8th Jun 2005 08:21
Royal Bank of Scotland Group PLC08 June 2005 PART 2 ANALYSIS OF IFRS ADJUSTMENTS EXCLUDING IAS 32, IAS 39 AND IFRS 4 Year ended 31 December 2004 Prop- erty, inclu- ding Soft- invest- ware Share Emp- ment Cons- devel- based loyee Ban- pro- Other olida- opment pay- bene- cassu- Good- Group perty Leases TPF JVs tion costs ments fits rance will Other Total £m £m £m £m £m £m £m £m £m £m £m £m Net interestincome (21) (18) (70) 4 (1) 16 - - (47) - - (137)Non-interestincome 22 27 (138) 25 (29) - - (85) 251 - (2) 71Insurance netpremium income - - - 109 - - - - 594 - - 703Total income 1 9 (208) 138 (30) 16 - (85) 798 - (2) 637Operatingexpenses 5 49 (74) 74 2 27 36 (83) 106 (5) (2) 135Insurance netclaims - - - 78 - - - - 702 - - 780Operatingprofit beforeprovisions (4) (40) (134) (14) (32) (11) (36) (2) (10) 5 - (278)Provisions - - (27) - 1 - - - - - - (26)Profit beforeintangiblesamortisationandintegrationcosts (4) (40) (107) (14) (33) (11) (36) (2) (10) 5 - (252)Intangibleassetsamortisation - - - - - - - - - (870) - (870)Integrationcosts - - - - - 251 - - - - - 251Profit beforetax (4) (40) (107) (14) (33) (262) (36) (2) (10) 875 - 367 ANALYSIS OF IFRS ADJUSTMENTS EXCLUDING IAS 32, IAS 39 AND IFRS 4Half year ended 30 June 2004 (unaudited) Prop- erty, inclu- ding Soft- invest- ware Share Emp- ment Cons- devel- based loyee Ban- pro- Other olida- opment pay- bene- cassu- Good- Group perty Leases TPF JVs tion costs ments fits rance will Other Total £m £m £m £m £m £m £m £m £m £m £m £m Net interestincome (11) (6) (37) 2 - 6 - - (21) - - (67)Non-interestincome 9 17 (59) 14 (1) - - (24) 47 - 2 5Insurance netpremium income - - - 49 - - - - 242 - (1) 290Total income (2) 11 (96) 65 (1) 6 - (24) 268 - 1 228Operatingexpenses (2) 29 (38) 28 - (4) 15 (23) 52 - 1 58Insurance netclaims - - - 37 - - - - 231 - (1) 267Operatingprofit beforeprovisions - (18) (58) - (1) 10 (15) (1) (15) - 1 (97)Provisions - - (13) - - - - - - - - (13)Profit beforeintangiblesamortisationandintegrationcosts - (18) (45) - (1) 10 (15) (1) (15) - 1 (84)Intangibleassetsamortisation - - - - - - - - - (409) - (409)Integrationcosts - - - - - 121 - - - - - 121Profit beforetax - (18) (45) - (1) (111) (15) (1) (15) 409 1 204 ANALYSIS OF IFRS ADJUSTMENTS EXCLUDING IAS 32, IAS 39 AND IFRS 4Divisional analysis Prop- erty, inclu- Year ding Soft- ended invest- ware Share Emp- 31 ment Cons- devel- based loyee Ban- December pro- Other olida- opment pay- bene- cassu- Good- 2004 perty Leases TPF JVs tion costs ments fits rance will Other Total £m £m £m £m £m £m £m £m £m £m £m £m CorporateBanking andFinancialMarkets - (39) - (14) (31) (21) - - - - (1) (106)Retail Banking - - - - - 1 - - (9) - - (8)Retail Direct - - (107) - (1) (7) - - - - - (115)Manufacturing - - - - - 27 - - - - - 27WealthManagement - (1) - - (1) (15) - - - - - (17)RBS Insurance (4) - - - - 6 - - (1) - - 1Ulster Bank - - - - - (2) - - - - - (2)Citizens - - - - - - - - - - - -Central items - - - - - - (36) (2) - 5 1 (32)Profit beforeintangiblesamortisationandintegrationcosts (4) (40) (107) (14) (33) (11) (36) (2) (10) 5 - (252)Intangibleassetsamortisation - - - - - - - - - (870) - (870)Integrationcosts - - - - - 251 - - - - - 251Profit beforetax (4) (40) (107) (14) (33) (262) (36) (2) (10) 875 - 367 ANALYSIS OF IFRS ADJUSTMENTS