires a level rate of return on the net investment in the lease. Tax cash flows are not reflected in the pattern of income recognition. | |
Assets held under operating leases are depreciated on a straight-line or reverse-annuity basis. | Assets held on operating leases are depreciated on a straight-line basis. | |
(d) Dividends | ||
Dividends payable on ordinary shares are recorded in the period to which they relate. | Dividends are recorded in the period in which they are declared. | |
(e) Consolidation | ||
UK GAAP requires consolidation of entities controlled by the reporting entity. Control is the ability to direct the financial and operating policies of an entity. | All entities controlled by the Group are consolidated together with special purpose entities (SPEs) where the substance of the relationship between the reporting entity and the SPE indicates that it is controlled by the reporting entity. | |
117
Notes on the accountscontinued
44 Transition to IFRS(continued)
UK GAAP | IFRS | |
(f) Associates and joint ventures | ||
An associate is an entity in which the reporting entity holds a participating interest and over whose operating and financial policies it exercises a significant influence in practice. A joint venture is an entity in which the reporting entity in practice shares control with other investors. Associates are accounted for using the equity method and joint ventures using the gross equity method. | The definitions of associate and joint venture are similar to those in UK GAAP. However, significant influence is defined as the power to participate in the financial and operating policies of the associate. A joint venture is an entity where the strategic financial and operating decisions require the unanimous consent of the parties sharing control. Associates are accounted for using the equity method. The Group proportionately consolidates its joint ventures. | |
(g) Property, plant and equipment | ||
The Group's freehold and long leasehold property occupied for its own use is recorded at valuation on the basis of existing use value. | The Group's freehold and long leasehold property occupied for its own use is recorded at cost less depreciation. | |
The Group has elected to use the UK GAAP valuation as at 31 December 2003 as deemed cost for freehold and long leasehold property occupied for its own use in its opening IFRS balance sheet (1 January 2004). | ||
(h) Investment property | ||
Investment property is revalued annually to open market value and changes in market value reflected in the Statement of total recognised gains and losses. | Investment property is stated at fair value. Any gain or loss arising from a change in fair value is recognised in profit or loss. | |
(i) Pensions | ||
Pension scheme assets are measured at fair value using mid-market prices. | Pension scheme assets are measured at fair value using bid prices. | |
The profit and loss account reflects the current and past service costs, and the interest or discount unwind attributable to the assets and liabilities of the fund. | The income statement reflects the current and past service costs, and the cumulative excess actuarial gains and losses amortised over the expected average remaining lives of participating employees. Excess gains and losses are those exceeding 10% of the higher of the gross assets or liabilities of the scheme. | |
Actuarial gains and losses representing other movements in the net pension asset or liability are recognised in the statement of total recognised gains and losses. | Any surplus or deficit of scheme assets over liabilities adjusted for unrecognised actuarial gains and losses and past service costs is recognised in the balance sheet as an asset (surplus) or liability (deficit). | |
(j) Income tax | ||
Deferred tax is not accounted for in relation to revaluations of fixed assets where there is no commitment to dispose of the asset or in relation to taxable gains or losses on sales of fixed assets that are rolled over into the tax cost of replacement fixed assets. | Deferred tax is provided on fixed asset revaluations and on taxable gains and losses on fixed asset sales rolled over into the tax cost of replacement assets. |
118
UK GAAP | IFRS | |
(k) Cash flow statements | ||
Cash comprises cash and balances with central banks and loans and advances to banks repayable on demand. | Cash and cash equivalents comprise cash on hand and demand deposits with banks together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value. | |
Under UK GAAP, cash flows are classified under the following headings: • operating activities • dividends from joint ventures and associates • returns on investments and servicing of finance • taxation • capital expenditure and financial investment • acquisitions and disposals • ordinary equity dividends paid • financing | Under IFRS cash flows are classified into operating, investing and financing activities. | |
Implementation of IAS 32, IAS 39 and IFRS 4 | ||
UK GAAP | IFRS | |
(l) Financial instruments: financial assets | ||
Loans are measured at cost less provisions for bad and doubtful debts, derivatives held for trading are carried at fair value and hedging derivatives are accounted for in accordance with the treatment of the item being hedged (see Derivatives and hedging below). Debt securities and equity shares intended for use on a continuing basis in the Group's activities are classified as investment securities and are stated at cost less provision for any permanent diminution in value. The cost of dated investment securities is adjusted for the amortisation of premiums or discounts. Other debt securities and equity shares are carried at fair value. | Under IAS 39, financial assets are classified into held-to-maturity; available-for-sale; held for trading; designated as at fair value through profit or loss; and loans and receivables. Financial assets classified as held-to-maturity or as loans and receivables are carried at amortised cost. Other financial assets are measured at fair value. Changes in the fair value of available-for-sale financial assets are reported in a separate component of shareholders' equity. Changes in the fair value of financial assets held-for-trading or designated as at fair value are taken to profit or loss. Financial assets can be classified as held-to-maturity only if they have a fixed maturity and the reporting entity has the positive intention and ability to hold to maturity. Trading financial assets are held for the purpose of selling in the near term. IFRS allows any financial asset to be designated as at fair value through profit or loss on initial recognition. Unquoted debt financial assets that are not classified as held-to-maturity, held for trading or designated as fair value through profit or loss are categorised as loans and receivables. All other financial assets are classified as available-for-sale. | |
(m) Financial instruments: financial liabilities | ||
Under UK GAAP, short positions in securities and trading derivatives are carried at fair value; all other financial liabilities are recorded at amortised cost. | IAS 39 requires all financial liabilities to be measured at amortised cost except those held for trading and those that were designated as at fair value through profit or loss on initial recognition. |
