3rd Aug 2005 07:00
Allied Irish Banks PLC03 August 2005 Provisional IFRS accounting policies The Accounting policies that the Group applied in the preparation of the interimfinancial statements and which it expects to apply for the year ended 31December 2005 are set out below. Full details of the accounting policies appliedin previous periods under IR GAAP can be found on pages 64 to 68 of the 2004Annual Report. AIB has availed of transitional provisions with regard to IAS 32,IAS 39 and IFRS 4. Therefore, comparative information for 2004 in respect offinancial instruments and insurance contracts has been prepared on the basis ofthe Group's policies under IR GAAP. 1 Accounting convention The financial information has been presented in accordance with InternationalAccounting Standards and International Financial Reporting Standards(collectively 'IFRS') as endorsed by the EU or expected to be applicable at 31December 2005. The financial statements have been prepared in accordance with IFRS as requiredby European directives. The financial statements have been prepared under thehistorical cost basis, except where the following assets are stated at theirfair value: derivative financial instruments, financial assets at fair valuethrough profit and loss, financial instruments held for trading and financialinstruments classified as available for sale. The preparation of accounts requires management to make estimates andassumptions that affect the reported amounts of certain assets, liabilities,revenues and expenses, and disclosures of contingent assets and liabilities.Since management's judgement involves making estimates concerning the likelihoodof future events, the actual results could differ from those estimates. Someestimation techniques involve significant amounts of management valuationjudgements, often in areas which are inherently uncertain. The estimationtechniques which are considered to be most complex are in the areas ofimpairment of financial assets, share based payments, fair value of financialassets and liabilities, the impairment of goodwill, the value of the long-termassurance business, and retirement benefits. The accounting policies have been consistently applied by Group entities. 2 Basis of consolidation The Group financial information includes the accounts of Allied Irish Banks,p.l.c. (the parent company) and its subsidiary undertakings, including certainspecial purpose entities where appropriate, made up to the end of the financialperiod. A subsidiary is one where the Group has the power, directly orindirectly, to govern the financial and operating policies of the entity, so asto obtain benefits from its activities. The existence and effect of potentialvoting rights that are currently exercisable or convertible are considered inassessing whether the Group controls the entity. Subsidiaries are consolidated from the date on which control is transferred tothe Group until the date that control ceases. The Group uses the purchase methodof accounting to account for the acquisition of subsidiary undertakings. Thecost of an acquisition is measured as the fair value of the assets given, equityinstruments issued and liabilities incurred or assumed at the date of thetransaction, plus costs directly attributable to the acquisition. Identifiableassets acquired are fair valued at the acquisition date, irrespective of theextent of any minority interest. The excess of the cost of acquisition over thefair value of the Group's share of the identifiable net assets acquired isrecorded as goodwill. Intra-group balances and any unrealised gains and losses, or income andexpenses, arising from intra-group transactions are eliminated on consolidation. 3 Interests in associated undertakings An associate is generally one in which the Group's interest is greater than 20%and less than 50% and in which the Group has significant influence, but notcontrol over, the entity's operating and financial policies. Investments in associated undertakings are initially recorded at cost andincreased (or decreased) each year by the Group's share of the post acquisitionnet income (or loss), or other movements reflected directly in the equity of theassociated undertaking. Goodwill arising on the acquisition of an associated undertaking is included inthe carrying amount of the investment (net of any accumulated impairment loss).When the Group's share of losses in an associate has reduced the carrying amountto zero, including any other unsecured receivables, the Group does not recognisefurther losses, unless it has incurred obligations to make payments on behalf ofthe entity. The Group's share of the results of associates after tax reflects the Group'sproportionate interest in the associates and is based on financial statementsmade up to a date not earlier than three months before the balance sheet date,adjusted to conform with the accounting polices of the Group. Unrealised gainsand losses on transactions with the associate are eliminated to the extent ofthe Group's interest in the investee. Provisional IFRS accounting policies 4 Foreign currency translation The consolidated financial statements are presented in Euro, which is theGroup's presentational currency. Items included in the financial statements of each of the Group's entities aremeasured using their functional currency, being the currency of the primaryeconomic environment in which the entity operates. Transactions and balances Foreign currency transactions are translated into the respective entity'sfunctional currency using the exchange rates prevailing at the dates of thetransactions. Monetary assets and liabilities denominated in foreign currenciesare retranslated at the rate prevailing at the period end. Foreign exchangegains and losses resulting from the settlement of such transactions and from theretranslation at period end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement exceptfor qualifying cash flow hedges. Exchange differences on equities and similarnon-monetary items held at fair value through profit or loss, are reported aspart of the fair value gain or loss. Translation differences on equitiesclassified as available-for-sale financial assets and non-monetary items, areincluded directly in equity. Foreign operations The results and financial position of all Group entities that have a functionalcurrency different from the Euro are translated into Euro as follows:-- assetsand liabilities including goodwill and fair value adjustments arising onconsolidation of foreign operations are translated at the closing rate; - incomeand expenses are translated into Euro at the average rates of exchange duringthe period; and - all resulting exchange differences are included in cumulativetranslation reserves within shareholders' equity. Exchange differences arising from the translation of the net investment in aforeign operation, and of borrowings designated as hedges of such investments,are taken to a separate component of shareholders' equity and included in theprofit or loss on disposal or partial disposal of the foreign operation. 