16th Jun 2005 12:35
Allied Irish Banks PLC16 June 2005 FOR IMMEDIATE RELEASE 16 JUNE 2005 Allied Irish Banks, p.l.c. Trading Update Allied Irish Banks, p.l.c. ("AIB") (NYSE:AIB) is issuing the following update ontrading before its half year close period. The half year to 30 June 2005 is the first time we will report underInternational Financial Reporting Standards (IFRS). For ease of comparison, thefollowing information and related comments are attached to this update: • An audited restatement of 2004 Group profit and loss account and balance sheet. This reflects the IFRS standards which are required to be applied to 2004. • An unaudited proforma of 2004 profit and loss account. In addition to the above restatement, further standards (IAS 32, IAS 39, IFRS 4) will affect our 2005 results. Where practical and as elaborated on in the attachment to this update, the proforma is presented as if these standards had applied to 2004. The impact of IFRS on our financial performance is less than that previouslyoutlined at our briefing on 1st March. Proforma IFRS earnings per share (EPS) in2004 are 127.1c (125.6c previously outlined). The strong, consistent and broad based performance we reported in 2004 iscontinuing this year. The key drivers of income growth remain unchanged. Highrates of increase in both loans and deposits reflect further market share gainsin targeted sectors and products in each of our franchises. Customer demand forour suite of deposit products has increased, notably in the Republic of Ireland.Income growth is expected to outpace cost growth again in 2005 - at an overalllevel and also within each of our operating divisions. The momentum in ouroperating divisions and the contribution we anticipate from our successfulpartnership with M&T are being complemented by strong asset quality. At our IFRS briefing on 1st March and at our subsequent AGM, we said that weexpected earnings per share for 2005 would be within a range of 135c - 137c.Based on strong current business trends and pipelines, together with better thananticipated asset quality, we are increasing our EPS guidance. We are nowtargeting EPS in 2005 to be in a range of 138c - 140c. This compares to theaforementioned 2004 base of 127.1c. Growth at the interim stage is expected tobe particularly strong due to a very low bad debt provision charge. This guidance for 2005 assumes: • c. 1% adverse impact on EPS anticipated from currency translation of earnings. • zero volatility due to accounting hedge ineffectiveness under IFRS. However, some volatility will arise and this will be disclosed separately in our accounts. We are making good progress in an enterprise wide programme to enhance andintegrate our risk management and compliance functions - a point acknowledged byS&P when that agency recently upgraded AIB's long term ratings. We have alsoinitiated a comprehensive programme to review and improve all our operations andsystems across the enterprise. Over time this action will generate furtherproductivity, service quality and operational risk benefits. We are actively managing our capital and funding positions. Both are wellcapable of supporting our ambitious organic growth plan. REPUBLIC OF IRELAND DIVISION The Irish economy continues to provide very favourable conditions for ourbusiness. We expect GDP growth of around 6% this year. We are reinforcing our position as the leading retail and commercial bank inIreland. Customer demand for our products and services is strong. The specialfocus our relationship managers are placing on deposit growth and ourcompetitive pricing are being very well received by customers and we are ontrack to increase deposits by around 15% in 2005. Loans are targeted to grow byover 20% reflecting our prime position in both the business and personal lendingmarkets. In mortgages, we are growing our book at a similar rate to the overallmarket. This is being achieved by harvesting the potential of our customer basewhile maintaining prudent repayment capacity and loan to value criteria. The impact of competition is largely unchanged and continues to be most evidentin an increased demand for lower margin deposit and mortgage products. We remainin a strong competitive position, sustained by our model of identifying customerneeds and offering good value products and services. Ark Life is performing in line with expectations to achieve a higher operatingprofit this year compared to 2004 proforma IFRS outturn. GREAT BRITAIN AND NORTHERN IRELAND DIVISION Our business banking franchise in Great Britain is performing strongly andcontinues to gain share in our chosen sectors. The ongoing investment that weare making in our people, locations and systems is reflected again this year bystrong increases in deposit and loan volumes. Our loan book is characterised bya combination of fast growth and high quality. The resilience of the loan bookis underpinned by our in depth knowledge of the limited number of mid marketbusiness sectors in which we participate. We do not participate in the consumercredit market and our focus in the personal market is largely confined toindividuals with whom we already