119
Notes on the accountscontinued
44 Transition to IFRS(continued)
UK GAAP | IFRS | |
(n) Liabilities and equity | ||
Under UK GAAP, all shares are classified as shareholders' funds. An analysis of shareholders' funds between equity and non-equity interests is given. | There is no concept of non-equity shares in IFRS. Instruments are classified between equity and liabilities in accordance with the substance of the contractual arrangements. A non-derivative instrument is classified as equity if it does not include a contractual obligation either to deliver cash or to exchange financial instruments with another entity under potentially unfavourable conditions, and, if the instrument will or may be settled by the issue of equity, settlement does not involve the issue of a variable number of shares. On implementation of IAS 32, non-equity shares with a balance sheet value of £419 million were reclassified as liabilities. | |
(o) Effective interest rate and lending fees | ||
Under UK GAAP, loan origination fees are recognised when received unless they are charged in lieu of interest. | IAS 39 requires the amortised cost of a financial instrument to be calculated using the effective interest method. The effective interest rate is the rate that discounts estimated future cash flows over an instrument's expected life to its net carrying value. It takes into account all fees and points paid that are an integral part of the yield, transaction costs and all other premiums and discounts. On implementation of IAS 39, the carrying value of financial assets was reduced by £256 million and financial liabilities increased by £81 million, deferred tax was reduced by £101 million and shareholder's equity reduced by £236 million. | |
(p) Derivatives and hedging | ||
Under UK GAAP non-trading derivatives are accounted for on an accruals basis in accordance with the accounting treatment of the underlying transaction or transactions being hedged. If a non-trading derivative transaction is terminated or ceases to be an effective hedge, it is re-measured at fair value and any gain or loss amortised over the remaining life of the underlying transaction or transactions being hedged. If a hedged item is derecognised the related non-trading derivative is remeasured at fair value and any gain or loss taken to the income statement. | Under IAS 39, all derivatives are measured at fair value. Hedge accounting is permitted for three types of hedge relationship: fair value hedge - the hedge of changes in the fair value of a recognised asset or liability or firm commitment; cash flow hedge - the hedge of variability in cash flows from a recognised asset or liability or a forecasted transaction; and the hedge of a net investment in a foreign entity. In a fair value hedge the gain or loss on the derivative is recognised in profit or loss as it arises offset by the corresponding gain or loss on the hedged item attributable to the risk hedged. In a cash flow hedge and in the hedge of a net investment in a foreign entity, the element of the derivative's gain or loss that is an effective hedge is recognised directly in equity. The ineffective element is taken to the income statement. Certain conditions must be met for a relationship to qualify for hedge accounting. These include designation, documentation and prospective and actual hedge effectiveness. On implementation of IAS 39, non-trading derivatives were remeasured at fair value. | |
Embedded derivatives are not bifurcated from the host contract. | A derivative embedded in a contract is accounted for as a stand-alone derivative if its economic characteristics are not closely related to the economic characteristics of the host contract, unless the entire contract is carried at fair value through profit or loss. | |
120
UK GAAP | IFRS | |
(q) Loan impairment | ||
Under UK GAAP provisions for bad and doubtful debts are made so as to record impaired loans at their ultimate net realisable value. Specific provisions are established against individual advances or portfolios of smaller balance homogeneous advances and the general provision covers advances impaired at the balance sheet date but which have not been identified as such. Interest receivable from loans and advances is credited to the income statement as it accrues unless there is significant doubt that it can be collected. | IFRS require impairment losses on financial assets carried at amortised cost to be measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the asset's original effective interest rate. There is no concept of specific and general provision - under IFRS impairment is assessed individually for individually significant assets but can be assessed collectively for other assets. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment. | |
(r) Offset | ||
Under UK GAAP an intention to settle net is not a requirement for set off; the entity must have the ability to insist on net settlement and that ability is assured beyond doubt. | For a financial asset and a financial liability to be offset, IFRS require that an entity must intend to settle on a net basis or to realise the asset and settle the liability simultaneously. On implementation of IAS 32, the balance sheet value of financial assets and financial liabilities increased by £34 billion. | |
(s) Linked presentation | ||
FRS 5 'Reporting the Substance of Transactions' allows qualifying transactions to be presented using the linked presentation. | There is no linked presentation under IFRS. If substantially all the risks and rewards have been retained, the gross assets and related funding are presented separately. | |
(t) Extinguishment of liabilities | ||
Under UK GAAP, recognition of a financial liability ceases once any transfer of economic benefits to the creditor is no longer likely. | A financial liability is removed from the balance sheet when, and only when, it is extinguished i.e. when the obligation specified in the contract is discharged or cancelled or expires. | |
121
Notes on the accounts continued
44 Transition to IFRS(continued)
(2) Analysis of IFRS adjustments, excluding IAS 32, IAS 39 and IFRS 4
Opening balance sheet at 1 January 2004 – Group
UK GAAP £m | Income tax £m | Leases £m | Consolidation £m | Software development costs £m | Employee benefits £m | Banc- assurance £m | Goodwill £m | Other £m | Total adjustments £m | IFRS £m | |||||||||||||||||||
Assets | |||||||||||||||||||||||||||||
Cash and balances at | |||||||||||||||||||||||||||||
central banks | 1,112 | — | — | — | — | — | — | — | — | — | 1,112 | ||||||||||||||||||
Treasury bills and other | |||||||||||||||||||||||||||||
eligible bills | 541 | — | — | — | — | — | — | — | — | — | 541 | ||||||||||||||||||
Loans and advances | |||||||||||||||||||||||||||||
to banks | 37,667 | — | — | — | — | — | — | — | — | — | 37,667 | ||||||||||||||||||
Loans and advances | |||||||||||||||||||||||||||||
to customers | 102,572 | — | (29 | ) | 343 | — | — | — | — | — | 314 | 102,886 | |||||||||||||||||
Debt securities | 21,727 | — | — | — | — | — | 21 | — | — | 21 | 21,748 | ||||||||||||||||||
Equity shares | 1,072 | — | — | — | — | — | 44 | — | — | 44 | 1,116 | ||||||||||||||||||