5 Interest income and expense recognition Interest income and expense is recognised in the income statement for allinterest-bearing financial instruments using the effective interest method. The effective interest method is a method of calculating the amortised cost of afinancial asset or liability (or group of assets and liabilities) and ofallocating the interest income or interest expense over the relevant period. Theeffective interest rate is the rate that exactly discounts the expected futurecash payments or receipts through the expected life of the financial instrument,or when appropriate, a shorter period, to the net carrying amount of thefinancial asset or financial liability. The application of the method has theeffect of recognising income (and expense) receivable (or payable) on theinstrument evenly in proportion to the amount outstanding over the period tomaturity or repayment. In calculating the effective interest rate, the Group estimates cash flows(using projections based on its experience of customers' behaviour) consideringall contractual terms of the financial instrument but excluding future creditlosses. The calculation takes into account all fees, including those for earlyredemption, and points paid or received between parties to the contract that arean integral part of the effective interest rate, transaction costs and all otherpremiums and discounts. All costs associated with mortgage incentive schemes are included in theeffective interest calculation. Fees and commissions payable to third parties inconnection with lending arrangements, where these are direct and incrementalcosts related to the issue of a financial instrument, are included in interestincome as part of the effective interest rate. 6 Fee and commission income Fees and commissions are generally recognised on an accruals basis when theservice has been provided, unless they have been included in the effectiveinterest rate calculation. Loan syndication fees are recognised as revenue whenthe syndication has been completed and the Group has retained no part of theloan package for itself or retained a part at the same effective interest ratefor the other participants. Portfolio and other management advisory and service fees are recognised based onthe applicable service contracts. Asset management fees related to investmentfunds are recognised over the period the service is provided. The same principleis applied to the recognition of income from wealth management, financialplanning and custody services that are continuously provided over an extendedperiod of time. Provisional IFRS accounting policies Commitment fees, together with related direct costs, for loan facilities wheredraw down is probable are deferred and recognised as an adjustment to theeffective interest on the loan once drawn. Commitment fees in relation tofacilities where draw down is not probable are recognised over the term of thecommitment. 7 Financial assets The Group classifies its financial assets into the following categories:-financial assets at fair value through profit or loss; loans and receivables;held to maturity investments; and available for sale financial assets. Purchases and sales of investments are recognised on trade date, being the dateon which the Group commits to purchase or sell the asset. Loans are recognisedwhen cash is advanced to the borrowers. Financial assets are initiallyrecognised at fair value, however with the exception of financial assets at fairvalue through profit and loss, the initial fair value includes direct andincremental transaction costs. The fair value of assets traded in active markets is based on current bidprices. In the absence of current bid prices, the Group establishes a fair valueusing valuation techniques. These include the use of recent arm's-lengthtransactions, reference to other similar instruments, discounted cash flowanalysis, option pricing models and other valuation techniques commonly used bymarket participants. Interest is calculated using the effective interest method and credited to theincome statement. Dividends on available-for-sale equity securities arerecognised in the income statement when the entity's right to receive payment isestablished. Impairment losses and translation differences on monetary items arerecognised in the income statement. Financial assets are derecognised when the rights to receive cash flows from thefinancial assets have expired or where the Group has transferred substantiallyall the risks and rewards of ownership. Financial assets at fair value through profit or loss This category has two sub categories:- Financial assets held for trading; andthose at fair value through profit or loss at inception. A financial asset isclassified in this category if it is held primarily for the purpose of sellingin the short term, or if it so designated by management, subject to certaincriteria. The assets are recognised initially at fair value and transaction costs aretaken directly to the income statement. Interest and dividends on assets withinthis category are reported in interest income, and dividend income,respectively. Gains and losses arising from changes in fair value are includeddirectly in the income statement within other financial income. Derivatives are also classified in this category unless they have beendesignated as hedges. Loans and receivables Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market and which are notclassified as available for sale. They arise when the Group provides money orservices directly to a customer with no intention of trading the loan. Loans andreceivables are initially recognised at fair value including direct andincremental transaction costs, and are subsequently carried on an amortised costbasis. Held to maturity Held to maturity investments are non-derivative financial assets with fixed ordeterminable payments that the Group's management has the intention and abilityto hold to maturity. If the Group was to sell other than an insignificant amountof held to maturity assets, the entire category would be tainted and would berequired to be reclassified as available for sale. Available for sale Available for sale investments are non-derivative financial investments that aredesignated as available for sale and are not categorised into any of the othercategories described above. Available for sale investments are those intended tobe held for an indefinite period of time, which may be sold in response to needsfor liquidity or changes in interest rates, exchange rates or equity prices. Available for sale investments are initially recognised at fair value includingdirect and incremental transaction costs. They are subsequently held at fairvalue. Gains and losses arising from changes in fair value are included as aseparate component of equity until sale when the cumulative gain or loss istransferred to the income statement. Provisional IFRS accounting policies 8 Financial liabilities Issued financial instruments or their components are classified as liabilitieswhere the substance of the contractual arrangement results in the Group having apresent obligation to either deliver cash or another financial asset to theholder, to exchange financial instruments on terms that are potentiallyunfavourable or to satisfy the obligation otherwise than by the exchange of afixed amount of cash or another financial asset for a fixed number of equityshares. 