IFRS Transition Document-Pt 1

27th Sep 2005 07:01

Bank of Ireland(Governor&Co)27 September 2005 Bank of Ireland Group Transition to IFRS Restatement of 31 March 2005 financial information 26 September 2005 Contents Page no. Forward looking statement 3 1. Introduction 4 2. Overview 5 2.1 Financial highlights 2.2 Balance sheet 3. Special Purpose Auditors Reports 8 4. Restatement under IFRS 4.1 Consolidated IFRS income statements 12 4.2 Consolidated IFRS balance sheets 13 4.3 Summarised IFRS segmental information 14 4.4 Reconciliation of movement in stockholders' funds 15 5. Significant differences from Irish GAAP 16 6. Basis of preparation 26 7. Provisional IFRS accounting policies 28 8. Reconciliations 42 8.1 Summary consolidated IFRS income statement for the year ended 31 March 2005 8.2 Summary consolidated IFRS income statement for the half year ended 30 September 2004 8.3 Consolidated balance sheet at 31 March 2005 (excludes effects of IAS 32, IAS 39 and IFRS 4) 8.4 Consolidated balance sheet at 30 September 2004 8.5 Consolidated opening balance sheet at 1 April 2004 8.6 IFRS consolidated opening balance sheet at 1 April 2005 (includes effects of IAS 32, IAS 39 and IFRS 4) 8.7 Consolidated summary of IFRS income adjustment for year ended 31 March 2005, and half year ended 30 September 2004 8.8 Consolidated Summary of IFRS balance sheet impacts 9. Pro-forma Segmental Information 58 9.1 Year ended 31 March 2005 9.2 Half year ended 30 September 2004 9.3 Reconciliation of pro-forma consolidated income statement for year ended 31 March 2005 9.4 Reconciliation of pro-forma consolidated income statement for half year ended 30 September 2004 Forward Looking Statement Certain statements contained in this transition report, including any targets,forecasts, projections descriptions of anticipated cost savings, statementsregarding the possible development or possible assumed future results ofoperations, any statement preceded by, followed by or that includes the words "believes", "expects", "aims", "intends", "will", "may", "anticipates" or similarexpressions or negatives thereof, and other statements that are not historicalfacts, are or may constitute forward looking statements (as such term is definedin the U.S. Private Securities Reform litigation Act of 1995). Because suchstatements are inherently subject to risks and uncertainties, actual results maydiffer materially from those expressed or implied by such forward-lookingstatements. Such risks and uncertainties include but are not limited to possiblechanges in International Financial Reporting Standards ('IFRS') or in theinterpretation or application of these standards, risks and uncertaintiesrelating to profitability targets, prevailing interest rates, the performance ofthe Irish and UK economies and the international capital markets, the Group'sability to expand certain of its activities, competition, regulatorydevelopments, the Group's ability to achieve the estimated benefits under thetransformation programme, the Group's ability to address information technologyissues and the availability of funding sources and other risks and uncertaintiesin this document. The Group does not undertake to release publicly any revisionor update to these forward-looking statements to reflect events, circumstancesor unanticipated events occurring after the date hereof. 1. Introduction Up to 31 March 2005 the Bank of Ireland Group ("the Group") prepared its Reportand Accounts in accordance with Irish Generally Accepted Accounting Principles(IR GAAP). From 1 January 2005 all listed companies in the EU are required toproduce consolidated accounts prepared under IFRS. The Group has fullyimplemented IFRS from 1 April 2005 and will produce its first full IFRS accountsfor the year ending 31 March 2006. As a first time adopter the Report and Accounts will be produced in accordancewith the transition arrangements detailed in IFRS 1. This requires the Group toapply all IFRS standards in existence on the Group's first reporting date, 31March 2006, and restate the comparative period with certain limited exceptions.This means that the Group will restate the March 2005 results (opening equity,income statement and balance sheet) to comply with all existing IFRS. Thisreport summarises the comparative information and reconciles it back topreviously published IR GAAP. While the introduction of IFRS in itself does notchange the economics, risks or cash flows of the business it does, however,change how they are translated through the income statement and balance sheet. Companies are not required to restate comparatives for IFRS 4 (InsuranceContracts), IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS39 (Financial Instruments: Recognition and Measurement) in their first set ofIFRS Accounts. In opting for this exemption the Group will apply IR GAAP toinsurance accounting and accounting for financial instruments for the March 2005comparative period. Also included in the report are provisional accounting policies to be used asthe basis for the preparation of the full and half-year financial accounts.These policies are prepared in accordance with all standards endorsed orexpected to be endorsed by the EU and with all extant accounting standards andinterpretations issued by the IASB. However, existing standards may change ornew standards or interpretations may be issued that may be applicable to theReport and Accounts for March 2006. Alternatively market practice may developwith regard to the interpretation and application of the existing standards. Anyof these occurrences may require an alteration to the accounting policies usedin the preparation of this document and, as a result, the financial informationpresented could be subject to change. 2. Overview The Group will apply IFRS in its Report and Accounts for the year ended 31 March2006. Although the move to IFRS changes the timing of earnings recognition, itis important to note we do not believe that there will be any IFRS impact onbusiness fundamentals, cash flows and the development of our growth strategies. 2.1 Financial Highlights The IR GAAP results to 31 March 2005 and 30 September 2004 have been restated totake account of International Financial Reporting Standards implemented witheffect from the 1st April 2004. The changes to earnings mainly reflect theaccounting treatment of goodwill, lease income, employee share option schemes,pension costs and certain aspects relating to the Group's life and pensionsbusiness, principally changing the method of consolidating our life assurancebusiness and grossing up the embedded value profits for both shareholders andpolicy-holders tax paid on long term assurance contracts, with a correspondingincrease to the tax charge. The restatement of these results for 31 March 2005, and 30 September 2004,excludes adjustments for standards implemented with effect from 1 April 2005:-IAS32, IAS39 and IFRS4. Had these standards been implemented in the year to 31March 2005 and the half year 30 September 2004 they would have impacted theaccounting for derivatives, loan impairment, income recognition on loans,insurance accounting and classification of financial instruments. Also set outbelow are the IFRS proforma impacts of income recognition on loans, insuranceaccounting and classification of issued financial instruments in order toestablish a proforma IFRS restatement for the year to 31 March 2005 and the halfyear to 30 September 2004. Changes to accounting for derivatives and loanimpairment under IAS39 are not included in the proforma restatement. a) Year End 31 March 2005 earnings restatement IRISH IFRS IFRS GAAP Statutory Pro-forma Profit before tax €1,321m €1,310m €1,220mProfit for the period €1,080m €1,054m €983mEPS 113.9 cent 111.1 cent 103.9 cent On an IFRS statutory basis, the Group profit before taxation has decreased by€11m to €1,310m. The benefit arising from the grossing up of policy-holders taxpaid on long term assurance contracts in our Life Business and the effect ofIFRS 3 which requires that goodwill is no longer amortised, but subject toannual impairment review, were offset by changes in lease accounting, the costof employee share option schemes, higher pension costs and the adjustment toincome from associates and joint ventures which moves from being shown on agross to net of tax basis. Group profit for the year reduced by €26m to €1,054m mainly as a result of thecost of employee share option schemes, higher pension costs and changes in leaseaccounting, offset somewhat by the benefit of not amortising goodwill. Theimpact on the Group EPS amounts to 2.8c of a reduction to 111.1c. For the year to 31 March 2005, on a pro-forma IFRS basis, profit before taxreduced by €90m to €1,220m. The main changes relate to income recognition onfinancial assets, which reduced profit before taxation by €32m and changes inthe insurance business (IFRS4/IAS39 versus Embedded Value Accounting), whichreduced profit before tax by €54m. The Group profit for the year was reduced by€71m to €983m, and Group EPS reduced by 7.1c to 104.0c as a result of thesechanges. b) Half Year end 30 September 2004 earnings restatement IR IFRS IFRS GAAP Statutory Pro-Forma Profit before tax €713m €697m €664mProfit for the period €593m €576m €546mEPS 62.0 cent 60.2 cent 57.2 cent Profit before tax is €16m lower at €697m on an IFRS statutory basis. Thepositive effect of the grossing up of shareholder and policy-holders tax paid onlong term assurance contracts in our Life Business and the effect of IFRS 3which requires that goodwill is no longer amortised, but subject to annualimpairment review, was offset by changes in lease accounting, the cost ofemployee share option schemes, higher pension costs and the tax adjustment toincome from associates and joint ventures referred to above. Profit for theperiod is €17m lower at €576m and Group EPS is 1.8c lower at 60.2 cent. On an IFRS pro-forma basis the Group Profit before tax is €33m lower arisingfrom the effect of income recognition on loans which reduced profit beforetaxation by €18m, and changes in the insurance business (IFRS4/IAS39 versusEmbedded Value Accounting) which reduced profit before tax by €13m. Groupprofit for the period is €30m lower and Group EPS is 3c lower at 57.2 cent. 2.2 Balance Sheet Application of IFRS also affects the reported balance sheet of the Group. Inaddition, new regulatory treatments apply to the calculation of Tier 1 and totalcapital. As a result of the restatement of the Group's 31 March 2005 resultsunder IFRS and together with the impact of IAS32, IAS39 and IFRS4, the effect onstockholders funds and regulatory capital of the Group is as follows:- Capital Ratios Stockholder Tier Total Funds Capital Capital IR GAAP at 31 March 2005 4,789 7.6% 10.6%IFRS at 1 April 2005 4,287 7.9% 10.9% The analysis of the impact on stockholders funds and on the capital ratios isshown below. Reconciliation of Stockholders Funds •m IR GAAP Stockholders funds as at 31 March 2004 4,281IFRS impact 1 April 2004 (173) ____Opening IFRS Stockholders funds 1 April 2004 4,108 IFRS profit retained for the period 1,054IFRS ordinary dividends (417)Non cumulative preference shares dividend (7) _____Transfer to reserves 630 Other reserve movements in the period:-Exchange adjustment (108)Movement in own shares (15)Additional IFRS impacts 31 March 2005 (338) _____Total reserve movements 31 March 2005 169 _____ Closing IFRS stockholders funds 31 March 2005 4,277 IFRS impact of standards applicable from 1 April 2005:- 10 _____Stockholders funds under IFRS at 1 April 2005 4,287 ==== Regulatory Capital Ratios The regulatory capital ratios for the Group at 1 April 2005 are set out below.These incorporate adjustments arising for the first time adoption of all IFRSincluding IAS32 and IAS39 and have been computed in accordance with IFSRA'sFinancial Regulatory policies statement. 