EXCLUDING IAS 32, IAS 39 AND IFRS 4Divisional analysis Prop- erty, Half inclu- Year ding Soft- ended invest- ware Share Emp- 30 ment Cons- devel- based loyee Ban- June pro- Other olida- opment pay- bene- cassu- Good- 2004 perty Leases TPF JVs tion costs ments fits rance will Other Total (unaudited) £m £m £m £m £m £m £m £m £m £m £m £m CorporateBanking andFinancialMarkets - (18) - - (1) - - - - - - (19)Retail Banking - - - - 1 - - (14) - - (13) Retail Direct - - (45) - - - - - - 1 - (44)Manufacturing - - - - - 16 - - - - - 16WealthManagement - - - - - (6) - - - 1 - (5)RBS Insurance - - - - - - - - (1) - - (1)Ulster Bank - - - - - (1) - - - - - (1)Citizens - - - - - - - - - - - -Central items - - - - - - (15) (1) - (2) 1 (17)Profit beforeintangiblesamortisationandintegrationcosts - (18) (45) - (1) 10 (15) (1) (15) - 1 (84)Intangibleassetsamortisation - - - - - - - - - (409) - (409)Integrationcosts - - - - - 121 - - - - - 121Profit beforetax - (18) (45) - (1) (111) (15) (1) (15) 409 1 204 ANALYSIS OF IFRS ADJUSTMENTS EXCLUDING IAS 32, IAS 39 AND IFRS 4 Prop- Other Soft erty ware31 plant deve- Inves- Share Emplo-December In- and Con- lop- tment based yee Ban-2004 Divi- come equip- solid- ment prop- pay- bene- cassu- Good- dends Tax ment Leases TPF JVs ation costs erty ment fits rance will Total £m £m £m £m £m £m £m £m £m £m £m £m £m £m Assets Cash and - - - - - - - - - - - - - -balances atcentralbanksItems in the - - - - - - - - - - - - - -course ofcollectionfrom otherbanksTreasury bills - - - - - - - - - - - - - -and othereligiblebillsLoans andadvances tobanks - - - - (2) - - - - - - 186 - 184Loans andadvances tocustomers - - - (132) (1,340) (41) 4,554 - (449) - - (810) - 1,782Debtsecurities - - - - - 153 465 - - - - 2,079 - 2,697Equity - - - - - - - - - - - 1,763 - 1,763sharesIntangiblefixed assets - - - - - - - 725 - - - - 941 1,666Property,plant andequipment - - (60) (153) (8) 75 - (168) 447 - - 1 - 134Settlement - - - - - - - - - - - - - -balancesOther assets - - - (12) - 34 25 - - - (4) 216 (76) 183Prepaymentsand accruedincome - - - 3 (12) 15 19 - 1 - - 20 - 46Long-termassuranceassets - - - - - - - - - - - (3,800) - (3,800)Total assets - - (60) (294) (1,362) 236 5,063 557 (1) - (4) (345) 865 4,655 Liabilities Deposits by - - - - - - - - - - - - - -banksItems in the - - - - - - - - - - - - - -course oftransmissionto otherbanksCustomeraccounts - - - - (1,015) - - - - - - (732) - (1,747)Debtsecurities inissue - - - - - - 5,039 - - - - - - 5,039Settlement - - - - - - - - - - - - - -balances andshortpositionsOtherliabilities (1,308) - - 6 (16) 31 (166) - - - - 85 - (1,368)Accruals anddeferredincome - - - 19 (3) 198 214 - - 20 - 11 - 459Post-retirementbenefitliabilities - - - - - 14 - - - - 1,025 - - 1,039Provisions forliabilitiesand charges- deferredtaxationliabilities - 109 - (90) 6 3 - 164 1 (6) (1,008) 12 (3) (812)- otherprovisions - - - - - - - - - - - 4,142 - 4,142Subordinated - - - - - - - - - - - - - -liabilitiesMinorityinterests - - - - (334) - - 6 - - - (9) - (337)Shareholders'funds 1,308 (109) (60) (229) - (10) (24) 387 (2) (14) (21) (54) 868 2,040Long-termassuranceliabilities - - - - - - - - - - (3,800) - (3,800)Totalliabilities - - (60) (294) (1,362) 236 5,063 557 (1) - (4) (345) 865 4,655 ANALYSIS OF IFRS ADJUSTMENTS EXCLUDING IAS 32, IAS 39 