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 amortised cost, anydifference between the proceeds net of transaction costs and the redemptionvalue is recognised in the income statement using the effective interest method.The Group is currently considering the impact of the expected EU endorsement ofthe June 2005 amendment to IAS 39 'the fair value option' with respect to thepossible designation of certain financial liabilities at fair value throughprofit or loss. 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. 9 Property, plant & equipment Property, plant and equipment is stated at cost less accumulated depreciationand provisions for impairment, if any. Additions and subsequent expenditures arecapitalised only to the extent that they enhance the future economic benefitsexpected to be derived from the asset. No depreciation is provided on freeholdland. Property, plant and equipment are depreciated on a straight line basisover their estimated useful economic lives. Depreciation is calculated based onthe gross carrying amount, less the estimated residual value at the end of itseconomic life. The Group generally uses the following useful lives when calculatingdepreciation: Freehold buildings and long-leasehold property 50 yearsShort leasehold property Life of lease, up to 50 yearsCosts of adaptation of freehold and leasehold propertyBranch properties up to 10 years*Office properties up to 15 years*Computers and similar equipment 3 - 5 yearsFixtures and fittings and other equipment 3 - 10 years * Subject to the maximum remaining life of the lease. The Group reviews its depreciation rates regularly to take account of any changein circumstances. When deciding on useful lives and methods, the principalfactors that the Group takes into account are the expected rate of technologicaldevelopments and expected market requirements for, and the expected pattern ofusage of, the assets. When reviewing residual values, the Group estimates theamount that it would currently obtain for the disposal of the asset, afterdeducting the estimated cost of disposal if the asset were already of the ageand condition expected at the end of its useful life. Gains and losses on disposal of property, plant and equipment are included inthe income statement. 10 Intangible assets Goodwill Goodwill may arise on the acquisition of subsidiary and associated undertakings.Purchased goodwill is the excess of the fair value of the purchase considerationand direct costs of making the acquisition, over the fair value of the Group'sshare of the assets acquired and the liabilities and contingent liabilitiesassumed on the date of the acquisition. For the purpose of calculating goodwill,fair values of acquired assets, liabilities and contingent liabilities aredetermined by reference to market values or by discounting expected future cashflows to present value. This discounting is either performed using market ratesor by using risk-free rates and risk adjusted expected future cash flows. Goodwill is capitalised and reviewed annually for impairment, or more frequentlywhen there are indications that impairment Provisional IFRS accounting policies may have occurred. Goodwill is allocated to cash-generating units for thepurpose of impairment testing. Goodwill on the acquisitions of associates isincluded in the carrying amount of those investments in the consolidatedfinancial statements. Gains or losses on the disposal of an entity include thecarrying amount of the goodwill relating to the entity sold. Capitalisedgoodwill was tested for impairment as at 1 January 2004, the date of transitionto IFRS. Goodwill previously written off to reserves under IR GAAP has not beenreinstated and will not be included in calculating any subsequent profit or losson disposal. Computer software Computer software is stated at cost, less amortisation and provisions forimpairment, if any. The identifiable and directly associated external andinternal costs of acquiring and developing software are capitalised where thesoftware is controlled by the Group, and where it is probable that futureeconomic benefits that exceed its cost will flow from its use over more than oneyear. Costs associated with maintaining software are recognised as an expensewhen incurred. Capitalised computer software is amortised over 3 to 5 years. 11 Derivatives and hedge accounting Derivatives, such as interest rate swaps, options and forward rate agreementsare used for trading and for hedging purposes. The Group maintains trading positions in a variety of financial instrumentsincluding derivatives. Trading transactions arise both as a result of activitygenerated by customers and from proprietary trading with a view to generatingincremental income. Non-trading derivative transactions, comprise transactions held for hedgingpurposes as part of the Group's risk management strategy, against assets,liabilities, positions or cash flows, themselves accounted for on an amortisedcost basis. Derivatives Derivatives are measured initially at fair value on the date on which thederivative contract is entered into and subsequently remeasured at fair value.Fair values are obtained from quoted market prices in active markets, includingrecent market transactions, and valuation techniques, including discounted cashflow models and options pricing models as appropriate. Derivatives are includedin assets when their fair value is positive, and liabilities when their fairvalue is negative, unless there is the legal ability and intention to settlenet. Profits or losses are only recognised on initial recognition of derivativeswhen there are observable current market transactions or valuation techniquesthat are based on observable market inputs. 