31 March 2005 1 April 2005 IR GAAP IFRSTier 1 Capital €5,740m €6,020mTotal Capital €8,059m €8,243mRisk Weighted Assets €75,892m €75,886mTier 1 Capital Ratio 7.6% 7.9%Total Capital Ratio 10.6% 10.9% SPECIAL PURPOSE AUDIT REPORT OF PRICEWATERHOUSECOOPERS TO THE GOVERNOR AND COMPANY OF THE BANK OF IRELAND (THE 'BANK') ON ITS INTERNATIONAL FINANCIALREPORTING STANDARDS ('IFRS') FINANCIAL INFORMATION We have audited the accompanying consolidated IFRS balance sheets of the Bankand its subsidiaries (the 'Group') as at 1 April 2004 and 31 March 2005, therelated consolidated IFRS income statement for the year ended 31 March 2005, the1 April 2005 balance sheet and transition adjustments relating to the adoptionof IAS 32, IAS 39 and IFRS 4 set out on pages 12 and 13 and the associated IFRS1 reconciliations and consolidated IFRS statement of changes in equity for theperiod ended 1 April 2005 set out on pages 15, 42, 44, 46-48, 50-51, 54-57prepared in accordance with the basis of preparation and the provisional IFRSaccounting policies set out on pages 26 to 41 (hereinafter referred to as the 'IFRS financial information'). In addition to the above noted opening and year end balance sheets, full yearincome statement and associated IFRS reconciliations, included with thefinancial information set out on pages 12, 13, 43, 45, 49, 52-53 are thehalf-year balance sheet, half-year income statement and associated IFRSreconciliations. We have not audited the half-year balance sheet, half-yearincome statement and associated IFRS reconciliations and these are not coveredby this opinion and do not form part of the above defined IFRS financialinformation. The IFRS financial information has been prepared by the Bank as part of itstransition to IFRS and to establish the financial position, and results ofoperations of the Group to provide the comparative financial informationexpected to be included in the first complete set of consolidated IFRS Accountsof the Group for the year ending 31 March 2006. Respective responsibilities of Directors and PricewaterhouseCoopers The Directors of the Bank are responsible for the preparation of theconsolidated IFRS financial information which has been prepared as part of theGroup's transition to IFRS. Our responsibilities, as independent auditors, areestablished in Ireland by the Auditing Practices Board, our profession's ethicalguidance and the terms of our engagement. Under the terms of engagement we arerequired to report to you our opinion as to whether the IFRS financialinformation has been prepared, in all material respects, in accordance with thebasis of preparation and provisional IFRS accounting policies set out on pages26 to 41. This report, including the opinion, has been prepared for, and only for, theBank for the purposes of assisting with the Group's transition to IFRS and forno other purpose. To the fullest extent permitted by law, we do not, in givingthis opinion, accept or assume responsibility for any other purpose or to anyother person to whom this report is shown or into whose hands it may come savewhere expressly agreed by our prior consent in writing. We read the other information contained in this document and consider itsimplications for our report if we become aware of any apparent misstatements ormaterial inconsistencies with the above defined IFRS financial information. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by theAuditing Practices Board. An audit includes examination, on a test basis, ofevidence relevant to the amounts and disclosures in the IFRS financialinformation. It also includes an assessment of the significant estimates andjudgements made by the directors in the preparation of the IFRS financialinformation, and of whether the accounting policies are appropriate to theGroup's circumstances and adequately disclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the IFRS financialinformation is free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of the IFRS financial information. Emphasis of matter Without qualifying our opinion, we draw your attention to the fact that the IFRSfinancial information may require adjustment before its inclusion as comparativeinformation in the Group's first set of IFRS Accounts for the year ending 31March 2006. This is because Standards currently in issue and adopted by the EUare subject to interpretations issued from time to time by the InternationalFinancial Reporting Interpretations Committee (IFRIC) and further Standards maybe issued by the International Accounting Standards Board (IASB) that will beadopted for financial years beginning on or after 1 April 2005. Additionally, without qualifying our opinion, IFRS is currently being applied inthe Republic of Ireland and in a large number of other countries simultaneouslyfor the first time. Furthermore, due to a number of new and revised Standardsincluded within the body of Standards that comprise IFRS, there is not yet asignificant body of established practice on which to draw in forming opinionsregarding interpretation and application. Accordingly, practice is continuingto evolve. At this preliminary stage, therefore, the full financial effect ofreporting under IFRS as it will be applied and reported on in the Group's firstIFRS Accounts for the year ending 31 March 2006 may be subject to change. Furthermore, without qualifying our opinion, we draw attention to the fact thatunder IFRS, only a complete set of accounts, comprising a balance sheet, incomestatement, statement of changes in equity and cash flow statement, together withcomparative financial information and explanatory notes can provide a fairpresentation of the Groups's financial position, results of operations and cashflows in accordance with IFRS. Opinion In our opinion, the accompanying IFRS financial information comprising theconsolidated IFRS balance sheets as at 1 April 2004 and 31 March 2005, therelated consolidated IFRS income statement for the year ended 31 March 2005, the1 April 2005 balance sheet and transition adjustments relating to the adoptionof IAS 32, IAS 39 and IFRS 4, set out on pages 12 and 13 and the associated IFRS1 reconciliations and consolidated IFRS statement of changes in equity for theyear ended 31 March 2005 set out on pages 15, 42, 44, 46-48, 50-51, 54-57 havebeen prepared, in all material respects, in accordance with the basis ofpreparation and the provisional IFRS accounting policies set out on pages 26 to41, which describe how IFRS have been applied under IFRS 1 including theassumptions made by the directors about the standards and interpretationexpected to be effective and the policies expected to be adopted when thedirectors prepare the first complete set of IFRS Accounts for the Group for theyear ending 31 March 2006. PricewaterhouseCoopersChartered AccountantsDublin26 September 2005 SPECIAL PURPOSE REVIEW REPORT OF PRICEWATERHOUSECOOPERS TO THE GOVERNOR ANDCOMPANY OF THE BANK OF IRELAND (THE 'BANK') ON ITS INTERNATIONAL FINANCIALREPORTING STANDARDS ('IFRS') INTERIM FINANCIAL INFORMATION We have been instructed by the Bank to review the accompanying consolidatedinterim IFRS financial information of the Bank and its subsidiaries (the 'Group') which comprises the consolidated interim IFRS balance sheet as at 30September 2004 and the related consolidated interim IFRS income statement forthe six month period then ended, set out on pages 12 and 13, and prepared inaccordance with the basis of preparation and the provisional IFRS accountingpolicies set out on pages 26 to 41 (hereinafter referred to as the 'interim IFRSfinancial information'). The interim IFRS financial information has been prepared by the Bank as part ofits transition to IFRS and to establish the financial position and results ofoperations of the Group to provide the comparative financial informationexpected to be included in the Group's interim financial results for the sixmonth period ended 30 September 2005. We have read the other information contained in this document and consideredwhether it contains any apparent misstatements or material inconsistencies withthe interim IFRS financial information. Respective responsibilities of Directors and PricewaterhouseCoopers The Directors of the Bank are responsible for the preparation of theconsolidated interim IFRS financial information which has been prepared as partof the Group's transition to IFRS. Our responsibilities, under the terms of ourengagement, are to report our review conclusions as to whether we are aware ofany material modifications that should be made to the IFRS interim financialinformation which has been prepared, in all material respects, in accordancewith the basis of preparation and provisional IFRS accounting policies set outon pages 26 to 41. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board applicable in the Republic of Ireland. Areview consists principally of making enquiries of group management and applyinganalytical procedures to the interim IFRS financial information and underlyingfinancial data and, based thereon, assessing whether the basis of preparationand provisional IFRS accounting policies set out on pages 26 to 41 have beenapplied, unless otherwise disclosed. A review excludes audit procedures such astests of controls and verification of assets, liabilities and transactions. Itis substantially less in scope than an audit and therefore provides a lowerlevel of assurance. Accordingly, we do not express an audit opinion on theinterim IFRS financial information. This report, including the conclusion, has been prepared for and only for theBank for the purpose of assisting with the Group's transition to IFRS and for noother purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Emphasis of matter Without qualifying our review conclusion, we draw your attention to the factthat the interim IFRS financial information may require adjustment before itsinclusion in the group's interim financial results for the six month periodended 30 September 2005. This is because Standards currently in issue andadopted by the EU are subject to interpretations issued from time to time by theInternational Financial Reporting Interpretations Committee (IFRIC) and furtherStandards may be issued by the International Accounting Standards Board (IASB)that will be adopted for financial years beginning on or after 1 April 2005. Additionally, without qualifying our review conclusion, IFRS is currently beingapplied in the Republic of Ireland and in a large number of other countriessimultaneously for the first time. Furthermore, due to a number of new andrevised Standards included within the body of Standards that comprise IFRS,there is not yet a significant body of established practice on which to draw informing opinions regarding interpretation and application. Accordingly,practice is continuing to evolve. At this preliminary stage, therefore, thefull financial effect of reporting under IFRS as it will be applied and reportedon in the Group's interim financial results for the six month period ended 30September 2005 may be subject to change. Review Conclusion On the basis of our review, we are not aware of any material modifications thatshould be made to the IFRS financial information as presented for the six monthperiod ended 30 September 2004, prepared in accordance with the basis ofpreparation and the provisional IFRS accounting policies set out on pages 26 to41. PricewaterhouseCoopersChartered AccountantsDublin26 September 2005 4. Restatement under IFRS 4.1 Consolidated IFRS Income statements Half-year ended 31-Mar-05 30-Sep-04 31-Mar-05 Total Unaudited Unaudited •m •m •mInterest income 4,263 2,188 2,075Interest expense (2,332) (1,247) (1,085)Net interest income 1,931 941 990Insurance net premium