Intangible assets | 273 | — | — | — | 646 | — | — | (16 | ) | — | 630 | 903 | |||||||||||||||||
Property, plant and | |||||||||||||||||||||||||||||
equipment | 1,523 | — | — | — | (59 | ) | — | — | — | — | (59 | ) | 1,464 | ||||||||||||||||
Settlement balances | 2,136 | — | — | — | — | — | — | — | — | — | 2,136 | ||||||||||||||||||
Derivatives at fair value | 2,352 | — | — | — | — | — | — | — | — | — | 2,352 | ||||||||||||||||||
Prepayments, accrued | |||||||||||||||||||||||||||||
income and other assets | 1,898 | — | — | 5 | — | 14 | (65 | ) | — | 194 | 148 | 2,046 | |||||||||||||||||
Total assets | 172,873 | — | (29 | ) | 348 | 587 | 14 | — | (16 | ) | 194 | 1,098 | 173,971 | ||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||
Deposits by banks | 18,501 | — | — | — | — | — | — | — | — | — | 18,501 | ||||||||||||||||||
Customer accounts | 116,569 | — | — | — | — | — | — | — | — | — | 116,569 | ||||||||||||||||||
Debt securities in issue | 2,112 | — | — | 344 | — | — | — | — | — | 344 | 2,456 | ||||||||||||||||||
Settlement balances and | |||||||||||||||||||||||||||||
short positions | 14,464 | — | — | — | — | — | — | — | — | — | 14,464 | ||||||||||||||||||
Derivatives at fair value | 2,236 | — | — | — | — | — | — | — | — | — | 2,236 | ||||||||||||||||||
Accruals, deferred income | |||||||||||||||||||||||||||||
and other liabilities | 3,990 | — | (1 | ) | 4 | — | 1 | — | — | — | 4 | 3,994 | |||||||||||||||||
Retirement benefit liabilities | 118 | — | — | — | — | 1,878 | — | — | — | 1,878 | 1,996 | ||||||||||||||||||
Deferred taxation liabilities | 99 | 120 | (7 | ) | — | 176 | (582 | ) | — | — | 194 | (99 | ) | — | |||||||||||||||
Subordinated liabilities | 5,743 | — | — | — | — | — | — | — | — | — | 5,743 | ||||||||||||||||||
Minority interests | 3 | — | — | — | — | — | — | — | — | — | 3 | ||||||||||||||||||
Shareholders' equity | 9,038 | (120 | ) | (21 | ) | — | 411 | (1,283 | ) | — | (16 | ) | — | (1,029 | ) | 8,009 | |||||||||||||
Total liabilities and equity | 172,873 | — | (29 | ) | 348 | 587 | 14 | — | (16 | ) | 194 | 1,098 | 173,971 | ||||||||||||||||
122
Opening balance sheet at 1 January 2004 – Bank
UK GAAP £m | Dividends £m | Income tax £m | Software development costs £m | Employee benefits £m | Other £m | Total adjustments £m | IFRS £m | |||||||||||||||
Assets | ||||||||||||||||||||||
Cash and balances at central banks | 901 | — | — | — | — | — | — | 901 | ||||||||||||||
Treasury bills and other eligible bills | 95 | — | — | — | — | — | — | 95 | ||||||||||||||
Loans and advances to banks | 17,517 | — | — | — | — | — | — | 17,517 | ||||||||||||||
Loans and advances to customers | 71,927 | — | — | — | — | — | — | 71,927 | ||||||||||||||
Debt securities | 446 | — | — | — | — | — | — | 446 | ||||||||||||||
Equity shares | 353 | — | — | — | — | — | — | 353 | ||||||||||||||
Investment in Group undertakings | 8,587 | — | — | — | — | (2,407 | ) | (2,407 | ) | 6,180 | ||||||||||||
Intangible assets | — | — | — | 604 | — | — | 604 | 604 | ||||||||||||||
Property, plant and equipment | 1,155 | — | — | — | — | — | — | 1,155 | ||||||||||||||
Derivatives at fair value | 961 | — | — | — | — | — | — | 961 | ||||||||||||||
Prepayments, accrued income and other assets | 1,074 | (231 | ) | — | — | 14 | 300 | 83 | 1,157 | |||||||||||||
Total assets | 103,016 | (231 | ) | — | 604 | 14 | (2,107 | ) | (1,720) | 101,296 | ||||||||||||
Liabilities | ||||||||||||||||||||||
Deposits by banks | 3,378 | — | — | — | — | — | — | 3,378 | ||||||||||||||
Customer accounts | 81,932 | — | — | — | — | — | — | 81,932 | ||||||||||||||
Debt securities in issue | 48 | — | — | — | — | — | — | 48 | ||||||||||||||
Derivatives at fair value | 574 | — | — | — | — | — | — | 574 | ||||||||||||||
Accruals, deferred income and other liabilities | 2,580 | — | — | — | (6 | ) | (1 | ) | (7 | ) | 2,573 | |||||||||||
Retirement benefit liabilities | — | — | — | — | 1,854 | — | 1,854 | 1,854 | ||||||||||||||
Deferred taxation liabilities | — | — | 66 | 181 | (552 | ) | 305 | — | — | |||||||||||||
Subordinated liabilities | 5,376 | — | — | — | — | — | — | 5,376 | ||||||||||||||
Shareholders' equity | 9,128 | (231 | ) | (66 | ) | 423 | (1,282 | ) | (2,411 | ) | (3,567 | ) | 5,561 | |||||||||
Total liabilities and equity | 103,016 | (231 | ) | — | 604 | 14 | (2,107 | ) | (1,720) | 101,296 | ||||||||||||
Reconciliation of shareholders’ funds as at 1 January 2004 | Group £m | Bank £m | ||||||||||||||||||||
UK GAAP shareholders' funds | 9,038 | 9,128 | ||||||||||||||||||||
Standards applicable to all periods: | ||||||||||||||||||||||
Valuation of subsidiaries and associates | — | (2,411 | ) | |||||||||||||||||||
Proposed dividends | — | (231 | ) | |||||||||||||||||||
Employee benefits | (1,833 | ) | (1,832 | ) | ||||||||||||||||||
Software development costs | 587 | 604 | ||||||||||||||||||||
Other | (44 | ) | — | |||||||||||||||||||
Tax effect on adjustments | 381 | 369 | ||||||||||||||||||||
Deferred tax | (120 | ) | (66 | ) | ||||||||||||||||||
Shareholders' funds under IFRS | 8,009 | 5,561 | ||||||||||||||||||||
123
Notes on the accounts continued
44 Transition to IFRS(continued)
Balance sheet at 31 December 2004 – Group
UK GAAP £m | Income tax £m | Property plant and equipment £m | Leases £m | Consolidation £m | Software development costs £m | Employee benefits £m | Banc- assurance £m | Goodwill £m | Other £m | Total adjustments £m | IFRS £m | ||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||
Cash and balances at central banks | 1,589 | — | — | — | — | — | — | — | — | — | — | 1,589 | |||||||||||||||||||
Treasury bills and other eligible bills | 172 | — | — | — | — | — | — | — | — | — | — | 172 | |||||||||||||||||||
Loans and advances to banks | 29,982 | — | — | — | — | — | — | — | — | — | — | 29,982 | |||||||||||||||||||
Loans and advances to customers | 131,353 | — | — | (16 | ) | 342 | — | — | — | — | — | 326 | 131,679 | ||||||||||||||||||
Debt securities | 22,407 | — | — | — | — | — | — | 19 | — | — | 19 | 22,426 | |||||||||||||||||||
Equity shares | 1,300 | — | — | — | — | — | — | 38 | — | — | 38 | 1,338 | |||||||||||||||||||
Intangible assets | 766 | — | — | — | — | 458 | — | — | 20 | — | 478 | 1,244 | |||||||||||||||||||
Property, plant and equipment | 1,694 | — | (35 | ) | (3 | ) | — | (114 | ) | — | — | — | — | (152 | ) | 1,542 | |||||||||||||||
Settlement balances | 3,538 | — | — | — | — | — | — | — | — | — | — | 3,538 | |||||||||||||||||||
Derivatives at fair value | 1,366 | — | — | — | — | — | — | — | — | — | — | 1,366 | |||||||||||||||||||
Prepayments, accrued income | |||||||||||||||||||||||||||||||
and other assets | 2,098 | — | — | 3 | 4 | — | 20 | (57 | ) | — | 277 | 247 | 2,345 | ||||||||||||||||||
Total assets | 196,265 | — | (35 | ) | (16 | ) | 346 | 344 | 20 | — | 20 | 277 | 956 | 197,221 | |||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||
Deposits by banks | 23,873 | — | — | — | — | — | — | — | — | — | — | 23,873 | |||||||||||||||||||
Customer accounts | 126,119 | — | — | — | — | — | — | — | — | — | — | 126,119 | |||||||||||||||||||
Debt securities in issue | 3,255 | — | — | — | 342 | — | — | — | — | — | 342 | 3,597 | |||||||||||||||||||
Settlement balances and | |||||||||||||||||||||||||||||||
short positions | 21,670 | — | — | — | — | — | — | — | — | — | — | 21,670 | |||||||||||||||||||