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. Embedded derivatives Some hybrid contracts contain both a derivative and a non-derivative component.In such cases, the derivative component is termed an embedded derivative. Wherethe economic characteristics and risks of embedded derivatives are not closelyrelated to those of the host contract, and the hybrid contract itself is notcarried at fair value through profit and loss, the embedded derivative istreated as a separate derivative, and reported at fair value with gains andlosses being recognised in the income statement. Hedging All derivatives are carried at fair value in the balance sheet and theaccounting treatment of the resulting fair value gain or loss depends on whetherthe derivative is designated as a hedging instrument, and if so, the nature ofthe item being hedged. Where derivatives are held for risk management purposes,and when transactions meet the criteria specified in IAS 39, the Groupdesignates certain derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or firmcommitments (fair value hedge); (2) hedges of probable future cash flows attributable to a recognised asset orliability, or a forecasted transaction (cash flow hedge);or (3) hedges of a net investment in a foreign operation. When a financial instrument is designated as a hedge, the Group formallydocuments the relationship between the hedging instrument and hedged item aswell as its risk management objectives and its strategy for undertaking thevarious hedging transactions. Provisional IFRS accounting policies The Group also documents its assessment, both at hedge inception and on anongoing basis, of whether the derivatives that are used in hedging transactionsare highly effective in offsetting changes in fair values or cash flows ofhedged items. The Group discontinues hedge accounting when: a. it is determined that a derivative is not, or has ceased to be, highly effective as a hedge; b. the derivative expires, or is sold, terminated, or exercised; c. the hedged item matures or is sold or repaid; or d. a forecast transaction is no longer deemed highly probable. To the extent that the changes in the fair value of the hedging derivativediffer from changes in the fair value of the hedged risk in the hedged item; orthe cumulative change in the fair value of the hedging derivative differs fromthe cumulative change in the fair value of expected future cash flows of thehedged item, the hedge is deemed ineffective. The amount of ineffectiveness,(taking into account the timing of the expected cash flows, where relevant)provided it is not so great as to disqualify the entire hedge for hedgeaccounting, is recorded in the income statement. In certain circumstances, the Group may decide to cease hedge accounting eventhough the hedge relationship continues to be highly effective by no longerdesignating the financial instrument as a hedge. Fair value hedge accounting Changes in fair value of derivatives that qualify and are designated as fairvalue hedges are recorded in the income statement, together with changes in thefair value of the hedged asset or liability that are attributable to the hedgedrisk. If the hedge no longer meets the criteria for hedge accounting, the fairvalue hedging adjustment cumulatively made to the carrying value of the hedgeditem is, for items carried at amortised cost, amortised over the period tomaturity of the previously designated hedge relationship using the effectiveinterest method. For available for sale items this fair value hedging adjustmentremains in equity until the hedged item affects profit or loss. If the hedgeditem is sold or repaid, the unamortised fair value adjustment is recognisedimmediately in the income statement. Cash flow hedge accounting The effective portion of changes in the fair value of derivatives that aredesignated and qualify as cash flow hedges is recognised initially directly inshareholders' equity, and recycled to the income statement in the periods whenthe hedged item will affect profit or loss. Any ineffective portion of the gainor loss on the hedging instrument is recognised in the income statementimmediately. 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 in the income statementwhen the forecast transaction arises. When a forecast transaction is no longerexpected to occur, the cumulative gain or loss that was reported in equity isimmediately transferred to the income statement. Net investment hedge Hedges of net investments in foreign operations, including monetary items thatare accounted for as part of the net investment, are accounted for similarly tocash flow hedges. The effective portion of the gain or loss on the hedginginstrument is recognised directly in equity and the ineffective portion isrecognised immediately in the income statement. The cumulative gain or losspreviously recognised in equity is recognised in the income statement on thedisposal or partial disposal of the foreign operation. Hedges of net investmentsmay include non-derivative liabilities as well as derivative financialinstruments. Derivatives that do not qualify for hedge accounting Certain derivative contracts entered into as economic hedges do not qualify forhedge accounting. Changes in the fair value of any derivative instrument that donot qualify for hedge accounting are recognised immediately in the incomestatement. 12 Impairment of financial assets It is Group policy to make provisions for impairment of financial assets toreflect the losses inherent in those assets at the balance sheet date. The Group assesses at each balance sheet date whether there is objectiveevidence that a financial asset or a portfolio of financial assets is impaired. Provisional IFRS accounting policies A financial asset or portfolio of financial assets is impaired and impairmentlosses are incurred if, and only if, there is objective evidence of impairmentas a result of one or more loss events that occurred after the initialrecognition of the asset ('a loss event') and that loss event or events has hadan impact such that the estimated present value of future cash flows is lessthan the current carrying value of the financial asset, or portfolio offinancial assets. Objective evidence that a financial asset, or a portfolio of financial assets,is impaired includes observable data that comes to the attention of the Groupabout the following loss events: a. significant financial difficulty of the issuer or obligor; b. a breach of contract, such as a default or delinquency in interest or principal payments; c. the granting to the borrower a concession, for economic or legal reasons relating to the borrower's financial difficulty that the Group would not otherwise consider; d. it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; e. the disappearance of an active market for that financial asset because of financial difficulties; or f. observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including: i. adverse changes in the payment status of borrowers in the portfolio; ii. national or local economic conditions that correlate with defaults on the assets in the portfolio. The Group first assesses whether objective evidence of impairment existsindividually for financial assets that are individually significant, andindividually or collectively for financial assets that are not individuallysignificant (i.e individually insignifiant). If the Group determines that noobjective evidence of impairment exists for an individually assessed financialasset, whether significant or not, it includes the asset in a group of financialassets with similar credit risk characteristics and includes these performingassets under the collective "incurred but not reported ('IBNR')"assessment. AnIBNR impairment provision represents an interim step pending the identificationof impairment losses on an individual asset in a group of financial assets. Assoon as information is available that specifically identifies losses onindividually impaired assets in