income 1,791 795 996Fees and commissions income 1,163 562 601Fees and commissions expense (263) (115) (148)Net fees and commissions income 900 447 453Net trading income 66 33 33Other operating income 833 266 567Total operating income 5,521 2,482 3,039Insurance net claims (2,222) (875) (1,347)Total operating income, net of insurance claims 3,299 1,607 1,692Administrative expenses 1,874 851 1,023Depreciation and amortisation 177 81 96Total operating expenses (2,051) (932) (1,119)Operating profit before impairment losses 1,248 675 573Impairment losses on loans and advances 21 (28) 49Operating profit 1,269 647 622Profit on disposal on business 11 31 (20)Income from associated undertakings and joint ventures 30 19 11Profit before taxation 1,310 697 613Taxation (256) (121) (135)Profit for the period 1,054 576 478 Attributable to minority interests (1) 5 (6)Attributable to stockholders 1,055 571 484 1,054 576 478 Basic earnings per share 111.1 60.2 51.0 Diluted earnings per share 110.2 59.7 50.5 4.2 Consolidated IFRS Balance Sheets 1-Apr-05 31-Mar-05 30-Sep-04 1-Apr-04 UnauditedAssets •m •m •m •mCash and balances at central banks 1,613 1,613 2,062 1,415Items in the course of collection from banks 560 560 593 584Central government and other eligible bills 8 1,607 1,350 1,428Trading securities 1,030 - - -Derivative financial instruments 2,277 - - -Other financial assets at fair value through profit 8,115 - - -and lossLoans and advances to banks 8,347 8,347 8,659 8,209Loans and advances to customers 79,988 79,836 72,743 67,475Debt securities - 22,711 20,472 17,235Equity shares - 5,716 5,160 4,647Available-for-sale financial assets 16,971 - - -Pledged assets 3,870 - - -Interests in associated undertakings 17 17 15 14Interests in joint ventures 61 61 48 243Intangible assets - Goodwill 219 219 177 147Intangible assets - Other 573 573 530 413Investment property 503 503 442 430Property, plant & equipment 726 720 713 760Deferred tax asset 55 99 87 76Other assets 3,083 5,198 4,628 4,714Total assets 128,016 127,780 117,679 107,790Equity and liabilitiesDeposits by banks 20,865 20,865 20,274 17,767Customer accounts 60,070 60,185 56,551 54,184Items in course of transmission to other banks 230 230 119 230Derivative financial instruments 2,167 - - -Liabilities to customers under investment contracts 4,917 - - -Debt securities in issue 21,243 21,217 18,460 13,803Life assurance liabilities attributable to policy - 8,713 7,734 7,164holdersInsurance contract liabilities 3,785 - - -Other liabilities 4,914 6,756 5,641 5,987Deferred tax liabilities 144 212 204 193Other provisions 180 180 - 64Post retirement benefit obligations 924 924 741 478Subordinated liabilities: 4,231 4,086 3,651 3,682Total liabilities 123,670 123,368 113,375 103,552EquityShare capital 663 663 679 679Share premium account 765 765 765 767Capital Reserve 310 561 554 503Retained profits 2,279 2,336 2,207 2,220Revaluation Reserve 158 158 115 122Cash flow hedge reserve 67 - - -Available for sale reserve 137 - - -Other equity reserves 114 - - -Own shares held for the benefit of life assurance (206) (206) (205) (183)policyholdersStockholders equity 4,287 4,277 4,115 4,108Minority interests 59 135 189 130Total equity 4,346 4,412 4,304 4,238Total equity and liabilities 128,016 127,780 117,679 107,790 4.3 Summarised IFRS Segmental Information (Unaudited) Year ended 31 March 2005 Retail Wholesale UK Asset UK Post Republic BOI Financial Financial Management Office Group of Life Services Services Services Financial & Ireland Services Central Total •m •m •m •m •m •m •m •mNet interest income 1,019 11 303 610 4 6 (22) 1,931Other income 304 2,456 324 232 252 1 8 3,577Total income 1,323 2,467 627 842 256 7 (14) 5,508Insurance claims - (2,216) - - - - (6) (2,222)Total income, net of insurance 1,323 251 627 842 256 7 (20) 3,286claimsOperating expenses (798) (90) (252) (482) (131) (54) (108) (1,915)Impairment losses on loans & (51) - (38) 14 - (4) - (79)advancesShare of operating profit from (2) - 37 - - (5) - 30associatesProfit before taxation * 472 161 374 374 125 (56) (128) 1,322Exceptional items (12) 1,310Taxation (256)Profit for the period 1,054Attributable to minority Interests (1)Attributable to stockholders 1,055 1,054Basic EPS 111.1 Half-year ended 30th September Retail BOI Wholesale UK Asset UK Post 2004 Republic Financial Financial Management Office Group of Life Services Services Services Financial & Ireland Services Central Total •m •m •m •m •m •m •m •mNet interest income 496 5 141 307 2 1 (11) 941Other income 149 976 152 115 133 2 5 1,532Total income 645 981 293 422 135 3 (6) 2,473Insurance claims - (869) - - - - (6) (875)Total income, net of insurance 645 112 293 422 135 3 (12) 1,598claimsOperating expenses (388) (46) (119) (244) (65) (18) (49) (929)Impairment losses on loans & (23) - (18) 14 - (1) - (28)advancesShare of operating profit from (1) - 24 - - (4) - 19associatesProfit before taxation ** 233 66 180 192 70 (20) (61) 660Exceptional items 37 697Taxation (121)Profit for the period 576Attributable to minority Interests 5Attributable to stockholders 571 576Basic EPS 60.2* excludes profit/losses on disposal of businesses, special loan loss releases and strategic costs** excludes profit/losses on disposal of businesses and strategic costs - March 05. 4.4 Reconciliation of Movements in Stockholder's Funds •mOpening Irish GAAP Stockholder's funds as at 31 March 2004 4,281 IFRS Impact 1 April 2004 •mOrdinary Dividends 257Pensions (286)SPE's (63)Leasing 52Consolidation 12Property (145)Total IFRS adjustments 1 April 2004 (173) Opening IFRS Stockholder's funds as at 1 April 2004 4,108 IFRS Retained Profit for the year to 31 March 2005 1,054Dividends (IFRS) (417) 637Minority interests/preference dividends (7)Exchange adjustments as per IR GAAP (108)Movements in own shares (15) 507Reserve Movements (IFRS) •mPensions (386)Consolidation 0Consolidation (5)Leasing 0Employee benefits 11Goodwill (1)Insurance business 0Property 43 (338)Net movements in reserves 31 March 2005 169 Closing IFRS Stockholder's funds 31 March 2005 4,277 IFRS Impact 1 April 2005 •mReclassification 127Hedging (3)VIF in life business (251)Debt/equity reclassification 114Effective interest rate 20Other 3 10 Opening IFRS Stockholder's funds as at 1 April 2005 4,287 5. Significant differences from Irish GAAP The significant differences between the Group's Irish accounting policies andIFRS accounting policies are summarised below. Irish GAAP IFRS (a) Consolidation and presentation Assets, liabilities and results of all All entities controlled by the group, as well as legallyundertakings controlled by the group are independent bodies (Special Purpose Entities) where theconsolidated. Control is the ability to direct substance of the relationship indicates that they arethe financial and operating policies of an controlled by the group, are consolidated. This resultsentity. in the consolidation of a number of funding related special purpose entities on the Balance Sheet and increases the assets and liabilities of the group. Mortgage and other securitisation vehicles are In relation to securitisations, linked presentation is notshown on the Balance Sheet using the linked permitted by IFRS. Consequently, the gross assets andpresentation method where financial recourse related funding are separately shown on the Balance Sheet.to the group is limited. (b) Life assurance In order to reflect the different nature of the The IFRS requires line by line consolidation for all itemspolicyholders' interests in the life assurance of income and expenditure, assets and liabilities.business, the assets and liabilities Consequently, the group is no longer permitted to report theattributable to policyholders are classified results and balances of the life assurance business as oneseparately in the Group Balance Sheet while the line items. Instead, these amounts are broken down andresults for the year are consolidated on one allocated to lines which reflect their nature, whetherline in the profit and loss account. attributable to stockholders or policyholders. The Group accounts for the value of the In accordance with IFRS4, life assurance products arestockholder's interest in long-term assurance classified as either investment contracts, which arebusiness using the embedded value method of accounted for in accordance with IAS 39 or insuranceaccounting. The embedded value is comprised of contracts, which are accounted for under IFRS 4. Thethe net tangible and financial assets of the principal effects of this change on the accounting forlife assurance business, including any surpluses investment contracts is the removal of that portion of theretained within the long-term business fund and embedded value which represents the value of in-forcethe present value of its in-force business. It business relating to those contracts, the recognition of anis computed in accordance with bases accepted in asset for deferred acquisition costs, and the deferral ofthe life assurance market. All life assurance up-front fees received for investment management services;products are accounted for in the same way; deferred acquisition costs and deferred up-front fees arethere is no difference between investment amortised over the period of the provision of investmentcontracts and insurance contracts. management services. The accounting for insurance contracts under IFRS4 is unchanged. Changes in embedded value, which are determinedon a post tax basis, are included in the profit IFRS requires that the profit and loss account and the valueand loss account, grossed up for tax at the of in-force asset in the balance sheet be grossed up basedBank's effective tax rate. The value of on total tax payable by the Group, comprising bothin-force asset is shown net of tax on the policyholder and stockholder tax.Balance Sheet. (c) Investments in associated companies and joint ventures Investments in associated undertakings and Investments in associates and joint ventures are accountedjoint ventures are stated at acquisition cost for by the equity method of accounting and are initiallyand unamortised goodwill arising on the recognised at cost. Cumulative post-acquisition movementsacquisition, together with the appropriate are adjusted against the carrying amount of theshare of post-acquisition reserves. investment. Income from associates and joint ventures isshown gross of tax with the associated taximpact shown in the tax charge. Income from associates and joint ventures is shown net of tax in the income statement. Associated tax is no longer included in the tax charge. (d) Goodwill Goodwill arising on acquisitions of subsidiary Goodwill is no longer amortised. It is tested annually forundertakings occurring after 31 March 1998 are impairment and carried at cost less accumulated impairmentcapitalised as assets on the balance sheet and losses.amortised on a straight line basis over theirestimated useful economic lives. Goodwill on acquisitions prior to 31 March 1998 The group has elected not to revisit goodwill onwas charged against reserves in the year of acquisitions prior to transition and as a result, theacquisition and in the event of a subsequent goodwill recognised in the Irish GAAP Balance Sheet at 1disposal the goodwill would be written back April 2004 has been carried forward without adjustment asand reflected in the profit and loss account. its deemed cost. Goodwill previously written off against reserves has not been re-instated. Goodwill carried in the Group Balance Sheet is As a result, the goodwill charged to the income statementsubject to impairment review when the carrying since 1 April 2004 has been reversed.amount may not be recoverable and is written down by the amount of any impairment lossidentified in the year. (e) Share based payments Where shares are