AND IFRS 4 Prop- Soft- erty ware30 plant deve- Inves- Share Emplo-June In- and Con- lop- tment based yee Ban-2004 Divi- come equip- Other solid- ment prop- pay- bene- cassu- Good-(unaudited) dends Tax ment Leases TPF JVs ation costs erty ment fits rance will Total £m £m £m £m £m £m £m £m £m £m £m £m £m £m Assets Cash andbalances atcentral banks - - - - - - 1 - - - - 16 - 17Items in the - - - - - - - - - - - - - -course ofcollectionfrom otherbanksTreasury bills - - - - - - - - - - - - - -and othereligiblebillsLoans andadvances tobanks - - - - (2) - 75 - - - - 118 - 191Loans andadvances tocustomers - - - (120) (1,327) (48) 3,949 - (417) - - (586) - 1,451Debtsecurities - - - - - 123 89 - - - - 1,999 - 2,211Equity - - - - - - - - - - - 1,695 - 1,695sharesIntangiblefixed assets - - - - - - - 822 - - - (1) 410 1,231Property,plant andequipment - - - (130) (7) 79 - (114) 415 - - - - 243Settlement - - - - - - - - - - - - - -balancesOther assets - - - (23) - 40 (8) - - - (3) 227 - 233Prepaymentsand accruedincome - - - - (4) 15 16 - 1 - - 13 - 41Long-termassuranceassets - - - - - - - - - - - (3,531) - (3,531)Total assets - - - (273) (1,340) 209 4,122 708 (1) - (3) (50) 410 3,782 Liabilities Deposits bybanks - - - - - - - - - - - 3 - 3Items in the - - - - - - - - - - - - - -course oftransmissionto otherbanksCustomeraccounts - - - - (990) - - - - - (595) - (1,585)Debtsecurities inissue - - - - - - 3,838 - - - - - - 3,838Settlement - - - - - - - - - - - - - -balances andshortpositionsOtherliabilities (529) - - 2 (27) 27 267 - - - - 336 - 76Accruals anddeferredincome - - - 20 12 176 15 - - 12 - 2 - 237Post-retirementbenefitliabilities - - - - - - - - - - 618 - - 618Provisions forliabilitiesand charges- deferredtaxationliabilities - 109 - (82) 7 6 - 209 - (4) (603) (1) - (359)- otherprovisions - - - - - - - - - - - 3,818 - 3,818Subordinated - - - - - - - - - - - - - -liabilitiesMinorityinterests - - - - (342) - 6 - - - (12) - (348)Shareholders'funds 529 (109) - (213) - - 2 493 (1) (8) (18) (70) 410 1,015Long-termassuranceliabilities - - - - - - - - - - - (3,531) - (3,531)Totalliabilities - - - (273) (1,340) 209 4,122 708 (1) - (3) (50) 410 3,782 ANALYSIS OF IFRS ADJUSTMENTS EXCLUDING IAS 32, IAS 39 AND IFRS 4 Prop- Soft erty ware plant deve- Inves- Share Emplo-1 In- and Con- lop- tment based yee Ban-January Divi- come equip- Other solid- ment prop- pay- bene- cassu- Good-2004 dends Tax ment Leases TPF JVs ation costs erty ment fits rance will Total £m £m £m £m £m £m £m £m £m £m £m £m £m £m Assets Cash and - - - - - - - - - - - - - -balances atcentralbanksItems in the - - - - - - - - - - - - - -course ofcollectionfrom otherbanksTreasury bills - - - - - - - - - - - - - -and othereligiblebillsLoans andadvances tobanks - - - - (2) - - - - - - 1,013 - 1,011Loans andadvances tocustomers - - - (147) (1,310) (55) 3,163 - (448) - - (541) - 662Debtsecurities - - - - - 111 12 - - - - 1,076 - 1,199Equity - - - - - - - - - - - 1,745 - 1,745sharesIntangiblefixed assets - - - - - - - 896 - - - - - 896Property,plant andequipment - - - (127) (7) 83 - (78) 448 - - 1 - 320Settlement - - - - - - - - - - - - - -balancesOther assets - - - - - 49 - - - - (10) 208 - 247Prepaymentsand accruedincome - - - - (4) 16 11 1 - - - 8 - 32Long-termassuranceassets - - - - - - - - - - - (3,557) - (3,557)Total