a group, those assets are removed from thegroup. Assets that are individually assessed for impairment and for which animpairment loss is, or continues to be, recognised are not included in acollective assessment of impairment. For loans and receivables and assets held to maturity, the amount of impairmentloss is measured as the difference between the asset's carrying amount and thepresent value of estimated future cash flows discounted at the asset's originaleffective interest rate. The amount of the loss is recognised using an allowanceaccount and the amount of the loss is included in the income statement. The calculation of the present value of the estimated future cash flows of acollateralised financial asset reflects the cash flows that may result from foreclosure costs for obtaining and selling the collateral,whether or not foreclosure is probable. For the purpose of collective evaluation of impairment (individuallyinsignificant impaired assets and IBNR) financial assets are grouped on thebasis of similar risk characteristics. These characteristics are relevant to theestimation of future cash flows for groups of such assets by being indicative ofthe counterparty's ability to pay all amounts due according to the contractualterms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluatedfor impairment are estimated on the basis of the contractual cash flows of theassets in the group and historical loss experience for assets with credit riskcharacteristics similar to those in the group. Historical loss experience isadjusted on the basis of current observable data to reflect the effects ofcurrent conditions that did not affect the period on which the historical lossexperience is based and to remove the effects of conditions in the historicalperiod that do not currently exist. The methodology and assumptions used for estimating future cash flows arereviewed regularly to reduce any differences between loss estimates and actualloss experience. Following impairment, interest income is recognised using the original effectiverate of interest which was used to discount the future cash flows for thepurpose of measuring the impairment loss. If, in a subsequent period, the amountof the impairment loss decreases and the decrease can be related objectively toan event occurring after the impairment was recognised, the previouslyrecognised impairment loss is reversed by adjusting the allowance account. Theamount of the reversal is recognised in the income statement. When a loan has been subjected to a specific provision and the prospects ofrecovery do not improve, a time will come when it may be concluded that there isno real prospect of recovery. When this point is reached, the amount of the loanwhich is considered Provisional IFRS accounting policies to be beyond the prospect of recovery is written off against the relatedprovision for loan impairment. Subsequent recoveries of amounts previouslywritten off decrease the amount of the provision for loan impairment in theincome statement. Assets acquired in exchange for loans and advances in order to achieve anorderly realisation are accounted for as a disposal of the loan and anacquisition of an asset. Any further impairment of the assets or businessacquired is treated as an impairment of the relevant asset and not as animpairment of the original instrument. In the case of equity instruments classified as available for sale, asignificant or prolonged decline in the fair value of the instrument below itscost is considered in determining whether impairment exists. Where such evidenceexists, the cumulative net loss that had been previously recognised directly inequity is removed from equity and recognised in the income statement. Reversalsof impairment of equity shares are not recognised in the income statement andincreases in the fair value of equity shares after impairment are recogniseddirectly in equity. In the case of debt instruments classified as available for sale, impairment isassessed based on the same criteria as all other financial assets. Reversals ofimpairment of debt securities are recognised in the income statement. 13 Employee benefits Retirement benefit obligations The Group provides employees worldwide with post retirement benefits mainly inthe form of pensions. The Group provides a number of defined benefit and defined contributionretirement benefit schemes the majority of which are funded. In addition, theGroup contributes, according to local law in the various countries in which itoperates, to Governmental and other plans which have the characteristics ofdefined contribution plans. Full actuarial valuations of defined benefit schemes are undertaken every threeyears and are updated to reflect current conditions at each balance sheet date.Scheme assets are valued at fair value determined by using current bid prices.Scheme liabilities are measured on an actuarial basis using the projected unitcredit method and discounted at the current rate of return on a high qualitycorporate bond of equivalent term and currency to the liability. The differencebetween the fair value of the plan assets and the present value of the definedbenefit obligation at the balance sheet date is recognised in the balance sheet.Schemes in surplus are shown as assets and schemes in deficit, together withunfunded schemes are shown as liabilities. Actuarial gains and losses arerecognised immediately in the statement of changes in shareholders' equity. The cost of providing defined benefit pension schemes to employees, comprisingthe current service cost, past service cost, the expected return on plan assetsand the change in the present value of scheme liabilities arising from thepassage of time is charged to the income statement within employee expenses. The cost of the Group's defined contribution schemes, are charged to the incomestatement in the accounting period in which they are incurred. Any contributionsunpaid at the balance sheet date are included as a liability. The Group has nofurther obligation under these plans once these contributions have been paid. Short-term employee benefits Short-term employee benefits, such as salaries and other benefits, are accountedfor on an accruals basis over the period which employees have provided servicesin the year. Bonuses are recognised to the extent that the Group has a presentobligation to its employees that can be measured reliably. The cost of providingsubsidised staff loans and preferential rates on staff deposits is chargedwithin employee expenses. Share based compensation The Group operates a number of share based compensation plans. For grants ofoptions after 7 November 2002, the fair value of the employee services receivedis measured by reference to the fair value of the shares or share optionsgranted on the date of the grant. The cost of the employee services received inexchange for the shares or share options granted is recognised in the incomestatement over the period during which the employees become unconditionallyentitled to the options, which is the vesting