have a business banking relationship. In Northern Ireland First Trust is growing profits in line with expectations.Superior productivity relative to our larger rivals enables us to outperform ina highly competitive banking environment. We anticipate loans and deposits togrow in double digits. We are targeting growth in loans and deposits for the division overall this yearto be close to 25% and 20% respectively. CAPITAL MARKETS Customer revenues continue to be the key dynamic that places us on track todeliver another year of significant growth. Corporate Banking remains the cornerstone of the division's profit. Loans in2005 are targeted to increase by around 20% reflecting strong customer demand inboth our domestic and international businesses. This growth is being achieveddespite competitive forces driving prices down which has moderated our volumegrowth. We are maintaining our pricing discipline to ensure we continue togenerate good risk adjusted returns relative to our cost of capital. Treasury is benefiting from the resilience of customer relationships and is ontrack to achieve a good performance. In line with our conservative approach toproprietary trading, utilisation of our risk limits remains modest and theembedded value in our investment portfolios is positive. Investment Banking is performing well and in line with expectations. POLAND DIVISION We expect to achieve good growth in 2005 on the much higher base of profitsachieved following a very strong recovery in 2004. Non interest income remains the principal driver of revenue. Notable features ofthis year's performance are the strong growth and market share gains we areachieving in electronic payment, investment fund and stockbroking fees. Depositvolumes are expected to increase by around 10%. Our corporate loan volumes areoutperforming a still contracting market and while we are maintaining our shareof local currency mortgages, we are not promoting higher risk f.x. mortgages. Weare targeting an overall single digit increase in our loan book. Asset qualityremains best in class and continues to improve. Cost management is good and we expect income to grow faster than costs thisyear. M&T BANK CORPORATION Our partnership with M&T is progressing well and meeting all our expectations.At its Q1 results announcement, M&T reaffirmed guidance for double digit growthin diluted GAAP earnings per share for 2005. Features of the Q1 results includedgood demand for commercial loans, very resilient asset quality and tight costmanagement. M&T management have said that their primary focus at present is on an organicgrowth agenda and to extract further synergies from the successful merger withAllfirst. Under IFRS we are now accounting for our share of M&T profits based on ouraverage shareholding for the period (22.7% for 2004). MARGINS We continue to expect a reduction in our net interest margin to approximate 20bps in 2005. The single biggest factor behind the attrition - loans growingfaster than deposits - is unchanged. A combination of lower rates for thereinvestment of customer account funds, business mix and competition are lessercontributory factors. NON INTEREST INCOME A constant currency increase of around 7% is expected this year. The move toEffective Interest Rate under IFRS reduces the rate of growth in non-interestincome - lending related fees are reflected in interest income and notnon-interest income as heretofore. Increased account activity, corporate bankingfees and the aforementioned performance in Poland are the primary sources ofgrowth. COSTS We expect constant currency total costs this year to increase by around 6%.Growth at the interim stage is likely to be higher, mainly due to a ramp up incosts incurred from the second half of 2004 and continuing in 2005 to ensurecompliance with a host of new regulatory requirements e.g. Sarbanes Oxley, BaselII. The cost performance reflects tight management in the context of our strongbusiness growth. ASSET QUALITY High quality is a consistent feature of the credit portfolios across ourfranchises. In the year to date we have had a very low level of gross newnon-performing loans combined with strong recoveries. This is likely to meanthat we will report a particularly low bad debt charge at the interim stage. Thecharge is also positively influenced by the new IFRS incurred loss provisionrule. Our portfolio reviews do not point to a deterioration in quality. However,in view of our very strong and consistent loan growth, we believe the currentexperience to be exceptional. We now expect the charge in 2005 to be less than20 bps of average loans, although IFRS makes forecasting more difficult. NOTE Group results for the half-year ended 30th June 2005 will be announced on 3rdAugust 2005. -ENDS- For further information please contact:Alan Kelly Catherine BurkeHead of Group Investor Relations Head of Corporate RelationsAIB Group AIB GroupBankcentre BankcentreDublin 4 Dublin 4Tel: +353-1-6600311 ext. 12162 Tel: +353-1-6600311 ext. 13894 Allied Irish Banks, p.l.c. Transition to IFRS Restatement of 2004 financial information Contents Page Introduction 2Summary 3Commentary 