awarded, or options granted, When shares are awarded, the fair value of the employeethe charge made to the profit and loss account services received in exchange for the grant of the optionsis the difference between the intrinsic value or shares is recognised as an expense and is charged toat the time the award is made and any the income statement over the vesting period. Save As Youcontribution made by the employee. For options Earn schemes are not exempt from these requirements.or shares granted at market prices, this willnot result in any charge in the accounts. The charge is determined by reference to the fair value of the options or shares granted, which is calculatedUnder the terms of the Group's Revenue approved excluding the impact of any non-market vesting conditions.Save As You Earn schemes, employees have the Non-market conditions are reflected through theoption to purchase shares at a discount to the assumptions about the number of options or shares that aremarket price. Such schemes are exempted from expected to vest. These assumptions are revisited at eachthe requirements to charge this difference to balance sheet date.the profit and loss account over the period oftheir savings contract. This results in a charge to the income statement for each of the Group's main share schemes.Where conditional awards are dependent onperformance criteria, the cost is spread overthe performance period. (f) Employee Benefits Contributions to the Group's defined benefit An asset or liability (net of the associated deferredschemes are charged to the profit and loss so taxation) is recognised in the balance sheet in respect ofas to spread the expected cost of pensions, defined benefit pension plans. It is the present value ofcalculated in accordance with the advice of the defined benefit obligation at the balance sheet datequalified actuaries, on a systematic basis over minus the fair value of plan assets, together withemployees' working lives. Variations from the adjustments for unrecognised past service cost.regular cost are spread over the averageremaining service life of relevant employees. The defined benefit obligation is calculated annually by independent actuaries using the projected unit creditThe assets and liabilities of defined benefit method. Actuarial gains and losses arising from experiencepension funds are not required to be adjustments and changes in actuarial assumptions areconsolidated on the Balance Sheet. charged or credited directly to reserves through the statement of recognised income and expense. The cost of the Group's defined contributionschemes are charged to the profit and loss for Past service costs are recognised immediately in income,the period in which they are incurred. unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period. As there is an overall deficit on the Group's pension schemes when calculated under IFRS, this has been recognised on the Balance Sheet on transition, net of deferred tax. (g) Software and Intangible assets Computer software is capitalised and included Acquired computer software licenses are capitalised on thewithin tangible assets where future economic basis of the costs incurred to acquire and bring to usebenefits are expected to arise from the asset. the specific software. These costs are amortised on theThese assets are amortised over their expected basis of their expected useful lives.useful lives. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group and which will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets and amortised over their useful lives. This has resulted in the reclassification of computer software from tangible to intangible assets. Other intangible assets are recognised if they are separable from the reporting entity or arise from contractual or other legal rights. This includes the payments made for the use of the UK Post Office brand and for customer distribution rights associated with the useOther intangible assets are recognised if they of the UK Post Office network.can be disposed of separately, withoutdisposing of the business of the entity. These payments will be amortised over their expected useful life. (h) Lessor Accounting Leasing income is recognised in proportion to Leasing income is recognised in proportion to the fundsthe funds invested in the lease so as to give a invested in the lease so as to give a constant rate ofconstant rate of return over each period after return over each period before taking account of taxationtaking account of taxation cash flows. cash flows. The taxation impacts of leasing are reflected in the income statement when they occur. This impacts the timing of recognition of income in the profit and loss account. (i) Dividends Dividends declared after the period end are Dividends are recorded in the period in which they arerecorded in the period to which they relate. approved. This results in an increase in stockholders funds on transition as no liability is recognised in the accounts for proposed dividends. (j) Deferred tax Deferred taxation is recognised on all timing Deferred tax is provided on temporary differences arisingdifferences where the transaction or event that between the tax bases of assets and liabilities and theirgives rise to an obligation to pay more tax in carrying amounts in the financial statements. Deferred taxthe future or a right to pay less tax in the is determined using tax rates that have been enacted orfuture, have occurred by the balance sheet date substantially enacted by the balance sheet date. Deferredusing rates of tax that have been enacted by tax related to fair value re-measurement of available forthe balance sheet date. sale investments and cash flow hedges, or related to the revaluation of land and buildings, which are charged or credited directly to equity, is also credited or charged directly to equity and is subsequently recognised in the income statement together with the deferred gain or loss. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets are recognised when it ismore likely than not that they will berecovered. Deferred tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the difference will not reverse in the foreseeable future.Deferred taxation is not provided in respect oftiming differences arising from the sale orrevaluation of fixed assets unless, by thebalance sheet date, a binding commitment to The primary areas where deferred taxation is now requiredsell the asset has been entered into. to be provided where previously not is on property revaluations and rolled over capital gains. (k) Tangible fixed assetsTangible fixed assets may be held at Tangible fixed assets may be held at depreciateddepreciated historical cost or a revalued historical cost or fair value. However, these revaluationsamount. The group's property portfolio is the must be on the basis of Open Market Value.only tangible fixed asset held at a revaluedamount. They were revalued on the basis ofExisting Use Value. This has given rise to adjustments to the group's revaluation reserve. (l) Derivatives and hedge accounting Derivative instruments used for trading Derivatives are initially recognised at fair value on thepurposes or used to manage risk in the trading date on which a derivative contract is entered into andportfolios are measured at fair value and the are subsequently re-measured at their fair value on theresultant profits and losses are included in Balance Sheet.dealing profits. Unrealised gains and lossesare reported in Other Assets or OtherLiabilities on a gross basis. The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the itemDerivatives used for hedging purposes are taken being hedged. The Group designates certain derivatives asto the profit and loss account in accordance either: (1) hedges of the fair value of recognised assetswith the accounting treatment of the underlying or liabilities or firm commitments (fair valuetransaction. Accrued income or expense is hedge); or, (2) hedges of highly probable future cashreported in prepayments and accrued income or flows attributable to a recognised asset oraccruals and deferred income on a gross basis. liability, or a forecasted transaction (cashflow hedge). Profits and losses related to qualifying hedgesof firm commitments and anticipated Changes in the fair value of derivatives that aretransactions are deferred and taken to the designated and qualify as fair value hedges are recordedprofit and loss account when the hedged in the income statement, together with any changes in thetransactions occur. fair value of the hedged asset or liability that are attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash-flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled to the income statement in the periods in which the hedged item will affect profit or loss. Certain derivative instruments do not qualify for hedge accounting. Changes in their fair value are recognised immediately in the income statement. The Group has primarily applied macro cash-flow hedging to derivatives hedging its funding base together with the use of a limited number of micro fair value hedges for large ticket transactions. The fair value of these derivatives is now reflected on the balance sheet. As a result of the strict hedge accounting rules in IAS 39, hedge accounting is likely to introduce volatility into to the income statement to the extent that hedging relationships prove ineffective. (m) Classification and measurement of financial instruments Under Irish GAAP, financial instruments are Under IFRS, financial instruments are classified as eitherclassified as either investment securities orother securities. Debt securities and equity shares held for use (a) Financial assets at fair value through profiton a continuing basis in the Group's activities or lossare classified as investment securities. Suchsecurities and shares are stated at cost less A financial asset is classified in thisprovision for any permanent diminution in category if acquired principally for the purpose ofvalue. selling in the short term or if so designated by management. Other securities and other equity shares arestated at fair value using mid-market values, (b) Loans and receivablesexcept for those securities maintained for thepurpose of hedging, which are accounted for on This category includes non-derivative financialthe same basis as the item hedged. Changes in assets with fixed or determinable payments thatthe fair value of securities marked to market are not quoted in an active market.are recognised in the profit and loss accountas they arise and included in dealing profits. (c) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. (d) Available-for-sale Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Financial assets are initially recognised at fair value plus transaction costs. Available-for-sale and financial assets at fair value through profit or loss are subsequently carried at fair value whereas loans and receivables and held-to-maturity investments are subsequently carried at amortised cost using the effective interest method. A large portion of the Group's debt securities, previously classified as both trading and investment, have been reclassified as available for sale. The fair value movements will pass through the available for sale reserve. (n) Issued debt and equity securities Under Irish GAAP, capital instruments which Instruments which carry a contractual obligation tocontain an obligation to transfer economic deliver cash or another financial asset to another entitybenefits to another party are classified as are classified as financial liabilities. The dividends ondebt. these instruments are recognised in the income statement as interest expense. Where there is discretion in relation to the payment of a dividend, the instrument