Derivatives at fair value | 1,105 | — | — | — | — | — | — | — | — | — | — | 1,105 | |||||||||||||||||||
Accruals, deferred income | |||||||||||||||||||||||||||||||
and other liabilities | 4,535 | — | — | — | 4 | — | — | — | — | — | 4 | 4,539 | |||||||||||||||||||
Retirement benefit liabilities | 243 | — | — | — | — | — | 1,850 | — | — | — | 1,850 | 2,093 | |||||||||||||||||||
Deferred taxation liabilities | 111 | 120 | — | (4 | ) | — | 103 | (607 | ) | — | — | 277 | (111 | ) | — | ||||||||||||||||
Subordinated liabilities | 5,808 | — | — | — | — | — | — | — | — | — | — | 5,808 | |||||||||||||||||||
Minority interests | 408 | — | — | — | — | — | — | — | — | — | — | 408 | |||||||||||||||||||
Shareholders' equity | 9,138 | (120 | ) | (35 | ) | (12 | ) | — | 241 | (1,223 | ) | — | 20 | — | (1,129 | ) | 8,009 | ||||||||||||||
Total liabilities and equity | 196,265 | — | (35 | ) | (16 | ) | 346 | 344 | 20 | — | 20 | 277 | 956 | 197,221 | |||||||||||||||||
124
Balance sheet at 31 December 2004 – Bank
UK GAAP £m | Dividends £m | Income Tax £m | Property plant and equipment £m | Software development costs £m | Employee benefits £m | Other £m | Total adjustments £m | IFRS £m | ||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash and balances at central banks | 956 | — | — | — | — | — | — | — | 956 | |||||||||||||||
Loans and advances to banks | 15,994 | — | — | — | — | — | — | — | 15,994 | |||||||||||||||
Loans and advances to customers | 77,619 | — | — | — | — | — | — | — | 77,619 | |||||||||||||||
Debt securities | 39 | — | — | — | — | — | — | — | 39 | |||||||||||||||
Equity shares | 587 | — | — | — | — | — | — | — | 587 | |||||||||||||||
Investment in Group undertakings | 9,076 | — | — | — | — | — | (2,823 | ) | (2,823 | ) | 6,253 | |||||||||||||
Intangible assets | — | — | — | — | 434 | — | — | 434 | 434 | |||||||||||||||
Property, plant and equipment | 1,284 | — | — | (37 | ) | — | — | — | (37 | ) | 1,247 | |||||||||||||
Derivatives at fair value | 704 | — | — | — | — | — | — | — | 704 | |||||||||||||||
Prepayments, accrued income and other assets | 1,542 | (81 | ) | — | — | — | 14 | 359 | 292 | 1,834 | ||||||||||||||
Total assets | 107,801 | (81 | ) | — | (37 | ) | 434 | 14 | (2,464 | ) | (2,134) | 105,667 | ||||||||||||
Liabilities | ||||||||||||||||||||||||
Deposits by banks | 3,480 | — | — | — | — | — | — | — | 3,480 | |||||||||||||||
Customer accounts | 87,925 | — | — | — | — | — | — | — | 87,925 | |||||||||||||||
Debt securities in issue | 39 | — | — | — | — | — | — | — | 39 | |||||||||||||||
Derivatives at fair value | 283 | — | — | — | — | — | — | — | 283 | |||||||||||||||
Accruals, deferred income and other liabilities | 2,178 | — | — | — | — | (6 | ) | (1 | ) | (7 | ) | 2,171 | ||||||||||||
Retirement benefit liabilities | — | — | — | — | — | 1,920 | — | 1,920 | 1,920 | |||||||||||||||
Deferred taxation liabilities | 11 | — | 66 | — | 130 | (572 | ) | 365 | (11 | ) | — | |||||||||||||
Subordinated liabilities | 4,747 | — | — | — | — | — | — | — | 4,747 | |||||||||||||||
Shareholders' equity | 9,138 | (81 | ) | (66 | ) | (37 | ) | 304 | (1,328 | ) | (2,828 | ) | (4,036 | ) | 5,102 | |||||||||
Total liabilities and equity | 107,801 | (81 | ) | — | (37 | ) | 434 | 14 | (2,464 | ) | (2,134) | 105,667 | ||||||||||||
Consolidated income statement for the year ended 31 December 2004
UK GAAP £m | Leases £m | Software development costs £m | Employee benefits £m | Goodwill £m | Discounted operations £m | Total adjustments £m | IFRS £m | ||||||||||||||
Net interest income | 4,360 | 13 | 10 | — | — | (265 | ) | (242 | ) | 4,118 | |||||||||||
Non-interest income | 3,641 | — | — | (1 | ) | — | (13 | ) | (14 | ) | 3,627 | ||||||||||
Total income | 8,001 | 13 | 10 | (1 | ) | — | (278 | ) | (256 | ) | 7,745 | ||||||||||
Operating expenses | 3,893 | — | 253 | 65 | (43 | ) | (53 | ) | 222 | 4,115 | |||||||||||
Operating profit before impairment losses | 4,108 | 13 | (243 | ) | (66 | ) | 43 | (225 | ) | (478 | ) | 3,630 | |||||||||
Impairment losses | 625 | — | — | — | — | 5 | 5 | 630 | |||||||||||||
Profit before tax | 3,483 | 13 | (243 | ) | (66 | ) | 43 | (230 | ) | (483 | ) | 3,000 | |||||||||
Tax | 955 | 4 | (73 | ) | (20 | ) | — | (69 | ) | (158 | ) | 797 | |||||||||
Discontinued operations | — | — | — | — | — | 161 | 161 | 161 | |||||||||||||
Profit for the year | 2,528 | 9 | (170 | ) | (46 | ) | 43 | — | (164 | ) | 2,364 | ||||||||||
Bank income statement for the year ended 31 December 2004 | |||||||||||||||||||||
UK GAAP £m | Dividends £m | Software development costs £m | Employee benefits £m | Total adjustments £m | IFRS £m | ||||||||||||||||
Profit for the year | 1,915 | 150 | (119 | ) | (45 | ) | (14 | ) | 1,901 | ||||||||||||
125
Notes on the accounts continued
44 Transition to IFRS(continued)
(3) Analysis of IAS 32, IAS 39 and IFRS 4 adjustments
Balance sheet at 1 January 2005 – Group
IFRS prospective adjustments | ||||||||||||||||||||||||||||||||||||
IFRS 31 December 2004 £m | Offset £m | Other IAS 39 £m | Debt equity £m | Classification measurement £m | Embedded derivatives £m | Provisioning and impairment £m | Hedging/ measurement £m | Derecognition £m | Revenue recognition £m | Other £m | Total adjustments £m | IFRS 1 January 2005 £m | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Cash and balances at | ||||||||||||||||||||||||||||||||||||
central banks | 1,589 | — | — | — | — | — | — | — | — | — | — | — | 1,589 | |||||||||||||||||||||||
Treasury bills and | ||||||||||||||||||||||||||||||||||||
other eligible bills | 172 | — | — | — | — | — | — | — | — | — | — | — | 172 | |||||||||||||||||||||||
Loans and advances | ||||||||||||||||||||||||||||||||||||
to banks | 29,982 | 12,209 | 4 | — | — | — | — | 28 | — | — | 1 | 12,242 | 42,224 | |||||||||||||||||||||||
Loans and advances | ||||||||||||||||||||||||||||||||||||
to customers | 131,679 | 19,588 | 551 | — | (1 | ) | — | (218 | ) | 133 | 1,479 | (254 | ) | (2 | ) | 21,276 | 152,955 | |||||||||||||||||||
Debt securities | 22,426 | — | 138 | — | (2 | ) | — | — | — | — | — | — | 136 | 22,562 | ||||||||||||||||||||||
Equity shares | 1,338 | — | — | — | 289 | — | — | — | — | — | — | 289 | 1,627 | |||||||||||||||||||||||
Intangible assets | 1,244 | — | — | — | — | — | — | — | — | — | — | — | 1,244 | |||||||||||||||||||||||
Property, plant and | ||||||||||||||||||||||||||||||||||||
equipment | 1,542 | — | — | — | — | — | — | — | — | — | — | — | 1,542 | |||||||||||||||||||||||
Settlement balances | 3,538 | — | — | — | — | — | — | — | — | — | — | — | 3,538 | |||||||||||||||||||||||
Derivatives at fair value | 1,366 | 1,983 | — | — | 3 | 60 | — | 366 | — | — | (1 | ) | 2,411 | 3,777 | ||||||||||||||||||||||
Prepayments, | ||||||||||||||||||||||||||||||||||||
accrued income | ||||||||||||||||||||||||||||||||||||
and other assets | 2,345 | — | (693 | ) | — | (2 | ) | (15 | ) | — | (202 | ) | 295 | (2 | ) | 52 | (567 | ) | 1,778 | |||||||||||||||||
Total assets | 197,221 | 33,780 | — | — | 287 | 45 | (218 | ) | 325 | 1,774 | (256 | ) | 50 | 35,787 | 233,008 | |||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits by banks | 23,873 | 12,209 | 8 | — | — | — | — | 10 | — | — | — | 12,227 | 36,100 | |||||||||||||||||||||||
Customer accounts | 126,119 | 19,588 | 349 | — | (2 | ) | (15 | ) | (18 | ) | 99 | — | — | 20,001 | 146,120 | |||||||||||||||||||||