4Consolidated preliminary income statement 7Consolidated preliminary balance sheet 8Summarised IFRS segmental information 9Changes in accounting policies - key differences from Irish GenerallyAccepted Accounting Principles 10Special purpose audit report 21Special purpose review report 23 Appendices1.Basis of preparation 252.Provisional IFRS accounting policies 273.Reconciliation of consolidated preliminary balance sheet at 1 January 2004 384.Restated financial information for the year end 31 December 2004 395.Reconciliation of consolidated preliminary balance sheet at 1 January 2005 416.Restated financial information for the half-year end 30 June 2004 437.Pro-forma financial information 45 FORWARD-LOOKING STATEMENT This document contains certain forward-looking statements within the meaning ofthe United States Private Securities Litigation Reform Act of 1995 with respectto the financial condition, results of operations and business of the Group andcertain of the plans and objectives of the Group. In particular, among otherstatements, certain statements on the impact of International FinancialReporting Standards are forward-looking in nature. By their nature,forward-looking statements involve risk and uncertainty because they relate toevents and depend on circumstances that will occur in the future. There are anumber of factors that could cause actual results and developments to differmaterially from those expressed or implied by these forward-looking statements.These factors include, but are not limited to, changes in economic conditionsglobally and in the regions in which the Group conducts its business, changes infiscal or other policies adopted by various governments and regulatoryauthorities, the effects of competition in the geographic and business areas inwhich the Group conducts its operations, the ability to increase market shareand control expenses, the effects of changes in taxation or accounting standardsand practices, acquisitions, future exchange and interest rates and the successof the Group in managing these events. Any forward-looking statements made by oron behalf of the Group speak only as of the date they are made. AIB cautions that the foregoing list of important factors is not exhaustive.Investors and others should carefully consider the foregoing factors and otheruncertainties and events when making an investment decision based on anyforward-looking statement. In light of these risks, uncertainties andassumptions, the forward-looking events discussed in this Report may not occur. Introduction Up to and including the year ended 31 December 2004, AIB's primary financialstatements were prepared in accordance with Irish Generally Accepted AccountingPrinciples ('IR GAAP'). On 1 January 2005, AIB Group ('the Group'), in commonwith other listed entities within the European Union ('EU'), implemented therequirements of International Financial Reporting Standards and InternationalAccounting Standards (collectively, 'IFRS') for the first time and these will beused for the purpose of preparing financial statements for the year ending 31December 2005. This document sets out the impact of these changes upon the Group's financialposition and reconciles the restated comparatives to previously published 2004IR GAAP financial statements. Comparative information for 2004 has been restated to take into account therequirements of all of the IFRSs except for IAS 32 'Financial Instruments:Disclosure and Presentation', IAS 39 'Financial Instruments: Recognition andMeasurement' and IFRS 4 'Insurance Contracts'. These three standards have beenimplemented with effect from 1 January 2005 and the opening balance sheet atthis date has been adjusted accordingly. Provisional accounting policies that the Group proposes to adopt in thepreparation of its 2005 half-year and full-year results are also provided. Theseprovisional accounting policies are in accordance with all standards and relatedinterpretations that have been or are expected to be endorsed by the EU, andwith all extant accounting standards and interpretations issued by theInternational Accounting Standards Board ('IASB'). Further standards and interpretations may be issued that could be applicable forfinancial years ending in 2005 or later but with the option for earlieradoption. The Group's first annual IFRS financial statements may, therefore, beprepared in accordance with different accounting policies to those used in thisdocument and, as a result, the financial information in this document could besubject to change. Summary From 1 January 2005 the Group has been using International Financial ReportingStandards (IFRS). Although the move to IFRS changes the timing of earningsrecognition, it is important to note that it does not impact on businessfundamentals or cash flows. The implementation of IFRS may result in greaterearnings volatility in future periods and the Group will endeavour to presentthe performance in a manner in which underlying business performance and trendsare identifiable. 