is classified as equity and the payments are included as preference dividends. As a result, the Stg£50.4m non cumulative preference shares have been classified as debt while the US$150m undated floating rate primary capital notes have been classified as equity. (o) Loan impairment Specific provisions are made for loans and Impairment losses are recognised where there is objectiveadvances when the Group consider that the evidence of impairment as a result of one or more losscreditworthiness of a borrower has deteriorated events that have occurred and where these events have hadsuch that the recovery of the whole or part of an impact on the estimated future cash flows of thean outstanding advance is in serious doubt. financial asset or portfolio of financial assets and is measured based on the difference between the carrying amount and the present value the estimated future cashflows, discounted at the original effective interestSpecific provisions are generally raised on an rate.individual basis, although specific provisionsmay be raised on a portfolio basis forhomogeneous assets and where statisticaltechniques are appropriate. Impairment is measured individually for assets that are individually significant and on a collective basis for portfolios with similar risk characteristics. General provisions are raised to cover losseswhich are present in loans and advances at thebalance sheet date, but which have not been Provisions for incurred losses that observable dataspecifically identified. indicates are present in the portfolio but have not yet been specifically identified are also raised. If collection of interest is doubtful, it iscredited to a suspense account and excluded The Bank's assessment of the overall level of creditfrom interest income in the profit and loss impairment is unchanged . However, the application of IFRSaccount. The suspense account in the balance has resulted in a re-analysis of the Irish GAAP generalsheet is netted against the relevant loan. and specific provisions into IFRS impairment allowances. (p) Effective Interest Rate Interest income is recognised as it accrues. Interest income and expense are recognised in the income statement using the effective interest rate. This rate includes all fees and points paid or received between parties to the contract, transaction costs and all other premiums or discounts. Fees earned on the execution of a significant act are recognised immediately Fees and commissions which represent a returnfor services provided, risk borne or which are The application of IFRS has resulted in certain upfrontin the nature of interest are generally fees and expenses being included in interest income andcredited to income when the service is spread over the expected life of the underlying asset,performed. rather than being taken upfront. (q) Offset Under Irish GAAP, an intention to settle net is For a financial asset and financial liability to benot a requirement for offset, the entity must offset, an entity must intend to settle on a net basis ofhave the ability to insist on net settlement to realise the asset and settle the liabilityand that ability is assured beyond doubt. simultaneously. As a result of this change, on 1 April 2005, the balance sheet has been grossed up for interbank derivatives which, although subject to set off arrangements, are not intended to be settled on a net basis. 6. Basis of Preparation Previously, the Group prepared its audited accounts under Irish GAAP. From 1April 2005, the Group is required to present its consolidated accounts inaccordance with accounting standards adopted for use in the EU. In preparing this financial information management has used its best knowledgeof the expected standards and interpretations, facts and circumstances, andaccounting policies that will be applied when the Group prepares its first setof Accounts, in accordance with accounting standards adopted for use in the EU,as of 31 March 2006. As a result, although this financial information is basedon management's best knowledge of expected standards and interpretations, andcurrent facts and circumstances, this may change. For example, IFRS standardsand IFRIC interpretations are subject to ongoing review and possible amendmentor interpretive guidance and therefore are still subject to change. Therefore,until the Group prepares its first set of Accounts in accordance with accountingstandards adopted for use in the EU, the possibility cannot be excluded that theaccompanying financial information may have to be adjusted. Save as noted below, the Group complies with the EU endorsed version of IAS 39.This carved out version relaxes some of the hedge accounting requirements andprohibits the designation of non trading financial liabilities at fair valuethrough profit or loss. The Group has not taken advantage of any of the relaxedhedge accounting requirements. However the recent amendment to IAS 39 "Financial Instruments: Recognition and measurement" in respect of the fair valueoption permits financial assets or liabilities, provided they meet certaincriteria, to be designated at fair value through the profit and loss account.The Group has adopted the fair value option ahead of its effective date on theassumption that it will be endorsed by the E.U. Consequently, the financialinformation herein has also been prepared in accordance with all extantaccounting standards, interpretations and amendments issued by the IASB. The rules for first time adoption of IFRS are set out in IFRS 1 "First-timeAdoption of International Financial Reporting Standards". IFRS 1 requires theGroup to determine its IFRS accounting policies and apply these retrospectivelyto determine the opening balance sheet position under IFRS at the date oftransition. Details of the provisional IFRS accounting policies are set out insection 7 below. IFRS 1 allows a number of mandatory exceptions and voluntary exemptions and theimpact of each mandatory exception and the voluntary exemptions that the Groupchooses to apply are outlined below. Impact for Bank of Ireland Mandatory exception Estimates The Group's estimates at the date of transition are consistent with those under Irish GAAP. Assets held for sale and discontinued operations The Group has no transactions prior to 1 April 2005 that are affected by the transitional requirements of IFRS 5 " Non-current Assets Held for Sale and Discontinued Operations". Derecognition of financial instruments Financial instruments derecognised before 1 April 2004 have not been re-recognised by the Group under IFRS. Hedge accounting IFRS compliant hedge accounting is applied by the Group from 1 April 2005. Voluntary exemption Business combinations By electing to apply IFRS 3 "Business Combinations" on a prospective basis from 1 April 2004, the Group has not restated past acquisitions and mergers. Goodwill previously written off to reserves has not been reinstated and no additional intangible assets have been recognised in this regard. Employee benefits Under Irish GAAP, the Group will recognise all cumulative actuarial gains and losses and elects to apply this treatment at the date of transition to IFRS, 1 April 2004. Cumulative translation adjustment The Group has opted to reset the cumulative translation difference on adoption of IFRS to zero. Comparatives for financial instruments and The Group has chosen not to restate comparatives for IAS 32designation of financial assets and liabilities and IAS 39, but to reflect the impact of these standards through adjustments to stockholders' equity as at 1 April 2005. At this date the Group has designated various financial assets and liabilities as at fair value through profit or loss or as available-for-sale. The Group has applied Irish GAAP to financial instruments and hedging transactions for its 2005 comparatives. Share-based payments The Group has elected not to apply IFRS 2 to equity instruments that were granted before 7 November 2002 and had not vested by 1 January 2005. Insurance contracts The Group has chosen not to restate its comparatives for IFRS 4 and will apply previous Irish GAAP. 7. Provisional IFRS Accounting Policies The principal accounting policies adopted in the preparation of theseconsolidated financial statements are set out below: 1. Consolidation (i) Subsidiaries Subsidiaries, which are those companies and other certain entities (includingspecial purpose entities) in which the Group, directly or indirectly, has powerto govern the financial and operating policies, are consolidated. The existence and effect of potential voting rights that are presentlyexercisable or convertible are considered when assessing whether the Groupcontrols another entity. Subsidiaries are consolidated from the date on which control is transferred tothe Group and are no longer consolidated from the date that control ceases. Thepurchase method of accounting is used to account for the acquisition ofsubsidiaries. The cost of an acquisition is measured at the fair value of theassets given up, equity instruments issued and liabilities incurred or assumedat the date of acquisition, plus costs directly attributable to the acquisition.The excess of the cost of acquisition over the fair value of the Group's shareof the identifiable net assets of the subsidiary acquired is recorded asgoodwill. If the cost of acquisition is less than the fair value of theidentifiable net assets of the subsidiary acquired, the difference is recogniseddirectly in the income statement. Intercompany transactions, balances and unrealised gains on transactions betweengroup companies are eliminated. Unrealised losses are also eliminated unless thetransaction provides evidence of impairment of the asset transferred. (ii) Associates and Joint Ventures Associates are entities in which the Group has significant influence, but notcontrol. This is generally demonstrated by the Group holding in excess of 20%,but less than 50% of the voting rights. Joint ventures are contractual arrangements whereby the Group and another partyundertake an economic activity that is subject to joint control. Investments in associates and joint ventures are accounted for by the equitymethod of accounting and are initially recognised at cost. Under this method,the Group's share of the post-acquisition profits or losses of associates andjoint ventures is recognised in the income statement, and its share ofpost-acquisition movements in reserves is recognised in reserves. The cumulativepost-acquisition movements are adjusted against the carrying amount of theinvestment. When the Group's share of losses in an associate or joint ventureequals or exceeds its interest in the associate or joint venture the Group doesnot recognise further losses unless it has incurred obligations or made paymentson behalf of the associate or joint venture. Unrealised gains on transactions between the Group and its associates or jointventures are eliminated to the extent of the Group's interest in the associate/joint venture; unrealised losses are also eliminated unless the transactionprovides evidence of an impairment of the asset transferred. The Group'sinvestment in associates and joint ventures includes goodwill (net of anyaccumulated impairment losses) identified on acquisition. 