16th Jun 2005 12:36
Allied Irish Banks PLC16 June 2005 Allied Irish Banks, p.l.c. ("AIB") (NYSE:AIB) Trading Update 16 June 2005 - PART 2 Basis of preparation Appendix 1 First time adoption of International Financial Reporting Standards ('IFRS') 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, in common with otherlisted entities within the European Union, implemented the requirements ofInternational Financial Reporting Standards and International AccountingStandards (collectively, 'IFRS') for the first time and these will be used forthe purpose of preparing financial statements for the year ending 31 December2005. This document has been prepared based on the recognition and measurementrequirements of IFRS issued by the International Accounting Standards Board ('IASB') and endorsed (or where there is a reasonable expectation ofendorsement) by the European Union ('EU') by 31 December 2005, other than thatin respect of the fair value option as described below. The IFRS in effect at 31 December 2005 may differ from those applied in thepreparation of the financial information in this document due to decisions thatmay be taken by the EU on endorsement, new or amended standards issued by theIASB, interpretative guidance issued by the International Financial ReportingInterpretations Committee ('IFRIC') and the requirements of companieslegislation. In addition, as IFRS is currently being applied in Europe for thefirst time, certain practices in applying the standards may develop, which maybe different than those adopted in this document. Therefore, the financialinformation in this document could be subject to change. The financial information contained in this document complies with the EU 'carved out' version of IAS 39 'Financial Instruments: Recognition andMeasurement' ('IAS 39') which means that AIB has not availed of the optionwithin the full IAS 39 to measure certain liabilities at fair value. TheEU-endorsed version does not permit non-trading financial liabilities to bedesignated as 'at fair value through profit or loss'. However, it is expectedthat proposed amendments to IAS 39 will result in the EU endorsing a revisedversion of the standard that would permit such designation in certaincircumstances ('the fair value option'). It is anticipated that the relevanttransitional arrangements would permit designation as at 1 January 2005 forcompanies adopting IFRS from that date. Should this option be available, AIBwould consider making use of the proposals where appropriate. In accordance with IFRS 1 'First-time Adoption of International FinancialReporting Standards' ('IFRS 1'), there have been no adjustments to the estimatesmade at the time of the approval of the IR GAAP interim report for the six monthperiod ended 30 June 2004 and the financial statements for the year ended 31December 2004. IFRS 1 provides first time adopters of IFRS with certainexemptions. IFRS 1 also allows or requires a number of other exceptions to itsgeneral principle that the standards in force at the reporting date should beapplied retrospectively. AIB has availed of certain exemptions as set out below:- First time application relating to financial instruments and insurance contracts AIB has availed of transitional provisions for IAS 32 'Financial Instruments:Disclosure and Presentation' ('IAS 32'), IAS 39 'Financial Instruments:Recognition and Measurement' ('IAS 39') and IFRS 4 'Insurance Contracts' ('IFRS4') and will not present comparative information in accordance with thesestandards in its 2005 financial statements. Accordingly, comparative informationfor 2004 in respect of financial instruments and insurance contracts will beprepared on the basis of the Group's accounting policies under IR GAAP. Share based payments AIB has implemented the requirements of IFRS 2 'Share Based Payment' ('IFRS 2')to all equity settled share based payments granted after 7 November 2002 thathad not vested by 1 January 2005. Property, plant & equipment AIB has retained its existing carrying value of occupied properties, plant andequipment at 1 January 2004 as deemed cost, rather than either reverting tohistorical cost or carrying out a valuation at the date of transition aspermitted by IFRS 1. Cumulative exchange differences AIB has elected to deem cumulative exchange differences on the net investmentsin foreign branches and subsidiaries as zero at January 2004, as permitted byIFRS 1. Employee benefits AlB has recognised the cumulative actuarial gains and losses of defined benefitpension schemes and other post retirement benefits upon transition. Business combinations AIB has elected not to apply IFRS 3 'Business Combinations' to businesscombinations that arose prior to 1 January 2004. Derecognition of financial instruments Financial instruments derecognised prior to 1 January 2004 have not beenre-recognised by the Group under IFRS. Effects of the transition to IFRS A description of the differences between IR GAAP and IFRS accounting policies isset out on pages 10 to 20. Reconciliations of balance sheets prepared under IRGAAP and IFRS at 1 January 2004, 30 June 2004 and 31 December 2004 are includedon pages 38, 40 and 44. Reconciliations of the profit and loss account preparedin accordance with IR GAAP and prepared in accordance with IFRS for the periodsending 30 June 2004 and 31 December 2004 are included on pages 39 and 43. Inaddition, a reconciliation of the amount of shareholders' equity at 1 January2005, before and after the application of IAS 32, IAS 39 and IFRS 4, and anexplanation of the effects of their application on the 1 January 2005 balancesheet, is presented on pages 41 to 42 and pages 15 to 20. Provisional IFRS accounting policies Appendix 2 This appendix sets out the Accounting policies that the Group expects to applyfrom 1 January 2005. Full details of the accounting policies applied in previousperiods under IRGAAP can be found on pages 64 to 68 of the 2004 Annual Report. 