2004 Earnings restatement The results for 2004 have been restated to take account of the InternationalFinancial Reporting Standards implemented with effect from 1 January 2004.Thisrestatement of results for 2004 excludes adjustments for standards implementedwith effect from 1 January 2005. The main changes to the 2004 profit and lossaccount resulting from the restatement are as follows: Year to December 2004 IR IFRS Increase/ GAAP Audited (decrease) • m • m • mTotal income 3,264 3,608 344Operating expenses 1,886 1,894 8Profit on ordinary activities before taxation 1,418 1,430 12Basic earnings per share 122.9c 132.0c 9.1c • Group profit on ordinary activities before taxation increased by • 12 millionto • 1,430 million. • Group profit attributable to ordinary shareholders increased by • 78 millionto • 1,125 million. • Basic earnings per share increased by EUR 9.1c from EUR 122.9c to EUR 132.0c. The changes impacting basic earnings per share primarily reflect the positiveaccounting treatment of goodwill partly offset by additional expense in respectof dividend withholding tax on undistributed associate undertaking profits andemployee share option schemes. 2004 Pro-forma earnings restatement As outlined above, the restatement of results for 2004 excludes adjustments forstandards implemented with effect from 1 January 2005. IAS 32, IAS 39 and IFRS 4have been implemented from 1 January 2005. Had these standards been implementedin 2004, it would have impacted the accounting for derivatives, loan impairment,income recognition on loans ('EIR'), insurance accounting and classification offinancial instruments. Set out below are the pro-forma impacts of EIR, insuranceaccounting and classification of financial instruments in order to establish a2004 pro-forma IFRS restatement. Accounting for derivatives and loan impairmentare not included in the pro-forma restatement. Year to December 2004 IFRS IFRS Increase/ Audited Pro-forma (decrease) • m • m • m Total income 3,608 3,602 (6)Operating expenses 1,894 1,893 (1)Profit on ordinary activities before taxation 1,430 1,425 (5)Basic earnings per share 132.0c 127.1c (4.9c) • 2004 pro-forma profit on ordinary activities before taxation reduced by • 5 million. - Effective interest rate adjustment reduced profit before taxation by • 28 million. - Insurance business (IFRS 4 / IAS 39 v embedded value accounting) reduced profit before taxation by • 24 million. - Classification of financial instruments increased profit before taxation by €47 million. • Earnings per share reduced by EUR 4.9 c to EUR 127.1c. - Effective interest rate adjustment - EUR 2.5c decrease. - Insurance business - EUR 2.4c decrease. Commentary on key differences 2004 Earnings restatement summary The key differences between IFRS and IR GAAP impacting the profit and lossaccount for 2004 are described on pages 10 to 14 and the analysis of the impactof IFRS is detailed on page 39. These impacts are summarised below. Year to December 2004 IR IFRS Increase/ GAAP Audited (decrease) • m • m • m Total income (1) 3,264 3,608 344Operating expenses (2) 1,886 1,894 8Share of operating profits of associated undertakings (3) 201 132 (69)Profit on ordinary activities before taxation 1,418 1,430 12Basic earnings per share (4) 122.9c 132.0c 9.1c (1) The • 344 million increase in total income reflects (a) the reclassification of the cost of employee benefits from net interestincome to operating expenses.(b) line by line profit and loss consolidation of insurance business (Ark Life). (2) The • 8 million increase in operating expenses reflects (a) line by line profit and loss consolidation of insurance business.(b) the cost of employee benefits reclassified from net interest income.(c) the charge in respect of share based payments.(d) change in the treatment of software development costs.(e) the benefit of not amortising goodwill in 2004. (3) The share of after tax profits of associates is included as part ofpre-tax profit. This reduces the share of operating profit of associatedundertakings on the face of the profit and loss account by • 61 million with anoffsetting reduction in the taxation charge. This classification is neutral froman earnings per share perspective. The application of IFRS to the results ofassociated undertakings also reduces the income from associated undertakings by• 8 million. (4) The EUR 9.1c increase in the basic earnings per share reflects (a) goodwill amortisation. +9.2c (b) share based payments. -1.2c (c) dividend withholding tax on associate company profits. -0.6c (d) software development costs +0.7c (e) other +1.0c 2004 Pro-forma earnings restatement summary The additional impacts of applying IAS 32, IAS 39 and IFRS 4 are described onpages 15 to 20 and a pro-forma income statement for 2004 reflecting the impactof EIR, insurance accounting and classification of financial instruments is setout on page 45. Year to December 2004 IFRS IFRS Increase/ Audited Pro-forma (decrease) • m • m • m Total income (1) 3,608 3,602 (6)Operating expenses 1,894 1,893 (1)Profit on ordinary activities before taxation 1,430 1,425 (5)Earnings per share (2) 132.0c 127.1c (4.9c) (1) The decrease of • 6 million in total income reflects (a) effective interest rate reduced total income by • 29 million. (b) insurance business (Ark Life) reduced total income by • 24 million. (c) classification of financial instruments increased total income by • 47million. (2) The 4.9c reduction in the earnings per share is outlined below IFRS EPS 132.0c EIR (2.5c) Insurance business (2.4c) Pro-forma IFRS EPS 127.1c Balance sheet and shareholders' equity The overall effect of the adoption of IFRS on the Group's balance sheet is setout below. 