2. Foreign currency translation Items included in the financial statements of each entity of the Group aremeasured using the currency of the primary economic environment in which theentity operates ("the functional currency"). The consolidated financialstatements are presented in euro, which is the functional and presentationcurrency of the parent. Foreign currency transactions are translated into euro at the exchange ratesprevailing at the dates of the transactions. Foreign exchange gains and lossesresulting from the settlement of such transactions and from the translation atyear-end exchange rates of monetary assets and liabilities denominated inforeign currencies, are recognised in the income statement, except when deferredin equity as qualifying cash flow hedges and qualifying net investment hedges.Translation differences on non-monetary items, such as equities held at fairvalue through profit and loss, are reported as part of the fair value gain orloss. Translation differences on non-monetary items such as equities classifiedas available-for-sale are included in the fair value reserve in equity. The results and financial position of all the group entities that have afunctional currency different from the presentation currency have beentranslated into the presentation currency as follows: • Assets and liabilities for each balance sheet presented are translated atthe closing rate at the date of that balance sheet; • Income and expenses for each income statement are translated at averageexchange rates (unless this average is not a reasonable approximation of thecumulative effect of the rates prevailing on the transaction dates, in whichcase income and expenses are translated at the date of the transactions); and • All resulting exchange differences are recognised as a separate componentof equity. On consolidation, exchange differences arising from the translation of the netinvestment in foreign entities and of borrowings and other currency instrumentsdesignated as hedges of such investments, are taken directly to a separatecomponent of stockholders' equity. When a foreign operation is sold, suchexchange differences are recognised in the income statement as part of the gainor loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. 3. Interest income and expense Interest income and expense are recognised in the income statement for allfinancial instruments measured at amortised cost or available for sale using theeffective interest method. The effective interest method is a method of calculating the amortised cost ofa financial asset or a financial liability and of allocating the interest incomeor interest expense over the relevant period. The effective interest rate isthe rate that exactly discounts estimated future cash payments or receiptsthrough the expected life of the financial instrument or, when appropriate, ashorter period, to the net carrying amount of the financial asset or liability.When calculating the effective interest rate, the Group estimates cash flowsconsidering all contractual terms of the financial instrument (for example,prepayment options) but does not consider future credit losses. The calculationincludes all fees and points paid or received between parties to the contractthat are an integral part of the effective interest rate, transaction costs andall other premiums or discounts. Once a financial asset or group of similar financial assets has been writtendown as a result of an impairment loss, interest income is recognised using therate of interest used to discount the future cash flows for the purposes ofmeasuring the impairment loss. 4. Fees and commission income Fees and commissions which are not an integral part of the effective interestrate are generally recognised on an accrual basis when the service has beenprovided. Commission and fees arising from negotiating, or participating in thenegotiation of a transaction for a third party, such as the acquisition ofloans, shares or other securities or the purchase or sale of businesses, arerecognised on completion of the underlying transaction. Portfolio and othermanagement advisory and service fees are recognised based on the applicableservice contracts usually on a time - apportionate basis. Asset management feesrelated to investment funds are recognised rateably over the period the serviceis provided. The same principle is applied for wealth management, financialplanning and custody services that are continuously provided over an extendedperiod of time. Loan commitment fees for loans that are likely to be drawndown, are deferred (together with related direct costs) and recognised as anadjustment to the effective yield on the loan once drawn. 5. Leases (a) A group company is the lessee The total payments made under operating leases are charged to the incomestatement on a straight-line basis over the period of the lease. When anoperating lease is terminated before the lease period has expired, any paymentrequired to be made to the lessor by way of penalty is recognised as an expensein the period in which termination takes place. Leases of property, plant and equipment where the Group has substantially allthe risks and rewards of ownership are classified as finance leases. Financeleases are capitalised at the lease's inception at the lower of the fair valueof the leased asset and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included inlong-term payables. The interest element of the finance costs is charged to theincome statement over the lease period so as to produce a constant periodic rateof interest on the remaining balance of the liability for each period. (b) A group company is the lessor When assets are held subject to a finance lease, the present value of the leasepayments is recognised as a receivable. The difference between the grossreceivable and the present value of the receivable is recognised as unearnedfinance income. Lease income is recognised over the term of the lease reflectinga constant periodic rate of return on the net investment in the lease. 6. Financial assets The Group classifies its financial assets in the following categories:financial assets at fair value through profit or loss; loans andreceivables; held-to-maturity investments; and available-for-sale financialassets. Management determines the classification of its investments atinitial recognition. (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, andthose designated at fair value through profit or loss at inception inaccordance with the Fair Value option. A financial asset is classifiedin this category if acquired principally for the purpose of selling in the shortterm or if so designated by management. Derivatives are also categorised astrading unless they are designated as hedges. An asset may be designated as at fair value through the profit and loss accountonly when (i) it eliminates or significantly reduces a measurement orrecognition inconsistency, "an accounting mismatch", that would otherwise arisefrom measuring assets or liabilities or recognising the gains and losses on themon a different basis; or (ii) a group of financial assets, financial liabilities or bothis managed and its performance is evaluated on a fair value basis in accordancewith a documented risk management or investment strategy. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. They generallyarise when the Group provides money, goods or services directly to a debtor withno intention of trading the receivable. (c) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group'smanagement has the positive intention and ability to hold to maturity. Were theGroup to sell other than an insignificant amount of held to maturity assets, theentire category would be tainted and would need to be reclassified as availablefor sale. (d) Available-for-sale Available-for-sale investments are not categorised into any of the othercatagories above. They are intended to be held for an indefinite periodof time, and may be sold in response to needs for liquidity or changes ininterest rates, exchange rates or equity prices. Purchases and sales of financial assets at fair value through profit orloss, held to maturity and available for sale are recognised on the trade-date -the date on which the Group commits to purchase or sell the asset. Loans arerecognised when cash is advanced to the borrowers. Financial assets areinitially recognised at fair value plus transaction costs. Financial assets arederecognised when the rights to receive cashflows from the financialassets have expired or where the Group has transferred substantially all risksand rewards of ownership. Available-for-sale financial assets and financial assets at fair value throughprofit or loss are subsequently carried at fair value. Loans andreceivables and held-to-maturity investments are subsequently carried atamortised cost using the effective interest method. Gains and losses arisingfrom changes in the fair value of the financial assets at fair value through profit or loss category are included in the income statement in the periodin which they arise. Gains and losses arising from changes in the fair value ofavailable-for-sale financial assets are recognised directly in equity,until the financial asset is derecognised or impaired at which time thecumulative gain or loss previously recognised in equity will be recognised inprofit or loss. However, interest calculated using the effectiveinterest method is recognised in the income statement. Dividends onavailable-for-sale equity instruments are recognised in the income statementwhen the entity's right to receive payment is established. The fair values of quoted investments in active markets are based on current bidprices. If the market for a financial asset is not active, the Group establishesfair value by using valuation techniques. These include the use of recent arm'slength transactions, discounted cashflow analysis, option pricingmodels and other valuation techniques commonly used by market participants. 7. Financial Liabilities Financial liabilities are initially recognised at fair value, being their issueproceeds (fair value of consideration received) net of transaction costsincurred. Financial liabilities are subsequently measured at either amortisedcost or fair value through profit and loss. For liabilities subsequently carriedat amortised cost, any difference between the proceeds net of transaction costsand the redemption value is recognised in the income statement using theeffective interest method. Preference shares, which carry a mandatory coupon, are classified as financialliabilities. The dividends on these preference shares are recognised in theincome statement as interest expense using the effective interest method. A liability may be designated as at fair value through the profit and lossaccount only when (i) it eliminates or significantly reduces a measurement orrecognition inconsistency, "an accounting mismatch", that would otherwise arisefrom measuring assets or liabilities or recognising the gains and losses on themon a different basis; or (ii) a group of financial assets, financial liabilities or bothis managed and its performance is evaluated on a fair value basis in accordancewith documented risk management or investment strategy. 8. Sale and repurchase agreements and lending of securities Securities sold subject to repurchase agreements ('repos') are retained on thebalance sheet and reclassified as pledged assets when the transferee hasthe right by contract or custom to sell or repledge the collateral; thecounterparty liability is included in deposits from banks on customer accounts,as appropriate. Securities purchased under agreements to resell ('reverserepos') are treated as collateralised loans and recorded as loans and advancesto banks or customers, as appropriate. The difference between sale andrepurchase price is treated as interest and accrued over the life of theagreements using the effective interest method. Securities lent tocounterparties are also retained on the balance sheet. Securities borrowed are not recognised in the financial statements,unless these are sold to third parties, in which case the purchase and sale arerecorded with the gain or loss included in trading income. The obligation toreturn them is recorded at fair value as a trading liability. 