1 Accounting convention The restated financial information has been presented in accordance withInternational Accounting Standards and International Financial ReportingStandards (collectively 'IFRS') as endorsed by the EU or expected to beapplicable at 31 December 2005. The financial statements have been prepared in accordance with IFRS as requiredby European directives. The financial statements have been prepared under thehistorical cost convention, as modified by the revaluation of certain fixedassets and certain asset and dealing positions. 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 made up to the endof the financial year. A subsidiary is one where the Group has the power,directly or indirectly, to govern the financial and operating policies of theentity, so as to obtain benefits from its activities. The existence and effectof potential voting rights that are currently exercisable or convertible areconsidered in assessing 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.Unrealised losses are eliminated unless the transaction provides evidence ofimpairment of the asset transferred. 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 is based on financialstatements made up to a date not earlier than three months before the balancesheet date, adjusted to conform with the accounting polices of the Group.Unrealised gains on transactions are eliminated to the extent of the Group'sinterest in the investee. Unrealised losses are also eliminated in the same wayas unrealised gains unless the transaction provides evidence of impairment ofthe asset transferred. 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 appropriate 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: o assets and liabilities including goodwill and fair value adjustments arising on consolidation of foreign operations are translated at the closing rate; o income and expenses are translated into Euro at the average rates of exchange during the period; and o all resulting exchange differences are included in cumulative translation 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 interest receivable in the incomestatement for all interest-bearing financial instruments classified as held tomaturity, available for sale or other loans and advances using the effectiveinterest method.(what about interest on trading securities) The effectiveinterest method is a method of calculating the amortised cost of a financialasset or liability (or group of assets and liabilities) and of allocating theinterest income or interest expense over the relevant period. The effectiveinterest rate is the rate that exactly discounts the expected future cashpayments or receipts through the expected life of the financial instrument, orwhen appropriate, a shorter period, to the net carrying amount of the financialasset or financial liability. The application of the method has the effect ofrecognising income (and expense) receivable (or payable) on the instrumentevenly in proportion to the amount outstanding over the period to maturity orrepayment. 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. 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 in 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. With the exception of financial assetsat fair value through profit and loss, financial assets are initially recognisedat fair value including direct and incremental 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 similarinstruments, discounted cash flow analysis, option pricing models and othervaluation techniques commonly used by market 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. 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. Gains and losses arising fromchanges in fair value are included directly in the income statement within otherfinancial 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. 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 recognised at fair value including direct andincremental transaction costs. They are subsequently held at fair value. Gainsand losses arising from changes in fair value are included as a separatecomponent of equity until sale when the cumulative gain or loss is transferredto the income statement. 8 Financial liabilities Financial liabilities are initially recognised at fair value, being their issueproceeds (fair value of consideration received) net of transaction costsincurred. Financial liabilities are subsequently measured at 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 will consider applying the fair value option to certain financialliabilities if this is permitted. 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 may have occurred. Goodwill isallocated to cash-generating units for the purpose of impairment testing.Goodwill on the acquisitions of associates is included in the carrying amount ofthose investments in the consolidated financial statements. Gains and losses onthe disposal of an entity include the carrying amount of the goodwill relatingto the entity sold. Goodwill previously written off to reserves under IRGAAP has not been reinstatedand will not be included in calculating any subsequent profit or loss ondisposal. 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, forward rate agreements areused for trading and for hedging purposes. The Group maintains trading positions in a variety of financial instrumentsincluding derivatives. Trading transactions arise as a result of activitygenerated by customers while others represent proprietary trading with a view togenerating incremental 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. All derivatives areincluded in assets when their fair value is positive, and liabilities when theirfair value is negative, unless there is the legal ability and intention tosettle net. Profits or losses are only recognised on initial recognition ofderivatives when there are observable current market transactions or valuationtechniques that 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 firm commitments (fair value hedge);(2) hedges of probable future cash flows attributable to a recognised asset or liability, 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. The Group also documents its assessment, both athedge inception and on an ongoing basis, of whether the derivatives that areused in hedging transactions are highly effective in offsetting changes in fairvalues or cash flows of hedged 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; ord) 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, theGroup may decide to cease hedge accounting even though the hedge relationshipcontinues to be highly effective by no longer designating the financialinstrument 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.