period. The amount to be expensedis determined by reference to the fair value of the option granted. The fairvalue of the options granted is determined using option pricing models, whichtake into account the exercise price of the option, the share price at date ofgrant of the option, the risk free interest rate, the expected volatility of theshare price over the life of the option and other relevant factors. Vestingconditions included in the terms of the grant are not taken into account inestimating fair value except where those terms relate to market conditions. Provisional IFRS accounting policies Non-market vesting conditions are taken into account by adjusting the number ofshares or share options included in the measurement of the cost of employeeservices so that ultimately, the amount recognised in the income statementreflects the number of vested shares or share options. Where vesting conditionsare related to market conditions, the charges for the services received arerecognised regardless of whether or not the market related vesting condition ismet, provided that the non-market vesting conditions are met. The expense related to share based payments is credited to shareholders' equity.Where the share based payment arrangements give rise to the issue of new shares,the proceeds of issue of the shares are credited to share capital (nominalamount) and share premium when the options are exercised. When the share basedpayment give rise to the reissue of shares from treasury shares the proceeds ofissue are credited to shareholders' equity. In addition there is a transferbetween the share based payment reserve and profit and loss account, reflectingthe cost of the share based payment recognised in the income statement. 14 Non-credit risk provisions Provisions are recognised for present legal or constructive obligations arisingas consequences of past events where it is probable that a transfer of economicbenefit will be necessary to settle the obligation, and it can be reliablyestimated. When the effect is material, provisions are determined by discounting expectedfuture cash flows at a pre-tax rate that reflects current market assessments ofthe time value of money and where appropriate, the risks specific to theliability. Payments are deducted from the present value of the provision and interest atthe relevant discount rates is charged annually to interest expense. Changes inthe present value of the liability as a result of movements in interest ratesare included in other financial income. The present value of provisions areincluded in other liabilities. When a leasehold property ceases to be used in the business, provision is made,where the unavoidable costs of the future obligations relating to the lease areexpected to exceed anticipated income. The provision is calculated using marketrates of interest to reflect the long-term nature of the cash flows. Restructuring costs Where the Group has a formal plan for restructuring a business and has raisedvalid expectations in the areas affected by the restructuring, by starting toimplement the plan or announcing its main features, provision is made for theanticipated cost of restructuring, including retirement benefits and redundancycosts, when an obligation exists. The provision raised is normally utilisedwithin twelve months. Future operating costs are not provided for. Legal claims and other contingencies Provisions are made for legal claims where the Group has a present legal orconstructive obligation as a result of past events and it is more likely thannot that an outflow of resources will be required to settle the obligation andthe amount can be reasonably estimated. Contingent liabilities are possible obligations whose existence will beconfirmed only by uncertain future events giving rise to present obligationswhere the transfer of economic benefit is uncertain or cannot be reliablymeasured. Contingent liabilities are not recognised but are disclosed in thenotes to the financial statements unless they are remote. 15 Income tax, including deferred income tax Income tax on the profit and loss for the year comprises current and deferredtax. Income tax is recognised in the income statement except to the extent thatit relates to items recognised directly in equity, in which case it isrecognised in equity. Current tax is the expected tax payable on the taxableincome for the year using tax rates enacted or substantially enacted at thebalance sheet date and any adjustment to tax payable in respect of previousyears. Income tax recoverable on tax allowable losses is recognised as an assetonly to the extent that it is regarded as recoverable by offset against currentor future taxable profits. Deferred income tax is provided, using the balance sheet liability method, ontemporary timing differences arising between the tax bases of assets andliabilities and their carrying amounts for financial reporting purposes.Deferred income tax is determined using tax rates based on legislation enactedor substantially enacted at the balance sheet date and expected to apply whenthe deferred tax asset is realised or the deferred tax liability is settled.Deferred tax assets are recognised where it is probable that future taxableprofits will be available against which the temporary differences will beutilised. Deferred and current tax assets and liabilities are only offset when they arisein the same tax reporting group and where there is both the legal right and theintention to settle on a net basis or to realise the asset and settle theliability simultaneously. Provisional IFRS accounting policies The principal temporary differences arise from depreciation of property, plantand equipment, revaluation of certain financial assets and liabilities includingderivative contracts, provisions for pensions and other post retirementbenefits, tax losses carried forward, and in relation to acquisitions, on thedifference between the fair values of the net assets acquired and their taxbase. Deferred income tax is provided on temporary differences arising frominvestments in subsidiaries and associates, except where the timing of thereversal of the temporary difference is controlled by the Group and it isprobable that the difference will not reverse in the foreseeable future. Inaddition the following temporary differences are not provided for: goodwill notdeductible for tax purposes and the initial recognition of assets andliabilities that affect neither accounting nor taxable profit. Income tax payable on profits, based on the applicable tax law in eachjurisdiction, is recognised as an expense in the period in which the profitsarise. The tax effects of income tax losses available for carry forward arerecognised as an asset when it is probable that future taxable profits will beavailable against which these losses can be utilised. Deferred tax related to items that are charged or credited to equity, iscredited or charged directly to equity and is subsequently recognised in the income statement together with the deferred gain or loss. 