9. Issued Debt and Equity Securities The classification of instruments as a financial liability or an equityinstrument is dependent upon the substance of the contractual arrangement.Instruments which carry a contractual obligation to deliver cash or anotherfinancial asset to another entity are classified as financial liabilities andare presented in other borrowed funds. The dividends on these instruments arerecognised in the income statement as interest expense. Where the Group hasdiscretion in relation to the payments, the instrument is classified as equityand the payments are included as preference dividends. If the Group purchases its own debt, it is removed from the balance sheet andthe difference between the carrying amount of the liability and theconsideration paid is included in net trading income. 10. Derivative financial instruments and hedge accounting Derivatives are initially recognised at fair value on the date on which aderivative contract is entered into and are subsequently remeasured at theirfair value. Fair values are obtained from quoted market prices in activemarkets, including recent market transactions, and valuation techniques,including discounted cashflow models and options pricing models, asappropriate. All derivatives are carried as assets when fair value is positive and asliabilities when fair value is negative. The best evidence of the fair value of a derivative at initial recognition isthe transaction price (i.e., the fair value of the consideration given orreceived) unless the fair value of that instrument is evidenced by comparisonwith other observable current market transactions in the same instrument (i.e.,without modification or repackaging) or based on a valuation technique whosevariables include only data from observable markets. When such evidence exists,the Group recognises profit on day one. Certain derivatives embedded in other financial instruments, such as theconversion option in a convertible bond, are treated as separate derivativeswhen their economic characteristics and risks are not closely related to thoseof the host contract and the host contract is not carried at fair value throughprofit or loss. These embedded derivatives are measured at fair value withchanges in fair value recognised in the income statement. The method of recognising the resulting fair value gain or loss depends onwhether the derivative is designated as a hedging instrument, and if so, thenature of the item being hedged. The Group designates certain derivatives aseither: (1) hedges of the fair value of recognised assets or liabilities orfirm commitments (fair value hedge); or, (2) hedges of highly probablefuture cashflows attributable to a recognised asset or liability, or toa forecasted transaction (cashflow hedge). Hedge accounting is used forderivatives designated in this way provided certain criteria are met. The Group documents, at the inception of the transaction, the relationshipbetween hedging instruments and hedged items, as well as its risk managementobjective and strategy for undertaking various hedge transactions. The Groupalso documents its assessment, both at hedge inception and on an ongoing basis,of whether the derivatives that are used in hedging transactions are highlyeffective in offsetting changes in fair values or cashflows of hedgeditems. (a) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fairvalue hedges are recorded in the income statement, together with any changes inthe fair value of the hedged asset or liability that are attributable to thehedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustmentto the carrying amount of a hedged item for which the effective interest methodis used is amortised to profit or loss over the period to maturity. Theadjustment to the carrying amount of a hedged security remains in retainedearnings until the disposal of the security. (b) Cashflow hedge The effective portion of changes in the fair value of derivatives that aredesignated and qualify as cashflow hedges are recognised in equity. Thegain or loss relating to the ineffective portion is recognised immediately inthe income statement. Amounts accumulated in equity are recycled to the income statement in theperiods in which the hedged item will affect profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meetsthe criteria for hedge accounting, any cumulative gain or loss existing inequity at that time remains in equity and is recognised when the forecasttransaction is ultimately recognised in the income statement. When a forecasttransaction is no longer expected to occur, the cumulative gain or loss that wasreported in equity is immediately transferred to the income statement. (c) Net investment hedge Hedges of net investments in foreign operations are accounted for similarly tocashflow hedges. Any gain or loss on the hedging instrument relating tothe effective portion of the hedge is recognised in equity; the gain or lossrelating to the ineffective portion is recognised immediately in the incomestatement. Gains and losses accumulated in equity are included in the incomestatement when the foreign operation is disposed of. (d) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes inthe fair value of any derivative instrument that does not qualify for hedgeaccounting are recognised immediately in the income statement. 11. Impairment of financial assets (a) Assets carried at amortised cost The Group assesses at each balance sheet date whether there is objectiveevidence that a financial asset or group of financial assets isimpaired. A financial asset or a group of financial assets isimpaired if, and only if, there is objective evidence of impairment as a resultof one or more events that occurred after the initial recognition of the asset(a 'loss event') and that loss event (or events) has an impact on the estimatedfuture cashflows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impairedincludes observable data that comes to the attention of the Group about thefollowing loss events: (i) significant financial difficulty of the issuer or obligor; (ii) a breach of contract, such as a default or delinquency ininterest or principal payments; (iii) the Group granting to the borrower, for economic or legalreasons relating to the borrower's financial difficulty, aconcession that the lender would not otherwise consider; (iv) it becoming probable that the borrower will enter bankruptcyor other financial reorganisation; (v) the disappearance of an active market for that financial asset because of financial difficulties; or (vi) observable data indicating that there is a measurabledecrease in the estimated future cashflows from a group of financial assets since the initial recognition of those assets, although thedecrease cannot yet be identified with the individual financialassets in the group, including: • adverse changes in the payment status of borrowers in the group; or• national or local economic conditions that correlate with defaultson the assets in the group. The Group first assesses whether objective evidence of impairment existsindividually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on loans and receivablesor held-to-maturity investments carried at amortised cost has been incurred, theamount of the loss is measured as the difference between the asset's carryingamount and the present value of estimated future cashflows (excludingfuture credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. If a loan or held-to-maturityinvestment has a variable interest rate, the discount rate for measuring anyimpairment loss is the current effective interest rate determined under thecontract. The calculation of the present value of the estimated future cash-flows of acollateralised financial asset reflects the cash-flows that may result fromforeclosure less costs for obtaining and selling the collateral, whether or notforeclosure is probable. For the purposes of a collective evaluation of impairment, financial assets aregrouped on the basis of similar credit risk characteristics (i.e. asset type,industry, geographical location, collateral type, past-due status and otherrelevant factors). Those characteristics are relevant to the estimation offuture cashflows for groups of such assets by being indicative of thedebtors' ability to pay all amounts due according to the contractual terms ofthe assets being evaluated. Future cashflows in a group of financial assets that arecollectively evaluated for impairment are estimated on the basis of thecontractual cashflows of the assets in the Group and historical lossexperience for assets with credit risk characteristics similar to those in theGroup. Historical loss experience is adjusted on the basis of current observabledata to reflect the effects of current conditions that did not affectthe period on which the historical loss experience is based and to remove theeffects of conditions in the historical period that do not exist currently. Themethodology and assumptions used for estimating future cashflows arereviewed regularly by the Group to reduce any differences between loss estimatesand actual loss experience. If, in a subsequent period, the amount of the impairment loss decreases and thedecrease can be related objectively to an event occurring after the impairmentwas recognised (such as an improvement in the debtor's credit rating), thepreviously recognised impairment loss is reversed by adjusting the allowanceaccount. The amount of the reversal is recognised in the income statement. When a loan is uncollectible, it is written off against the related provisionfor loan-impairment. Such loans are written off after all the necessaryprocedures have been completed and the amount of the loss has been determined.Subsequent recoveries of amounts previously written off decrease the amount ofthe provision for loan impairment in the income statement. (b) Available-for-sale assets The Group assesses at each balance sheet date whether there is objectiveevidence that an available-for-sale asset is impaired. In addition to thefactors set out above, a significant or prolonged decline in the fair value ofthe asset below its cost is considered in determining whether an impairment losshas been incurred. If an impairment loss has been incurred, the cumulative lossmeasured as the difference between the original cost and the current fair value,less any impairment loss on that asset previously recognised, is removed fromequity and recognised in the income statement. If, in a subsequent period, thefair value of a debt instrument classified as available-for-sale increases andthe increase can be objectively related to an event occurring after theimpairment loss was recognised, the impairment loss is reversed through theincome statement. Impairment losses recognised in the income statement on equityinstruments are not reversed through the income statement. 