assets - - - (274) (1,323) 204 3,186 819 - - (10) (47) - 2,555 Liabilities Deposits by - - - - - - - - - - - - - -banksItems in the - - - - - - - - - - - - - -course oftransmissionto otherbanksCustomeraccounts - - - - (1,002) - - - - - (495) - (1,497)Debtsecurities inissue - - - - - - 3,129 - - - - - - 3,129Settlement - - - - - - - - - - - - - -balances andshortpositionsOtherliabilities (1,059) - - (8) (23) 29 (156) - - - - 198 - (1,019)Accruals anddeferredincome - - - 10 8 169 211 - - 6 - - - 404Post-retirementbenefitliabilities - - - - - - - - - - 591 - - 591Provisions forliabilitiesand charges- deferredtaxationliabilities - 109 - (75) 7 6 - 243 - (2) (584) (4) - (300)- otherprovisions - - - - - - - - - - - 3,882 - 3,882Subordinated - - - - - - - - - - - - - -liabilitiesMinorityinterests - - - - (313) - - 5 - - - (13) - (321)Shareholders'funds 1,059 (109) - (201) - - 2 571 - (4) (17) (58) - 1,243Long-termassuranceliabilities - - - - - - - - - - - (3,557) - (3,557)Totalliabilities - - - (274) (1,323) 204 3,186 819 - - (10) (47) - 2,555 NOTES ON 2004 RESULTS 1. IFRS Earnings per shareEarnings per share have been calculated based on the following: Full year First half 2004 2004 (unaudited) £m £mEarningsProfit attributable to ordinary shareholders 4,856 2,401Add back dividends on dilutive convertiblesecurities 66 - _______ _______Diluted earnings attributable to ordinaryshareholders 4,922 2,401 _______ _______ Weighted average number of ordinary sharesIn issue during the period 3,085 3,013Effect of dilutive share options and convertiblenon-equity shares 73 18 _______ _______Diluted weighted average number of ordinary sharesduring 3,158 3,031the period _______ _______ Basic earnings per share 157.4p 79.7pIntangibles amortisation 1.2p 0.1pIntegration costs 11.6p 4.1p _______ _______Adjusted earnings per share 170.2p 83.9p _______ _______ Diluted earnings per share 155.9p 79.2p _______ _______2. Reconciliation of shareholders' funds 31 December 30 June 1 January 2004 2004 2004 £m £m £m UK GAAP shareholders'funds 31,865 30,407 26,098Standards applicable to all periods: Proposed dividend 1,308 529 1,059Goodwill and otherintangibles 865 410 -Software developmentcosts 551 702 814Leasing (319) (295) (276)Share based payments (20) (12) (6)Other (159) (83) (72)Tax effect on aboveadjustments (77) (127) (167)Deferred tax (109) (109) (109) _______ _______ _______Shareholders' fundsunder IFRS 33,905 31,422 27,341 _______ _______ _______ SECTION 3 2005 Results The financial information on pages 42 to 47 shows the effects of implementingIAS 32, IAS 39 and IFRS 4 on 1 January 2005. This therefore reflects allretrospective and prospective adjustments. 2005 results The implementation of IFRS has had a limited effect on the Group's restatedresults for 2004 and on its balance sheet as at 31 December 2004. However, theGroup's 2005 results will also be affected by IAS 32 'Financial Instruments:Disclosure and Presentation', IAS 39 'Financial Instruments: Recognition andMeasurement' and IFRS 4 'Insurance Contracts' which the Group has implementedfrom 1 January 2005. The key aspects of these standards, which are expected tohave a more significant effect on the Group, are discussed below. Hedging - IAS 39 contains detailed criteria that must be met for derivatives