16 Impairment of property, plant and equipment and intangible assets At each balance sheet date, or more frequently where events or changes incircumstances dictate, property, plant and equipment and intangible assets, areassessed for indications of impairment. If indications are present, these assetsare subject to an impairment review. Goodwill is subject to an impairment reviewas at the balance sheet date each year. The impairment review comprises acomparison of the carrying amount of the asset with its recoverable amount. Therecoverable amount is determined as the higher of the net selling price of theasset and its value in use.Net selling price is calculated by reference to theamount at which the asset could be disposed of in a binding sale agreement in anarm's length transaction evidenced by an active market or recent transactionsfor similar assets. Value in use is calculated by discounting the expectedfuture cash flows obtainable as a result of the asset's continued use, includingthose resulting from its ultimate disposal, at a market-based discount rate on apre-tax basis. The carrying values of property, plant and equipment and intangible assets arewritten down by the amount of any impairment and this loss is recognised in theincome statement in the period in which it occurs. A previously recognisedimpairment loss relating to a fixed asset may be reversed in part or in fullwhen a change in circumstances leads to a change in the estimates used todetermine the fixed asset's recoverable amount. The carrying amount of the fixedasset will only be increased up to the amount that it would have been had theoriginal impairment not been recognised. Impairment losses on goodwill are notreversed. For the purpose of conducting impairment reviews in respect ofgoodwill, the recoverable amount is determined as the higher of the net sellingprice of the cash-generating unit and its value in use. Cash-generating unitsare the lowest level at which management monitors the return on investment onassets. 17 Collateral & netting The Group enters into master agreements with counterparties, to ensure that ifan event of default occurs, all amounts outstanding with those counterpartieswill be settled on a net basis. Collateral The Group obtains collateral in respect of customer liabilities where this isconsidered appropriate. The collateral normally takes the form of a lien overthe customer's assets and gives the Group a claim on these assets for bothexisting and future liabilities. The Group also receives collateral in the form of cash or securities in respectof other credit instruments, such as stock borrowing contracts, and derivativecontracts in order to reduce credit risk. Collateral received in the form ofsecurities is not recorded on the balance sheet. Collateral received in the formof cash is recorded on the balance sheet with a corresponding liability orasset. These items are assigned to deposits received from banks or othercounterparties in the case of cash collateral received, and to loans andadvances to banks or customers in the case of cash collateral paid away. Anyinterest payable or receivable arising is recorded as interest expense orinterest income respectively. Netting Financial assets and liabilities are offset and the net amount reported in thebalance sheet if, and only if, there is a currently enforceable legal right toset off the recognised amounts and there is an intention to settle on a netbasis, or to realise an asset and settle the liability simultaneously. This isnot generally the case with master agreements, and the related assets andliabilities are presented gross in the balance sheet. Provisional IFRS accounting policies 18 Financial guarantees Financial guarantees are given to banks, financial institutions and other bodieson behalf of customers to secure loans, overdrafts and other banking facilities('facility guarantees'), and to other parties in connection with the performanceof customers under obligations related to contracts, advance payments made byother parties, tenders, retentions and the payment of import duties. Financialguarantees are initially recognised in the financial statements at fair value onthe date that the guarantee is given. Subsequent to initial recognition, thebank's liabilities under such guarantees are measured at the higher of theinitial measurement, less amortisation calculated to recognise in the incomestatement the fee income earned over the period, and the best estimate of theexpenditure required to settle any financial obligation arising as a result ofthe guarantees at the balance sheet date. Any increase in the liability relating to guarantees is taken to the incomestatement in Provisions for undrawn contractually committed facilities andguarantees. 19 Sale and repurchase agreements (including stock borrowing and lending) Investment and other securities may be lent or sold subject to a commitment torepurchase them ('repos'). Such securities are retained on the balance sheetwhen substantially all the risks and rewards of ownership remain with the Group.The liability to the counterparty is included separately on the balance sheet asappropriate. Similarly, when securities are purchased subject to a commitment to resell('reverse repos'), or where the Group borrows securities, but does not acquirethe risks and rewards of ownership, the transactions are treated ascollateralised loans, and the securities are not included in the balance sheet. The difference between the sale and repurchase price is accrued over the life ofthe agreements using the effective interest method. Securities lent tocounterparties are also retained in the financial statements. Securities borrowed are not recognised in the financial statements, unless theseare sold to third parties, at which point the obligation to repurchase thesecurities is recorded as a trading liability at fair value and any subsequentgain or loss included in Trading income. 20 Leases Lessor Assets leased to customers are classified as finance leases if the leaseagreements transfer substantially all the risks and rewards of ownership, withor without ultimate legal title. When assets are held subject to a financelease, the present value of the lease payments, discounted at the rate ofinterest implicit in the lease, is recognised as a receivable. The differencebetween the total payments receivable under the lease and the present value ofthe receivable is recognised as unearned finance income, which is allocated toaccounting periods under the pre-tax net investment method to reflect a constantperiodic rate of return. Assets leased to customers are classified as operating leases if the leaseagreements do not transfer substantially all the risks and rewards of ownership.The leased assets are included within property, plant and equipment on theGroup's balance sheet and depreciation is provided on the depreciable amount ofthese assets on a systematic basis over their estimated useful lives. Leaseincome is recognised on a straight-line basis over the period of the leaseunless another systematic basis is more appropriate. Lessee Operating lease rentals payable are recognised as an expense in the incomestatement on a straight line basis over the lease term unless another systematicbasis is more appropriate. 