31 December 1 January Increase/ 2004 2005 (decrease) IR GAAP IFRS • m • m • mBalance sheetShareholders' equity 5,581 6,750 1,169Total assets 102,240 102,819 579 The key differences between IFRS and IRGAAP are set out on pages 10 to 20 andthe principal impacts of the transition to IFRS on equity at 1 January 2005 areset out below. The reconciliation of shareholders' equity at 31 December 2004 isset out in Appendix 4, and at 1 January 2005 incorporating the impacts of IAS32, IAS 39 and IFRS 4, is set out in Appendix 5. • mDividends 336Effective interest rate (65)Impairment 139Available for sale securities 273Derivatives 38Insurance accounting (185)Classification of financial instruments 588Other 45 1,169 Total assets at 1 January 2005 increased by • 0.6 bn to • 102.8 bn, whencompared to the IRGAAP balance sheet at 31 December 2004. The increase arose asa result of a number of different items which are detailed on pages 10 to 20.IFRS requires certain items, netted under previous GAAP, to be shown gross andthis accounted for an increase of • 1.4bn, while other adjustments increasedtotal assets by • 0.4bn. Consolidation of previous unconsolidated entitiesreduced total assets by• 1.2 bn due to the elimination of intra group transactions giving a netincrease in total assets of • 0.6 bn. 31 December 1 January 2004 2005 IR GAAP IFRSCapital Ratios % %Tier 1 capital 7.9 8.3Total capital 10.7 10.9 The treatment of some items in the calculation of regulatory capital has stillto be finalised, although the effect, if any, is not expected to be material.The Tier 1 capital ratio increased to 8.3% and the total capital ratio to 10.9%.The higher ratios reflect the benefit from the transition adjustments to equity,primarily a timing difference on the recording of the ordinary dividend. Themark to market of available-for-sale debt securities and derivatives classifiedas cash flow hedges are both excluded from the regulatory capital calculation. Consolidated preliminary income statement Audited Unaudited IFRS IFRS year half-year 31 December 30 June 2004 2004 • m • m Interest and similar income 4,035 1,838Interest expense and similar charges 1,901 817 Net interest income 2,134 1,021Dividend income 60 38Fees and commissions income 1,051 507Fees and commissions expense (136) (65)Net trading income 235 103Other operating income 264 142Other income 1,474 725 Total operating income 3,608 1,746 Insurance claims 309 156 Administrative expenses 1,739 833Integration and restructuring costs 9 -Depreciation of property, plant and equipment 67 32Amortisation and impairment of intangible assets and goodwill 79 32Total operating expenses 1,894 897 Group operating profit before provisions 1,405 693Impairment losses on loans and advances (114) (55)Provisions for contingent liabilities and commitments (20) (8)Amounts written off fixed assets 1 - Group operating profit 1,272 630Share of profits of associated undertakings 132 62Profit on disposal of property 9 2Profit on disposal of business 17 12 Group profit on ordinary activities before taxation 1,430 706Taxation on ordinary activities 272 145 Group profit on ordinary activities after taxation 1,158 561Profit attributable to minority interests 29 17Preference dividends 4 2 33 19 Profit attributable to the ordinary shareholders of Allied Irish Banks, p.l.c. 1,125 542 Earnings per • 0.32 ordinary share - basic 132.0c 64.1c Earnings per • 0.32 ordinary share - diluted 131.5c 63.9c Consolidated preliminary balance sheet Audited Audited Unaudited Audited IFRS IFRS IFRS IFRS 1 January 31 December 30 June 1 January 2005 2004 2004 2004 • m • m • m • m AssetsCash and balances at central banks 887 887 599 838Items in course of collection 368 368 625 339Central government bills and other eligible bills - - 153 45Trading portfolio assets 7,957 - - -Assets held at fair value through profit and loss 1,871 - - -Derivative financial instruments 2,581 - - -Loans and advances to banks 2,538 2,540 2,741 2,633Loans and advances to customers 65,692 64,738 59,258 51,091Debt securities - 24,501 24,228 18,366Equity shares - 1,641 1,470 1,300Financial investments 15,720 - - -Interests in associated undertakings 1,395 1,379 1,459 1,361Intangible assets and goodwill 540 540 534 537Property, plant and equipment 745 745 755 753Other assets 1,460 2,622 1,824 1,843Deferred taxation 204 228 166 161Prepayments and accrued income 861 920 815 636 Total assets 102,819 101,109 94,627 79,903 LiabilitiesDeposits by banks 20,428 20,428 23,838 18,094Customer accounts 50,151 50,151 47,740 43,813Trading portfolio liabilities 332 - - -Derivative financial instruments 2,541 - - -Investment contract liabilities 2,422 2,422 2,344 2,085Debt securities in issue 11,805 11,805 6,826 