Debt securities in issue | 3,597 | — | — | — | — | — | — | — | 1,479 | — | 1 | 1,480 | 5,077 | |||||||||||||||||||||||
Settlement balances | ||||||||||||||||||||||||||||||||||||
and short positions | 21,670 | — | 163 | — | — | — | — | — | — | — | — | 163 | 21,833 | |||||||||||||||||||||||
Derivatives at fair value | 1,105 | 1,983 | — | — | 3 | 60 | — | 457 | — | — | — | 2,503 | 3,608 | |||||||||||||||||||||||
Accruals, deferred | ||||||||||||||||||||||||||||||||||||
income and other | ||||||||||||||||||||||||||||||||||||
liabilities | 4,539 | — | (623 | ) | (7 | ) | 76 | (3 | ) | — | (291 | ) | 295 | 81 | — | (472 | ) | 4,067 | ||||||||||||||||||
Retirement benefit | ||||||||||||||||||||||||||||||||||||
liabilities | 2,093 | — | — | — | — | — | — | — | — | — | — | — | 2,093 | |||||||||||||||||||||||
Deferred taxation | ||||||||||||||||||||||||||||||||||||
liabilities | — | — | — | — | 86 | 1 | (55 | ) | 50 | (30 | ) | (101 | ) | 49 | — | — | ||||||||||||||||||||
Subordinated liabilities | 5,808 | — | 103 | 426 | — | — | — | — | — | — | 1 | 530 | 6,338 | |||||||||||||||||||||||
Minority interests | 408 | — | — | (6 | ) | — | — | — | — | — | — | — | (6 | ) | 402 | |||||||||||||||||||||
Shareholders’ equity | 8,009 | — | — | (413 | ) | 124 | 2 | (163 | ) | 117 | (69 | ) | (236 | ) | (1 | ) | (639 | ) | 7,370 | |||||||||||||||||
Total liabilities and equity | 197,221 | 33,780 | — | — | 287 | 45 | (218 | ) | 325 | 1,774 | (256 | ) | 50 | 35,787 | 233,008 | |||||||||||||||||||||
126
Balance sheet at 1 January 2005 – Bank
IFRS prospective adjustments | |||||||||||||||||||||||||||||||||||
IFRS 31 December 2004 £m | Offset £m | Other IAS 39 £m | Debt equity £m | Classification measurement £m | Embedded derivatives £m | Provisioning and impairment £m | Hedging measurement £m | Derecognition £m | Revenue recognition £m | Other £m | Total adjustments £m | IFRS 1 January 2005 £m | |||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||
Cash and balances at | |||||||||||||||||||||||||||||||||||
central banks | 956 | — | — | — | — | — | — | — | — | — | — | — | 956 | ||||||||||||||||||||||
Loans and advances | |||||||||||||||||||||||||||||||||||
to banks | 15,994 | 2,885 | — | — | — | — | — | 25 | — | — | — | 2,910 | 18,904 | ||||||||||||||||||||||
Loans and advances | |||||||||||||||||||||||||||||||||||
to customers | 77,619 | 10,880 | 409 | (33 | ) | — | — | (207 | ) | 133 | — | (272 | ) | 1 | 10,911 | 88,530 | |||||||||||||||||||
Debt securities | 39 | — | — | — | — | — | — | — | — | — | — | — | 39 | ||||||||||||||||||||||
Equity shares | 587 | — | — | — | 288 | — | — | — | — | — | — | 288 | 875 | ||||||||||||||||||||||
Investment in Group | |||||||||||||||||||||||||||||||||||
undertakings | 6,253 | — | — | 31 | — | — | — | — | — | — | — | 31 | 6,284 | ||||||||||||||||||||||
Intangible assets | 434 | — | — | — | — | — | — | — | — | — | — | — | 434 | ||||||||||||||||||||||
Property, plant and | |||||||||||||||||||||||||||||||||||
equipment | 1,247 | — | — | — | — | — | — | — | — | — | — | — | 1,247 | ||||||||||||||||||||||
Derivatives at fair value | 704 | 706 | — | — | — | 7 | — | 121 | — | — | — | 834 | 1,538 | ||||||||||||||||||||||
Prepayments, | |||||||||||||||||||||||||||||||||||
accrued income | |||||||||||||||||||||||||||||||||||
and other assets | 1,834 | — | (409 | ) | — | — | (7 | ) | — | 38 | — | — | 36 | (342 | ) | 1,492 | |||||||||||||||||||
Total assets | 105,667 | 14,471 | — | (2 | ) | 288 | — | (207 | ) | 317 | — | (272 | ) | 37 | 14,632 | 120,299 | |||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||||||
Deposits by banks | 3,480 | 2,885 | 3 | — | — | — | — | — | — | — | (1 | ) | 2,887 | 6,367 | |||||||||||||||||||||
Customer accounts | 87,925 | 10,880 | 264 | — | — | (7 | ) | — | 99 | — | — | 11,236 | 99,161 | ||||||||||||||||||||||
Debt securities in issue | 39 | — | — | — | — | — | — | — | — | — | — | — | 39 | ||||||||||||||||||||||
Derivatives at fair value | 283 | 706 | — | — | — | 7 | — | 419 | — | — | — | 1,132 | 1,415 | ||||||||||||||||||||||
Accruals, deferred | |||||||||||||||||||||||||||||||||||
income and other | |||||||||||||||||||||||||||||||||||
liabilities | 2,171 | — | (370 | ) | (6 | ) | 1 | — | — | (270 | ) | — | 78 | (3 | ) | (570 | ) | 1,601 | |||||||||||||||||
Retirement benefit | |||||||||||||||||||||||||||||||||||
liabilities | 1,920 | — | — | — | — | — | — | — | — | — | — | — | 1,920 | ||||||||||||||||||||||
Deferred tax | — | — | — | — | 86 | — | (36 | ) | 46 | (30 | ) | (105 | ) | 39 | — | — | |||||||||||||||||||
Subordinated liabilities | 4,747 | — | 103 | 426 | — | — | — | — | — | — | 1 | 530 | 5,277 | ||||||||||||||||||||||
Shareholders’ equity | 5,102 | — | — | (422 | ) | 201 | — | (171 | ) | 122 | (69 | ) | (245 | ) | 1 | (583 | ) | 4,519 | |||||||||||||||||
Total liabilities and equity | 105,667 | 14,471 | — | (2 | ) | 288 | — | (207 | ) | 317 | — | (272 | ) | 37 | 14,632 | 120,299 | |||||||||||||||||||
127
Notes on the accounts continued
44 Transition to IFRS(continued)
Reconciliation of shareholders’ funds | ||||||
Group £m | Bank £m | |||||
UK GAAP shareholders' funds at 31 December 2004 | 9,138 | 9,138 | ||||
Standards applicable to all periods: | ||||||
Valuation of subsidiaries and associates | — | (2,828 | ) | |||
Proposed dividend | — | (81 | ) | |||
Employee benefits | (1,767 | ) | (1,898 | ) | ||
Software development costs | 344 | 434 | ||||
Other | (31 | ) | (37 | ) | ||
Tax effect on adjustments | 445 | 440 | ||||
Deferred tax | (120 | ) | (66 | ) | ||
Shareholders' funds under IFRS at 31 December 2004 | 8,009 | 5,102 | ||||
Standards applicable from 1 January 2005: | ||||||
Non-equity shares reclassified to debt | (419 | ) | (419 | ) | ||
Revenue recognition | (337 | ) | (350 | ) | ||
Derecognition | (99 | ) | (99 | ) | ||
Securities | 210 | 287 | ||||
Other | (43 | ) | (2 | ) | ||
Tax effect on adjustments | 49 | — | ||||
Shareholders' funds under IFRS at 1 January 2005 | 7,370 | 4,519 | ||||
Equity – minority interests | 402 | — | ||||
Equity under IFRS at 1 January 2005 | 7,772 | 4,519 | ||||
Group | Bank | |||||||
As at 1 January 2005 | Fair value on implementation of IAS 39 £m | Carrying value under UK GAAP £m | Fair value on implementation of IAS 39 £m | Carrying value under UK GAAP £m | ||||
Financial assets | ||||||||
– designated as at fair value through profit or loss | 1,137 | 1,062 | 60 | 60 | ||||
– available-for-sale | 3,851 | 3,562 | 911 | 624 | ||||
Financial liabilities | ||||||||
– designated as at fair value through profit or loss | 1,326 | 1,259 | 60 | 60 | ||||
45 Ultimate holding company
The Group’s ultimate holding company and ultimate controlling party is The Royal Bank of Scotland Group plc and its immediate parent company is The Royal Bank of Scotland plc. Both companies are incorporated in Great Britain and registered in Scotland. As at 31 December 2005, The Royal Bank of Scotland Group plc heads the largest group in which the Group is consolidated and The Royal Bank of Scotland plc heads the smallest group in which the Group is consolidated. Copies of the consolidated accounts of both companies may be obtained from The Secretary, The Royal Bank of Scotland Group plc, Gogarburn, PO Box 1000, Edinburgh EH12 1HQ.