21 Share capital Issued financial instruments, or their components, are classified as equitywhere they meet the definition of equity and confer on the holder a residualinterest in the assets of the Group. Share issue costs Incremental costs directly attributable to the issue of new shares or optionsare shown in equity as a deduction, net of tax, from the proceeds. Provisional IFRS accounting policies Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in whichthey are approved by the Company's shareholders, or in the case of interimdividend when it has been approved by the Board of directors. Dividends declaredafter the balance sheet date are disclosed in the subsequents events note. Treasury shares Where the Company or other members of the consolidated Group purchases theCompany's equity share capital, the consideration paid is deducted from totalshareholders' equity as treasury shares until they are cancelled. Where suchshares are subsequently sold or reissued, any consideration received is includedin shareholders' equity. 22 Insurance and investment contracts The Group has classified its Long Term Assurance business in accordance withIFRS 4 'Insurance Contracts'. Insurance contracts are those contracts containingsignificant insurance risk. Tracker bonds which provide for a return of premiumon death are regarded as containing significant insurance risk. Investmentcontracts are contracts that do not have significant insurance risk. There areno contracts with discretionary participating features. Insurance contracts The Group accounts for its insurance contracts using the embedded value basis.The embedded value comprises two components: the net assets attributable to theGroup and the present value of the in-force business ('VIF'). The change in theVIF before tax is accounted for as revenue. The value is estimated as the netpresent value of future cash flows attributable to the Group before tax, basedon the market value of the assets at the balance sheet date, using assumptionsthat reflect experience and a long-term outlook for the economy and thendiscounting at an appropriate risk discount rate. Insurance contract liabilities are calculated on the modified statutory basis.Premiums are recognised as revenue when due from the policyholder. Claims, whichtogether with the increase in insurance contract liabilities are recognised inthe income statement as they arise, are the cost of all claims arising duringthe period. Investment contracts Investment contracts are primarily unit-linked. The liability is measured atfair value, which is the bid value of the assets held to match the liability,less an amount in respect of tax. Increases in investment contract liabilitiesare recognised in the income statement as they arise. Revenue in relation toinvestment management services is recognised as the services are provided.Premiums and claims are accounted for directly in the balance sheet asadjustments to the investment contract liability. 23 Segment reporting Business segments are distinguishable components of the Group that provideproducts or services that are subject to risks and rewards that are different tothose of other business segments. Geographical segments provide products orservices within a particular economic environment that is subject to risks andrewards that are different to those of components operating in other economicenvironments. The Group has determined that business segments are the primaryreporting segments. 24 Cash and cash equivalents For the purposes of the cash flow statement, cash comprises cash on hand anddemand deposits, and cash equivalents comprise highly liquid investments thatare convertible into cash with an insignificant risk of changes in value withoriginal maturities of less than 3 months. 25 Trust activities The Group commonly acts as trustees and in other fiduciary capacities thatresult in the holding or placing of assets on behalf of individuals, trusts,retirement benefit plans and other institutions. These assets and income arisingthereon are excluded from the financial statements, as they are not assets ofthe Group. Notes 1 Transition to IFRS As set out in the basis of preparation, the interim financial information hasbeen prepared based on the recognition and measurement requirements of IFRSother than that in respect of the fair value option. AIB has availed oftransitional provisions for IAS 32 'Financial Instruments: Disclosure andPresentation' ('IAS 32'), IAS 39 'Financial Instruments: Recognition andMeasurement' ('IAS 39') and IFRS 4 'Insurance Contracts' ('IFRS 4') and has notpresented comparative information in accordance with these standards.Accordingly, comparative information for 2004 in respect of financialinstruments and insurance contracts is prepared on the basis of the Group'saccounting policies under IR GAAP. A description of the differences between IR GAAP and IFRS accounting policies isset out in 'Transition to IFRS - Restatement of 2004 financial information' ('the transition document') on pages 10 to 20 and in the 2004 Annual Report onpages 42 to 55. Reconciliations of balance sheets prepared under IR GAAP andIFRS at 1 January 2004, 30 June 2004 and 31 December 2004 are included in thetransition document on pages 38, 40 and 44 and are summarised below.Reconciliations of the profit and loss account prepared in accordance with IRGAAP and prepared in accordance with IFRS for the periods ending 30 June 2004and 31 December 2004 are included on pages 39 and 43 of the transition documentand are summarised below. In addition, a reconciliation of the amount ofshareholders' equity at 1 January 2005, before and after the application of IAS32, IAS 39 and IFRS 4 is summarised below and included as an appendix to thisinterim financial information. An explanation of the effects of the applicationof IAS 32, IAS 39 and IFRS 4 on the 1 January 2005 balance sheet, is presentedin the transition document on pages 15 to 20. The transition document isavailable at www.aibgroup.com. The following table sets out the reconciliation from previously reported IrishGAAP information for profit after taxation and shareholders' equity for June2004 and December 2004, and the reconciliation to shareholders' equity at 1January 2005 after the application of IAS 32, IAS 39 and IFRS 4. Profit after taxation Shareholders' equity Half-year Year 30 June 31 December 30 June 31 December 2004 2004 2004 2004 • m • m • m • m As reported under Irish GAAP 524 1,082 5,755 5,581Reconciliation adjustments to IFRS excluding IAS 32, IAS 39and IFRS 4:Associated undertakings - 1 (5) 12Finance leases 1 2 - 1Software 2 6 16 20Taxation (2) (4) (47) (47)Intangible assets & goodwill 41 79 46 79Dividends - - 181 336Share based payments (5) (9) 9 10Related Shares:
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