3,489Insurance contract liabilities 1,465 864 733 799Current taxation 197 175 209 203Other liabilities 1,593 3,388 3,166 2,432Accruals and deferred income 700 913 734 530Retirement benefit liabilities 886 886 624 683Provisions for liabilities and charges 122 122 115 87Deferred taxation 38 52 57 54Subordinated liabilities 2,178 2,765 2,170 2,130 Total liabilities 94,858 93,971 88,556 74,399 Shareholders' equityShare capital 294 294 293 290Share premium account 1,693 1,693 1,694 1,694Other equity interests 770 182 203 196Reserves 1,159 954 965 927Profit and loss account 2,834 2,804 2,736 2,239Shareholders' equity 6,750 5,927 5,891 5,346Minority interests 1,211 1,211 180 158 Total shareholders' equity including minority interests 7,961 7,138 6,071 5,504 Total liabilities, shareholders' equity and minority interests 102,819 101,109 94,627 79,903 Summarised IFRS segmental information Year 31 December 2004 AIB Bank AIB Bank Capital Poland Group Total ROI GB & NI Markets • m • m • m • m • m • mOperations by business segmentsNet interest income 1,206 416 360 174 (22) 2,134Other income 670 189 390 188 37 1,474 Total operating income 1,876 605 750 362 15 3,608Insurance claims 309 - - - - 309Total operating expenses 838 305 403 245 103 1,894Provisions 44 13 29 29 18 133 Group operating profit/(loss) 685 287 318 88 (106) 1,272Share of operating (loss)/profit of associated undertakings (1) - 4 1 128 132 Profit on disposal of property 7 1 - 1 - 9Profit on disposal of businesses - - 4 13 - 17 Group profit on ordinary activities before taxation 691 288 326 103 22 1,430 Half-year 30 June 2004 AIB Bank AIB Bank Capital Poland Group Total ROI GB & NI Markets • m • m • m • m • m • mOperations by business segmentsNet interest income 584 201 174 81 (19) 1,021Other income 313 94 188 94 36 725 Total operating income 897 295 362 175 17 1,746Insurance claims 156 - - - - 156Total operating expenses 406 152 186 118 35 897Provisions 28 (3) 17 21 - 63 Group operating profit/(loss) 307 146 159 36 (18) 630Share of operating profit of associated undertakings - - 3 - 59 62 Profit on disposal of property - 1 - 1 - 2Profit on disposal of businesses - - - 12 - 12 Group profit on ordinary activities before taxation 307 147 162 49 41 706 Changes in accounting policies - key differences from IRISH GAAP ('IR GAAP') Changes applying to comparatives from 1 January 2004 (and to the IFRS balancesheet at that date) IR GAAP IFRS (a) Basis of consolidationIn order to reflect the different nature of the IAS 27 'Consolidated and separate financialshareholders' and policyholders' interests in the statements'long-term assurance business, the value of long-termassurance business attributable to shareholders and requires that all entities are consolidated on athe long-term assurance assets and liabilities line by line basis, except in very limitedattributable to policyholders are classified under circumstances. The assets and liabilities of theseparate headings in the consolidated balance sheet. life assurance subsidiary will be consolidated on a line by line basis and all intra group transactions will be eliminated. The income and expense of the life assurance subsidiary will be shown within each relevant line item of the income statement whereas under IR GAAP it was shown as a one line item. Under IAS, movement in the value of the long-term assurance business is presented net of tax. IFRS also requires the consolidation of certain entities that was not required under IR GAAP, including securitisation vehicles where appropriate. Under IR GAAP, movements in the value of thelong-term assurance business attributable toshareholders, was presented in the profit and lossaccount grossed up at the statutory tax rate. IFRS impact: This is principally a change in presentation on the face of the income statementand balance sheet. The balance sheet also reduced slightly due to theelimination of intra group transactions. (b) Interests in associated undertakingsThe attributable share of income of associated IAS 1 'Presentation of Financial Statements' requiresundertakings, based on accounts made up to the end of the the Group to include its share of the income offinancial year, is included in the consolidated profit and associated undertakings as a single item on a net ofloss account using the equity method of accounting. tax basis in the consolidated income statement. The Group share of tax of associates is included withinthe Group's tax charge in the Group profit and loss accountand disclosed separately in the notes to the accounts. IFRS impact: This is principally a change in presentation. Profit before taxation willreduce, and the taxation charge will reduce, with no impact on earnings pershare. (c) Finance leasesIncome from finance leasing transactions is apportioned Under IAS 17 'Leases', income from finance leasingover the primary leasing period on an after tax basis in transactions is apportioned over the primary leasingproportion to the net cash investment using the investment period at a rate calculated to give a constant rate ofperiod method. return on the investment in the lease, without taking into account the taxation