128
46 Significant differences between IFRS and US GAAP
The consolidated accounts of the Group have been prepared in accordance with IFRS issued and extant at 31 December 2005 which differ in certain significant respects from US GAAP. The significant differences which affect the Group are summarised below in three separate sections:
Section (1) covers significant differences between US GAAP and IFRS for the income statement for the year ended 31 December 2005 and the balance sheet at 31 December 2005. These differences include those between US GAAP and IAS 32 and IAS 39. As permitted by IFRS 1, the Group implemented IAS 32 and IAS 39 from 1 January 2005 without restating comparatives.
Section (2) sets out the significant differences between US GAAP and IFRS for 2004.
Section (3) summarises those areas where, though the recognition and measurement principles in US GAAP and IFRS are the same, adjustments to IFRS amounts are required due to differing implementation dates for the Group.
(1) For 31 December 2005
IFRS | US GAAP | ||
(a) | Property revaluation and depreciation | ||
Freehold and long leasehold property occupied for the Group'suse is carried at cost less accumulated depreciation.Depreciation is charged based on an estimated useful life of50 years. As permitted by IFRS 1, valuation as at 31 December2003 is its deemed cost. Investment properties are carried at fair value; changes in fairvalue are included in the income statement. | Under US GAAP, revaluations of property are not permitted.Depreciation is charged, and gains or losses on disposal arebased on the historical cost for both own-use and investmentproperties. | ||
(b) | Leasehold property provisions | ||
Provisions are recognised on leasehold properties when thereis a commitment to vacate the property. | Provisions are recognised on leasehold properties at the timethe property is vacated. | ||
(c) | Loan origination | ||
Only costs that are incremental and directly attributable to theorigination of a loan are deferred over the period of the relatedloan or facility. | Certain direct (but not necessarily incremental) costs aredeferred and recognised over the period of the related loan orfacility. | ||
(d) | Pension costs | ||
The main scheme is deemed a defined benefit scheme that shares risk between various entities of the RBS Group. There is no contractual agreement or stated policy for charging the net defined benefit cost for the plan as a whole to individual group entities. Consequently, pursuant to IAS 19, the net defined benefit cost has been recognised in the financial statements of the Group, the entity that is considered legally the sponsoring employer for the scheme. The income statement reflects the current and past service cost and the cumulative excess actuarial gains and losses amortised over the expected average remaining lives of participating employees. Excess gains and losses are those exceeding 10% of the higher of the gross assets or liabilities of the scheme. Pension scheme assets are measured at their fair value. Scheme liabilities are measured on an actuarial basis using the projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency. Any surplus or deficit of scheme assets over liabilities adjusted for unrecognised actuarial gains and losses and past service costs is recognised in the balance sheet as an asset (surplus) or liability (deficit). | Under US GAAP, the main scheme is considered a single-employer plan. Each subsidiary of The Royal Bank of Scotland Group plc accounts for its participation as a participation in a multi-employer pension plan pursuant to SFAS 87. For US GAAP reporting purposes, The Royal Bank of Scotland Group plc is designated as the scheme sponsor and consequently follows defined benefit plan accounting in its consolidated financial statements. Accordingly, the Group has accounted for its for its participation in the main scheme in accordance with the amount allocated by The Royal Bank of Scotland Group plc. | ||
129
Notes on the accounts continued
46 Significant differences between IFRS and US GAAP(continued)
IFRS | US GAAP | ||
(e) | Financial instruments | ||
Financial assets designated as at fair value through profit or loss | |||
Under IFRS, a financial asset may be designated as at fair value through profit or loss on initial recognition. | Such designation is not allowed under US GAAP. | ||
Debt securities classified as loans and receivables | |||
Non-derivative financial assets with fixed or determinablerepayments that are not quoted in an active market areclassified as loans and receivables except those that areclassified as held-to-maturity, held-for-trading, available-for-saleor designated as at fair value through profit or loss. Loans andreceivables are initially recognised at fair value plus directlyrelated transaction costs. They are subsequently measured atadjusted cost using the effective interest method less anyimpairment losses. | Under US GAAP, these debt securities are classified asavailable-for-sale securities with unrealised gains and lossesreported in a separate component of equity, except when theunrealised loss is considered other than temporary in whichcase the loss is included in net income. | ||
Financial assets other than debt securities and equity shares | |||
classified as available-for-sale | |||
Under IAS 39 financial assets classified as available-for-salemay take any legal form. | Under US GAAP, only debt and equity securities can beclassified as available-for-sale. (Such securities are measuredat fair value with unrealised gains and losses reported in aseparate component of equity). | ||
Foreign exchange gains and losses on monetary available-for-sale financial assets | |||
For the purposes of recognising foreign exchange gains andlosses, a monetary available-for-sale financial asset is treatedas if it were carried at amortised cost in the foreign currency.Accordingly, for such financial assets, exchange differencesresulting from retranslating amortised cost are recognised inprofit or loss. | Such differences are included with other unrealised gains andlosses and reported in a separate component of equity. | ||
Financial liabilities | |||
All financial liabilities held-for-trading are classified as suchand carried at fair value with changes in fair value recognisedin net income. A financial liability may be designated as at fairvalue through profit or loss. | Only financial liabilities that are derivatives and short positionsare carried at fair value with changes in fair value recognisedin net income. | ||
130
IFRS | US GAAP | ||
(f) | Derivatives and hedging activities | ||
Gains and losses arising from changes in fair value of aderivative are recognised as they arise in profit or loss unlessthe derivative is the hedging instrument in a qualifying hedge.The Group enters into three types of hedge relationship:hedges of changes in the fair value of a recognised asset orliability or firm commitment (fair value hedges); hedges of thevariability in cash flows from a recognised asset or liability or aforecast transaction (cash flow hedges); and hedges of the netinvestment in a foreign entity. | US GAAP principles are similar to IFRS. There are howeverdifferences in their detailed application. The Group has notrecognised any hedge relationships for US GAAP purposes. Allderivatives are measured at fair value with changes in fairvalue recognised in net income. | ||
(g) | Liabilities and equity | ||
The Group classifies a financial instrument that it issuesas a financial asset, financial liability or an equity instrumentin accordance with the substance of the contractualarrangement. An instrument is classified as a liability if thereis a contractual obligation to deliver cash or another financialasset, or to exchange financial assets or financial liabilities onpotentially unfavourable terms. An instrument is classified asequity if it evidences a residual interest in the assets of theGroup after the deduction of liabilities. | Under US GAAP, preference shares issued by the Group areclassified as equity as they are perpetual and redeemable onlyat the option of the Group. | ||
(h) | Offset arrangements | ||
A financial asset and a financial liability are offset and the netamount reported in the balance sheet when, and only when,the reporting entity currently has a legally enforceable right toset off the recognised amounts; and intends either to settle ona net basis, or to realise the asset and settle the liabilitysimultaneously. Arrangements such as master netting arrangements do notgenerally provide a basis for offsetting. | Under US GAAP, debit and credit balances with the samecounterparty may be offset only where there is a legallyenforceable right of set-off and the intention to settle on a netbasis. However, fair value amounts for forward, interest rateswap, currency swap, option, and other conditional orexchange contracts executed with the same counterpartyunder a master netting agreement may be offset as mayrepurchase and reverse repurchase agreements that areexecuted under a master netting agreement with the samecounterparty and have the same settlement date. This GAAP difference has no effect on net income orshareholders’ equity. | ||
131
Notes on the accounts continued
46 Significant differences between IFRS and US GAAP(continued)
(2) For 2004
As indicated above, as permitted by IFRS 1, in the preparation of the Group's 2004 consolidated income statements and balance sheets, all IFRS have been applied except those relating to financial instruments where UK GAAP principles then current have been applied.