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 fromforeclosure costs for obtaining and selling the collateral, whether or notforeclosure is probable. For the purposes of a 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 to be beyond the prospect of recovery is written off againstthe related provision for loan impairment. Subsequent recoveries of amountspreviously written off decrease the amount of the provision for loan impairmentin the income 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 has 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 valuation 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, past service cost, the expected return on plan assets andthe change in the preset value of scheme liabilities arising from the passage oftime 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 obligations under these plans once these contributions have been paid. Short-term employee benefits Short-term employee benefits, such as salaries, and other benefits, areaccounted for on an accruals basis over the period which employees have providedservices in the year. Bonuses are recognised to the extent that the Group has apresent obligation to its employees that can be measured reliably. The cost ofproviding subsidised staff loans and preferential rates on staff deposits ischarged within employee expenses. Share based compensation The Group operates a number of share based compensation plans. The fair value ofthe employee services received is measured by reference to the fair value of theshares or share options granted on the date of the grant. The cost of theemployee services received in exchange for the shares or share options grantedis recognised in the income statement over the period during which the employeesbecome unconditionally entitled to the options, which is the vesting period. Theamount to be expensed is determined by reference to the fair value of the optiongranted. The fair value of the options granted is determined using optionpricing models, which take into account the exercise price of the option, theshare price at date of grant of the option, the risk free interest rate, theexpected volatility of the share price over the life of the option and otherrelevant factors. Vesting conditions included in the terms of the grant are nottaken into account in estimating fair value except where those terms relate tomarket conditions. Non-market vesting conditions are taken into account byadjusting the number of shares or share options included in the measurement ofthe cost of employee services so that ultimately, the amount recognised in theincome statement reflects the number of vested shares or share options. Wherevesting conditions are related to market conditions, the charges for theservices received are recognised regardless of whether or not the market relatedvesting condition is met, provided that the non-market vesting conditions aremet. 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 profit and loss account. 14 Non-credit risk provisions Provisions are recognised for present legal or constructive obligations arisingas consequences of past events where it is probable that 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 benefit 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, including deferred income tax, on taxable profits is recognised asan expense in the period in which the profits arise. Income tax recoverable ontax allowable losses is recognised as an asset only to the extent that it isregarded as recoverable by offset against current or 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 taxableprofit 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. 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 retirement benefitsand 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. 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 theincome 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 payable 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. 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 was 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, securities purchased subject to a commitment to resell ('reverserepos'), or where the Group borrows securities, but does not acquire the risksand rewards of ownership, the transactions are treated as collateralised loans,and the securities are not included in the balance sheet. The difference between sale and repurchase price is accrued over the life of theagreements 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 Net 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 Share issue costs Incremental costs directly attributable to the issue of new shares or options orthe acquisition of a business are shown in equity as a deduction, net of tax,from the proceeds. 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 subsequent 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 then discounting 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 arethe cost of all claims arising during the 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. Revenue in relation to investment managementservices is recognised as the services are provided. Premiums and claims areaccounted for directly in the balance sheet as adjustments to the investmentcontract 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 differentrisks and rewards that are different to those of components operating in othereconomic environments. The Group has determined that business segments are theprimary reporting 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. Reconciliation of consolidated preliminary balance sheet Appendix 3As at 1 January 2004 Irish GAAP Consol- Associated Finance Software Taxation Intangible Dividends Share Employee IFRS 31 December idation under- Leases assets & based benefits 1 Jan- & uaryRelated Shares:
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