flows generated by the lease. Rentals received in advance but not yet amortised tothe profit and loss account are included in other Finance lease receivables are stated in the balanceliabilities. sheet at the gross rentals receivable, less income allocated to future periods and provisions for impairment. IFRS impact: There is a change in the income recognition profile for individual transactions,but the overall impact on the income statement is not significant. The reclassification of rentals received in advance from liabilities to assetsreduces the size of the balance sheet. Changes applying to comparatives from 1 January 2004 (and to the IFRS balancesheet at that date) IR GAAP IFRS(d) Software and software development costs Operating software and application software are IAS 38 'Intangible assets & system development costs'capitalised with computer hardware within tangible fixed requires capitalisation of computer software developmentassets. costs as an intangible asset, where the entity will generate future economic benefits from the asset, that AIB capitalises software development costs under FRS will flow to the entity, and the cost of the asset can be15, when it leads to the creation of a definable software measured reliably. Capitalised costs are amortised overasset, subject to a de-minimis limit. the software's estimated useful life. IFRS impact: The classification criteria of IFRS gives rise to a reclassification fromtangible fixed assets to intangible assets, being the carrying value ofpreviously recognised operating software. The recognition requirements within IAS 38 increases shareholders' equity due toan increase in capitalised assets. The impact on the income statement isdependent on the level of internal expenditure on computer software developmentin any period. There will be some reclassification impact as administrativeexpenses will be lower with an increase in the depreciation / amortisationcharge. (e) Employee and retirement benefitsAIB implemented FRS 17 'Retirement Benefits' in the The approach within IAS 19 'Employee Benefits' is similarpreparation of its accounts for the year ended 2001. to FRS 17. AIB will continue to recognise the actuarial gains and losses directly in equity through the statement The current service cost and past service cost of the of recognised income and expense.defined benefit schemes is charged to operating profitand the expected return on assets, net of the change in The cost of providing pensions and post retirementthe present value of the scheme liabilities arising from benefits is shown within administrative expenses andthe passage of time, is credited to other finance income. analysed in the notes to the accounts. Pension scheme assets are recognised in the balance Pension scheme assets are recognised in the balancesheet at their fair value based on current mid prices. sheet at their fair value based on current bid prices. The net pension scheme liabilities are shown in the Deferred taxation relating to the recognition of thebalance sheet net of deferred taxation. net pension scheme liabilities is shown within deferred taxation. The cost of providing benefits such as subsidisedloans and preferential rates on deposits is charged to Under IAS 19, the cost of providing these benefits shouldnet interest income as it arises. be recognised within employee costs, over the expected service lives of the employees. IFRS impact: There is a presentation change on the face of the income statement. Otherfinance income, which is the expected return on pension scheme assets net of thechange in value of plan liabilities, is now shown within administrativeexpenses. This gives rise to a reduction in operating expenses with no impact onprofit before taxation. There is also a presentation change on the face of theincome statement arising from the change in accounting treatment of certainbenefits with an increase in net interest income and an increase inadministrative expenses. The change in the manner in which deferred tax on the net pension schemeliabilities is presented gives rise to a gross up of deferred tax assets andpension scheme liabilities. A transition adjustment arises on the application of IAS 19 which increases theretirement benefit liabilities and reduces shareholders' equity. Changes applying to comparatives from 1 January 2004 (and to the IFRS balancesheet at that date) IR GAAP IFRS (f) Taxation Subject to certain exceptions, deferred taxation is Under IAS 12 'Income Taxes' deferred tax liabilities andrecognised in full in respect of timing differences assets are generally recognised in respect of allthat have originated but not reversed at the balance temporary differences, subject to assessment of thesheet date. recoverability of deferred tax assets. Deferred tax assets are recognised, only to the extent that it is probableDeferred tax is not provided on timing differences that sufficient taxable profits will be available againstarising:- on the revaluation of property when no which these differences can be utilised.commitment has been made to sell the asset; when ataxable gain on the sale of an asset is rolled