IFRS or relevant UK GAAP | US GAAP | ||
(a) | Property revaluation and depreciation | ||
Freehold and long leasehold property occupied for the Group'suse is carried at cost less accumulated depreciation.Depreciation is charged based on an estimated useful life of50 years. As permitted by IFRS 1, valuation as at 31 December2003 is its deemed cost. Investment properties are carried at fair value; changes in fairvalue are included in the income statement. | Under US GAAP, revaluations of property are not permitted.Depreciation is charged, and gains or losses on disposal arebased on the historical cost for both own-use and investmentproperties. | ||
(b) | Leasehold property provisions | ||
Provisions are raised on leasehold properties when there is acommitment to vacate the property. | Provisions are recognised on leasehold properties at the timethe property is vacated. | ||
(c) | Loan origination fees | ||
Certain loan fees, together with related costs, are recognisedin the income statement as received or incurred. | Applicable non-refundable loan fees and certain direct costsare deferred and recognised over the period of the relatedloan or facility. | ||
(d) | Pension costs | ||
The main scheme is deemed a defined benefit scheme that shares risk between various entities of the RBS Group. There is no contractual agreement or stated policy for charging the net defined benefit cost for the plan as a whole to individual group entities. Consequently, pursuant to IAS 19, the net defined benefit cost has been recognised in the financial statements of the Group, the entity that is considered legally the sponsoring employer for the scheme. The income statement reflects the current and past service cost and the cumulative excess actuarial gains and losses amortised over the expected average remaining lives of participating employees. Excess gains and losses are those exceeding 10% of the higher of the gross assets or liabilities of the scheme. Pension scheme assets are measured at their fair value. Scheme liabilities are measured on an actuarial basis using the projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency. Any surplus or deficit of scheme assets over liabilities adjusted for unrecognised actuarial gains and losses and past service costs is recognised in the balance sheet as an asset (surplus) or liability (deficit). | Under US GAAP, the main scheme is considered a single-employer plan. Each subsidiary of The Royal Bank of Scotland Group plc accounts for its participation as a participation in a multi-employer pension plan pursuant to SFAS 87. For US GAAP reporting purposes, The Royal Bank of Scotland Group plc is designated as the scheme sponsor and consequently follows defined benefit plan accounting in its consolidated financial statements. Accordingly, the Group has accounted for its for its participation in the main scheme in accordance with the amount allocated by The Royal Bank of Scotland Group plc. | ||
(e) | Extinguishment of liabilities | ||
Recognition of a financial liability ceases once any transfer ofeconomic benefits to the creditor is no longer likely. | A financial liability is derecognised only when the creditor ispaid or the debtor is legally released from being the primaryobligator under the liability, either judicially or by the creditor. | ||
132
IFRS or relevant UK GAAP | US GAAP | ||
(f) | Securities | ||
The Group’s debt and equity securities are classified as beingheld as investment securities or for trading purposes. Investmentsecurities are stated at cost less provision for any permanentdiminution in value. Premiums and discounts on dated debtsecurities are amortised to interest income over the period tomaturity. Securities held for trading purposes are carried at fairvalue with changes in fair value recognised in profit or loss. | The Group’s investment debt securities andmarketable investment equity shares are classified as available-for-sale securities and measured at fair value with unrealisedgains and losses reported in a separate component of equity,except when the unrealised loss is considered other-than-temporary in which case the loss is included in net income.The Group recognises an other-than-temporary impairment on anavailable-for-sale equity share when its carrying value hasexceeded its market value for a period of more than twelve months. | ||
(g) | Derivatives and hedging activities | ||
Non-trading derivatives are entered into by the Group to hedgeexposures arising from transactions entered into in the normalcourse of banking activities. They are recognised in the accountsin accordance with the accounting treatment of the underlyingtransaction or transactions being hedged. To be classified as non-trading, a derivative must match or eliminate the risk inherent inthe hedged item from potential movements in interest rates,exchange rates and market values. In addition, there must be ademonstrable link to an underlying transaction, pool of transactionsor specified future transaction or transactions. Specified futuretransactions must be reasonably certain to arise for the derivativeto be accounted for as a hedge. In the event that a non-tradingderivative transaction is terminated or ceases to be an effectivehedge, the derivative is remeasured at fair value and any resultingprofit or loss amortised over the remaining life of the underlyingtransaction or transactions being hedged. If a hedged item isderecognised, or a specified future transaction is no longer likelyto occur, the related non-trading derivative is remeasured at fairvalue and the resulting profit or loss taken to the income statement. | The Group has not made changes in its use of non-tradingderivatives to meet the hedge criteria in SFAS 133 ‘Accountingfor Derivative Instruments and Hedging Activities’. For USGAAP purposes, its portfolio of non-trading derivatives isremeasured to fair value and changes in fair value reflected innet income. | ||
Monetary assets denominated in a foreign currency areretranslated at closing rates with exchange differences taken toprofit or loss. Equity shares financed by foreign currencyborrowings are retranslated at closing rates with exchangedifferences taken to reserves along with differences on therelated borrowings. | SFAS 133 does not permit a non-derivative financial instrumentto be designated as the hedging instrument in a fair value hedgeof the foreign exchange exposure of available-for-sale securities. | ||
Embedded derivatives are not bifurcated from the host contract. | SFAS 133 requires derivatives embedded in other financialinstruments to be accounted for on a stand-alone basis if theyhave economic characteristics and risks that differ from thoseof the host instrument. | ||
(h) | Consolidation | ||
All entities controlled by the Group are consolidated togetherwith special purpose entities (SPEs) where the substance of therelationship between the reporting entity and the SPE indicatesthat it is controlled by the reporting entity. | US GAAP requires consolidation by the primary beneficiary ofa variable interest entity (VIE). An enterprise is the primarybeneficiary of a VIE if it will absorb a majority of the entity’sexpected losses, receive a majority of the entity's expectedresidual returns, or both. | ||
133
Notes on the accounts continued
46 | Significant differences between IFRS and US GAAP(continued) | ||
IFRS or relevant UK GAAP | US GAAP | ||
(i) | Offset arrangements | ||
Debit and credit balances with the same counterparty areaggregated into a single item where there is a right to insist onnet settlement and the debit balance matures no later than thecredit balance. | Under US GAAP, debit and credit balances with the samecounterparty may be offset only where there is a legallyenforceable right of set-off and the intention to settle on a netbasis. However, fair value amounts for forward, interest rateswap, currency swap, option, and other conditional orexchange contracts executed with the same counterpartyunder a master netting agreement may be offset as mayrepurchase and reverse repurchase agreements that areexecuted under a master netting agreement with the samecounterparty and have the same settlement date. | ||
(3) | Implementation timing differences | ||
This section sets out the areas where differences in amounts reported under IFRS and US GAAP arise because the effective dates ofstandards are different although the recognition and measurement principles are the same. | |||
IFRS | US GAAP | ||
Intangible assets | |||
Purchased goodwill | |||
Purchased goodwill is recorded at cost less any accumulatedimpairment losses. Goodwill is tested annually (at 30 September)for impairment or more frequently if events or changes incircumstances indicate that it might be impaired. | US GAAP requires the same treatment of purchased goodwill.This was adopted by the Group from 1 July 2001. Prior to thisgoodwill was recognised as an asset and amortised overperiods of up to 25 years. No amortisation was written back onthis change of policy. During 2005, the Group changed thedate for performing its annual goodwill impairment test from1 January to 30 September for certain of its reporting units inorder to conform to the date selected by the Group uponadoption of IFRS. | ||
Goodwill arising on acquisitions after 1 October 1998 wascapitalised and amortised over its estimated useful economiclife. Goodwill arising on acquisitions before 1 October 1998was deducted from equity. The carrying amount of goodwill inthe Group's opening IFRS balance sheet was its carrying valueunder UK GAAP as at 31 December 2003. | |||
There was no restatement of previous acquisitions in 1998. | |||
In 2004 no amortisation was written back. | |||
Other intangibles | |||
Until 2004 intangible assets acquired in a businesscombination were recognised separately from goodwill only ifthey were separable and reliably measurable. Thereafterintangibles have been recognised if they are separable orarise from contractual or other legal rights. All intangibles are amortised over their useful economic lives. | The same treatment was adopted for US GAAP purposes from1 July 2001. | ||
Other adjustments in the reconciliation of net income for the year ended 31 December 2005 from IFRS to US GAAP include refinements to estimates, primarily loan impairment provisions, arising from the implementation of IFRS.