12. Property, plant and equipment Freehold land and buildings are initially recognised at cost, and subsequentlyheld at fair value. Revaluations are made with sufficient regularity to ensurethat the carrying amount does not differ materially from the open market valueat the balance sheet date All other property, plant and equipment, including freehold and leaseholdadaptations, is stated at cost less accumulated depreciation. Cost includesexpenditure that is directly attributable to the acquisition of the items.Subsequent costs are included in the asset's carrying amount or are recognisedas a separate asset, as appropriate, only when it is probable that futureeconomic benefits associated with the item will flow to the Group and the costof the item can be measured reliably. All other repairs and maintenance arecharged to the income statement during the financial period in which they areincurred. Increases in the carrying amount arising on the revaluation of freehold land andbuildings are credited to revaluation reserves in stockholders' equity.Decreases that offset previous revaluations and increases on the same asset arecharged against property revaluation reserve; all other decreases are charged tothe income statement. Freehold and long leasehold property is maintained in a state of good repair andthe directors consider that residual values based on prices prevailing at thetime of acquisition or subsequent valuation are such that depreciation is notmaterial. Accordingly, freehold property is not depreciated. Depreciation is calculated on the straight-line method to write down thecarrying value of assets to their residual values over their estimated usefullives as follows: Freehold property Not depreciatedAdaptation works on freehold & leasehold property 15 years, or the remaining period of the leaseComputer and other equipment Maximum of ten years The assets' residual values and useful lives are reviewed, and adjusted ifappropriate, at each balance sheet date. Property, plant and equipment arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. An asset's carrying amount iswritten down immediately to its recoverable amount if the asset's carryingamount is greater than its estimated recoverable amount. The estimatedrecoverable amount is the higher of the asset's fair value less costs to sell orvalue in use. Gains and losses on disposal of property, plant and equipment are determined byreference to their carrying amount and are taken into account in determiningoperating profit. 13. Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiary/associate/joint venture at the date of acquisition. Goodwill on acquisition of subsidiaries is included in 'Intangible assets'.Goodwill on acquisitions of associates/joint ventures is included in 'Investments in associates'. Goodwill is tested annually for impairment and carried at cost less accumulatedimpairment losses. Gains and losses on the disposal of an entity include thecarrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash generating units for the purpose of impairmenttesting. (b) Computer software Acquired computer software licenses are capitalised on the basis of the costsincurred to acquire and bring to use the specific software. These costs areamortised on the basis of their expected useful lives, which is normally fiveyears. Costs associated with developing or maintaining computer software programmes arerecognised as an expense as incurred. Costs that are directly associated withthe production of identifiable and unique software products controlled by theGroup and which will probably generate economic benefits exceeding costs beyondone year, are recognised as intangible assets. Direct costs include softwaredevelopment employee costs and an appropriate portion of relevant overheads. Computer software development costs recognised as assets are amortised using thestraight-line method over their useful lives, which is normally five years. (c) Other intangible assets Included within other intangible assets are payments made for the use of the UKPost Office brand and for customer distribution rights associated with the useof the UK Post Office network. These are amortised on a straight-line basisover its useful life. 14. Provisions Provisions are recognised when the Group has a present legal or constructiveobligation as a result of past events, it is probable that an outflow ofresources embodying economic benefits will be required to settle the obligation,and a reliable estimate of the amount of the obligation can be made. 15. Employee benefits (a) Pension obligations The Group companies operate various pension schemes. The schemes are funded andthe assets of the schemes are held in separate trustee administered funds. TheGroup has both defined contribution and defined benefit plans. A definedbenefit plan is a pension plan that defines an amount of pension benefit to beprovided, usually as a function of one or more factors such as age, years ofservice or compensation. A defined contribution plan is a pension plan underwhich the Group pays fixed contributions into a separate entity (a fund) andwill have no legal or constructive obligations to pay further contributions ifthe fund does not hold sufficient assets to pay all employees benefits relatingto employee service in the current and prior periods. The asset/liability recognised in the balance sheet in respect of definedbenefit pension plans is the present value of the defined benefit obligation atthe balance sheet date minus the fair value of plan assets, together withadjustments for unrecognised past service cost. The defined benefit obligationis calculated annually by independent actuaries using the projected unit creditmethod. The present value of the defined benefit obligation is determined bydiscounting the estimated future cash outflows using interest rates of highquality corporate bonds that are denominated in the currency in which thebenefits will be paid, and that have terms to maturity approximating the termsof the related pension liability. Actuarial gains and losses arising from experience adjustments and changes inactuarial assumptions are charged or credited directly to reserves through thestatement of recognised income and expense. Past service costs are recognisedimmediately in income, unless the changes to the pension plan are conditional onthe employees remaining in service for a specified period of time (the vestingperiod). In this case, the past service costs are amortised on a straight-linebasis over the vesting period. For defined contribution plans, once the contributions have been paid, thecompany has no further payment obligations. The contributions are recognised asemployee benefit expense when they are due. Prepaid contributions arerecognised as an asset to the extent that a cash refund or a reduction in thefuture payments is available. (b) Equity compensation benefits The Group has a number of equity share based payment schemes. The fair value ofthe employee services received in exchange for the grant of the options orshares is recognised as an expense. The total amount to be expensed over thevesting period is determined by reference to the fair value of the options orshares granted, excluding the impact of any non-market vesting conditions (forexample, growth in EPS). Non-market vesting conditions are included inassumptions about the number of options or shares that are expected to vest. Ateach balance sheet date, the entity revises its estimate of the number ofoptions or shares that are expected to vest. It recognises the impact of therevision of the original estimates, if any, in the income statement, and acorresponding adjustment to equity over the remaining vesting period. Where new shares are issued, the proceeds received net of any directlyattributable transaction costs are credited to share capital (nominal value) andshare premium when the options are exercised. 16. Income taxes Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the Accounts. Deferred income tax is determinedusing tax rates (and tax laws) that have been enacted or substantially enactedby the balance sheet date and are expected to apply when the related deferredincome tax asset is realised or the deferred income tax liability is settled. The rates enacted or substantively enacted at the balance sheet date are used todetermine deferred income tax. However, the deferred income tax is notaccounted for if it arises from initial recognition of an asset or liability ina transaction other than a business combination that at the time of thetransaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised to the extent that it is probable that futuretaxable profit will be available against which the temporary differences can beutilised. Deferred income tax is provided on temporary differences arising frominvestments in subsidiaries and associates/joint ventures, except where thetiming of the reversal of the temporary difference is controlled by the Groupand it is probable that the difference will not reverse in the foreseeablefuture. Deferred tax related to fair value re-measurement of available for saleinvestments and cash flow hedges, or related to the revaluation of land andbuildings, which are charged or credited directly to equity, is also credited orcharged directly to equity and is subsequently recognised in the incomestatement together with the deferred gain or loss. Income tax payable on profits, based on the applicable tax law in eachjurisdiction, is recognised as an expense in the period in which profits arise.The tax effects of income tax losses available for carry forward are recognisedas an asset when it is probable that future taxable profits will be availableagainst which these losses are utilised. 17. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprisecash in hand and balances with central banks and post office banks that can bewithdrawn on demand. It also comprises balances with an original maturity ofless than three months. 18. Share capital and treasury stock (a) Share issue costs Incremental external costs directly attributable to the issue of new shares oroptions or to the acquisition of a business, are shown in equity as a deduction,net of tax, from the proceeds. (b) Dividends Dividends are recognised in equity in the period in which they are approved. Dividends for the year which are declared after the balance sheet date are dealtwith in the subsequent events note. (c) Treasury shares Where the Company or its subsidiaries purchases the Company's equity sharecapital, the consideration paid is deducted from total stockholders' equity astreasury shares until they are cancelled. Where such shares are subsequentlysold or reissued, any consideration received is included in stockholders'equity. 19. Life Assurance Operations In accordance with IFRS4, the Group classifies all life assurance products aseither insurance or investment contracts for accounting purposes. Insurancecontracts are those contracts that transfer significant insurance risk. Thesecontracts are accounted for using an embedded value basis. Investment contracts are accounted for in accordance with IAS39. All of theGroup's investment contracts are unit-linked in nature. These contracts areaccounted for as financial liabilities whose value is linked to the fair valueof the financial assets within the policyholders' unit-linked funds. The Groupwill recognise an asset for deferred acquisition costs relating to investmentcontracts. Up-front fees received for investment management services will bedeferred. The Group recognises the value of in-force life assurance business asset as thepresent value of future profits expected to arise from contracts classified asinsurance under IFRS 4. The asset is determined by projecting the futurestatutory surpluses attributable to stockholders estimated to arise frominsurance contracts. The surpluses are projected using appropriate assumptionsas to future investment returns, persistency, mortality and expense levels.These surpluses are then discounted at a risk-adjusted rate. The value of in-force asset in the consolidated balance sheet and movements inthe asset in the income statement are presented on a gross of tax basis. The taxcharge comprises both current and deferred tax expense and includes taxattributable to both stockholders and policyholders for the period. 20. Offset Financial assets and liabilities are offset and the net amount reported in thebalance sheet when there is a legally enforceable right of set-off and there isan intention to settle on a net basis, or realise the asset and settle theliability simultaneously. This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW

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