over Unremitted earnings from subsidiary and associatedinto replacement assets; or on the potential additional companies may result in a deferred tax liability unlesstax that may be payable on the payment of a dividend by the entity is able to control the timing of remittancesa subsidiary or associated undertaking where no and it is probable that the earnings will not be remittedcommitment has been made to pay a dividend. in the foreseeable future. IFRS impact: Additional deferred tax balances arise on transition in respect of temporarydifferences not previously recognised. These include temporary differencesrelating to the revaluation of properties and the roll over of taxable gains andthe additional tax that may arise on unremitted profits of associated andsubsidiary companies. There will be continuing income statement implications from IAS 12, particularlythe requirement to reflect the additional tax that would be payable on theremittance of profits by associated companies. (g) Foreign currency Exchange adjustments arising from the retranslation of net IAS 21 'The Effects of Changes in Foreign Exchangeinvestments, net of hedging profits and losses, are Rates' requires that all exchange differences arisingrecognised in the statement of total recognised gains and on the retranslation of a foreign operation with a different functional currency than the Euro, should belosses. recognized in a foreign exchange reserve as a separate component of equity. The profit on disposal of a foreign operation iscalculated based on the carrying value of the operation at On disposal of a foreign operation the exchangethe date of disposal. Previous exchange translation gains differences previously recognised in reserves relatingand losses remain in shareholders' equity. to that foreign operation are reversed and recognised in the income statement in arriving at the profit or loss on disposal. IFRS 1 permits companies to deem cumulative exchange differences as zero at 1 January 2004. IFRS impact: This will primarily be a presentational change within shareholders' equity. Inaddition, gains on any future disposals of subsidiaries will be higher or lowerdepending on whether the functional currency of the subsidiary has appreciatedagainst the Euro since the later of 1 January 2004 or date of the acquisition orrecognition of the increase in the investment through profits retained in theforeign operation. Changes applying to comparatives from 1 January 2004 (and to the IFRS balancesheet at that date) IR GAAP IFRS (h) Intangible assets and goodwillGoodwill and intangible assets arising on acquisitions of IFRS 1 'First-time adoption of International Financialsubsidiary and associated undertakings prior to 1 January Reporting Standards' does not require the reinstatement1998 have been written off to reserves in the year ofacquisition. of goodwill previously written off to reserves. Goodwill, arising on the acquisitions of subsidiary The book value of goodwill existing at 31 Decemberand associated undertakings since 31 December 1998, is 2003 under IR GAAP is carried forward under IFRS 1 from 1capitalised as an asset on the balance sheet. Purchased January 2004, subject to two adjustments. If there aregoodwill is the excess of cost over the fair value of the previously unrecognised intangible assets that meetGroup's share of net assets acquired. Intangible assets recognition criteria under IAS 38 'Intangible Assets',were not identified as a separate component of goodwill these are reported separately to the extent that they areon acquisitions arising prior to 31 December, 2004. included in goodwill at the date of transition. In addition, any adjustments to provisional fair values (and Goodwill is amortised to the profit and loss account hence goodwill) made during the first twelve months afterover its estimated useful economic lives. The useful an acquisition are reflected in the comparativeeconomic life of goodwill is determined at the time of information.acquisition, taking into consideration factors such asthe nature of the business acquired, the market in which Under IFRS 3, 'Business Combinations' intangibleit operates and its position in that market. assets are identified separately from purchased goodwill acquisitions of subsidiary and associated undertakings. In all cases goodwill is subject to a maximum life of Intangible assets are capitalised as assets on the20 years and is subject to an impairment review in balance sheet and amortised over their expected lives andaccordance with FRS 11 'Impairment of Fixed Assets and subject to regular impairment reviews. Goodwill isGoodwill'. capitalised as an asset, without amortisation but with impairment reviews carried out at least on an annual On the disposal of subsidiary or associated basis in accordance with IAS 36 'Impairment of Assets'.undertakings, any unamortised goodwill together with AIB will apply IFRS 3 to all acquisitions occurring aftergoodwill previously written off directly to reserves is 1 January 2004.included with the Group's share of net assets of theRelated Shares:
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