Recent developments in US GAAP
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards 154 ‘Accounting Changes and Error Corrections’. The standard replaces APB 20 and SFAS 3 and amends the treatment of changes of accounting principle and the correction of errors. It is effective for accounting changes and corrections of errors made in fiscal years beginning after 15 December 2005.
In February 2006, the FASB published SFAS 155 ‘Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No 133 and 140’ (SFAS 155) which is effective for all financial instruments acquired or issued by the Group after 1 January 2007. The statement allows any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation to be measured at fair value. The statement also eliminates the exemption from applying SFAS 133 to interests in securitised financial assets.
The FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140’ in March 2006. SFAS 156 addresses the recognition and measurement of separately recognised servicing assets and liabilities and provides an approach to obtain hedge-like (offset) accounting. The standard also: clarifies when an obligation to service financial assets should be separately recognised as a servicing asset or liability; requires fair value measurement for these assets and liabilities, if practicable; permits fair value or amortisation for subsequent measurement of these assets and liabilities; and permits a servicer using derivatives to offset servicing risk to measure both the derivative and related servicing asset or liability at fair value.
134
Selected figures in accordance with US GAAP
The following tables summarise the significant adjustments to consolidated net income available for ordinary shareholders and shareholders’ equity which would result from the application of US GAAP instead of IFRS. Where applicable, the adjustments are stated gross of tax with the tax effect shown separately in total.
Consolidated statement of income | 2005 £m | 2004 £m | ||||
Profit attributable to ordinary shareholders – IFRS | 2,446 | 2,316 | ||||
Adjustments in respect of: | ||||||
Property revaluation and depreciation | 4 | 4 | ||||
Leasehold property provisions | (17 | ) | (20 | ) | ||
Loan origination | 42 | (17 | ) | |||
Pension costs | (89 | ) | (119 | ) | ||
Extinguishment of liabilities | - | (49 | ) | |||
Financial instruments | (10 | ) | 21 | |||
Derivatives and hedging | (115 | ) | (248 | ) | ||
Liabilities and equity | 47 | - | ||||
Timing differences and other | (234 | ) | 66 | |||
Taxation | 68 | 118 | ||||
Net income available for ordinary shareholders – US GAAP | 2,142 | 2,072 | ||||
Consolidated shareholders’ equity | 2005 £m | 2004 £m | ||||
Shareholders’ equity – IFRS | 9,440 | 8,009 | ||||
Adjustments in respect of: | ||||||
Property revaluation and depreciation | (573 | ) | (577 | ) | ||
Leasehold property provisions | 21 | 38 | ||||
Loan origination | 247 | (132 | ) | |||
Pension costs | 2,030 | 2,119 | ||||
Extinguishment of liabilities | - | (109 | ) | |||
Financial instruments | (18 | ) | 271 | |||
Derivatives and hedging | (30 | ) | 195 | |||
Liabilities and equity | 460 | - | ||||
Timing differences | 67 | 83 | ||||
Taxation | (700 | ) | (707 | ) | ||
Shareholders’ equity – US GAAP | 10,944 | 9,190 | ||||
Total assets under US GAAP of £257.0 billion (2004 – £222.3 billion) primarily reflects the effect of certain arrangements that can be netted under US GAAP, together with the effect of adjustments made to shareholders’ equity.
47 Post balance sheet events
There have been no significant events between the year end and the date of approval of these accounts which would require a change to or disclosure in the accounts.
48 Restatement of Cash flow statements
The Group and Bank cash flow statements for the years ended 31 December 2005 and 2004 have been restated to correct an inadvertent error in the calculation of the effects of foreign exchange rate changes on cash and cash equivalents.
The tables below show the effect of the restatements:
(a) Cash flow statements
2005 | 2004 | ||||||||||||
Previously reported £m | Restated £m | Previously reported £m | Restated £m | ||||||||||
Group | |||||||||||||
Other non-cash items | 4,227 | (3,185 | ) | (3,099 | ) | 750 | |||||||
Net cash inflow from trading activities | 7,466 | 54 | 875 | 4,724 | |||||||||
Net cash flows from operating activities | |||||||||||||
before tax | 31,639 | 24,227 | (3,813 | ) | 36 | ||||||||
Net cash flows from operating activities | 30,469 | 23,057 | (4,864 | ) | (1,015 | ) | |||||||
Effects of foreign exchange rate | |||||||||||||
changes on cash and cash | |||||||||||||
equivalents | (4,791 | ) | 2,621 | 2,484 | (1,365 | ) | |||||||
Bank | |||||||||||||
Other non-cash items | (499 | ) | (881 | ) | (149 | ) | 66 | ||||||
Net cash inflow from trading activities | 1,546 | 1,164 | 2,894 | 3,109 | |||||||||
Net cash flows from operating activities | |||||||||||||
before tax | 7,556 | 7,174 | 3,031 | 3,246 | |||||||||
Net cash flows from operating activities | 6,894 | 6,512 | 2,485 | 2,700 | |||||||||
Effects of foreign exchange rate | (247 | ) | 135 | 139 | (76 | ) | |||||||
changes on cash and cash | |||||||||||||
equivalents | |||||||||||||
(b) Note 34 Net cash flows from operating activities
2005 | 2004 | ||||||||||||
Previously reported £m | Restated £m | Previously reported £m | Restated £m | ||||||||||
Group | |||||||||||||
Other non-cash items | 5,007 | (2,405 | ) | (2,339 | ) | 1,510 | |||||||
Net cash inflow from trading activities | 7,466 | 54 | 875 | 4,724 | |||||||||
Net cash flows from operating activities | 30,469 | 23,057 | (4,864 | ) | (1,015 | ) | |||||||
Bank | |||||||||||||
Other non-cash items | 511 | 129 | (238 | ) | (23 | ) | |||||||
Net cash inflow from trading activities | 1,546 | 1,164 | 2,894 | 3,109 | |||||||||
Net cash flows from operating activities | 6,894 | 6,512 | 2,485 | 2,700 | |||||||||
135
Exhibit index for this amendment on Form 20-F/A
Exhibit number | Description |
12.1 | CEO certification required by Rule 13a-14(a) |
12.2 | CFO certification required by Rule 13a-14(a) |
13.1 | Certification required by Rule 13a-14(b) |
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized this amendment to be signed on its behalf by the undersigned.
National Westminster Bank Plc
Registrant
/s/ Guy Robert Whittaker
Guy Robert Whittaker
Group Finance Director
18 December 2006