tobe accounted for as hedges and limits the circumstances in which hedgeaccounting is available. Hedge accounting is permitted for three types of hedgerelationship: fair value hedge - the hedge of changes in the fair value of arecognised asset or liability or firm commitment; cash flow hedge - the hedge ofvariability in cash flows from a recognised asset or liability or a forecastedtransaction; and the hedge of a net investment in a foreign entity. The Grouphas designated derivatives in both fair value and cash flow hedges. The Group,however, has not amended its overall approach to asset and liability managementand its other hedging activities in the light of IFRS. It continues to usederivatives to hedge risk positions if economically beneficial even where hedgeaccounting conditions are not met. As IAS 39 requires all derivatives to bemeasured at fair value, such 'economic hedges' will introduce volatility intothe Group's results. Even where transactions qualify for hedge accounting, IAS39 will give greater volatility than UK GAAP - in income from hedgeineffectiveness and in shareholders' funds reflecting changes in the fair valueof derivatives in cash flow hedges taken to equity. Loan impairment - the significant change, on implementation of IAS 39, in theway loan losses are measured is the explicit requirement to discount expectedrecoveries. As a result provisions are higher initially but the differencebetween the discounted and undiscounted amounts emerges as interest income overthe recovery period. Effective interest - under UK GAAP, loan origination fees were recognised whenreceived unless charged in lieu of interest. Interest income and expense wererecognised on an accruals basis. IAS 39 requires the amortised cost of afinancial instrument to be calculated using the effective interest method. Theeffective interest rate is the rate that discounts estimated future cash flowsover an instrument's expected life to its net carrying value. It takes intoaccount all fees and points paid that are an integral part of the yield,transaction costs and all other premiums and discounts. This GAAP differenceresults in certain lending fees being deferred over the life of the asset andchanges the way interest is recognised to a constant yield basis. Capital instruments - IAS 32 does not contain the UK GAAP concept of 'non-equityshares'. Instruments that have the characteristics of debt must be classified asliabilities. As a result, most of the Group's preference shares and non-equityminority interests have been reclassified as liabilities on implementation ofIAS 32. For 2004, this reclassification would have increased interest expense by£402 million with a corresponding reduction in preference share dividends of£239 million and in non-equity minority interests of £126 million, net of tax of£37 million. The changes in the classification of debt and equity instruments and in hedgeaccounting, loan impairment and effective interest calculations are expected tolead to a reduction in the Group's profit before tax.We estimate that the total impact on 2004 adjusted earnings per share, had allIFRS applied, would have been a reduction of around 5%. We expect a similar IFRSimpact for 2005 relative to UK GAAP adjusted earnings per share. Balance sheet and capital ratios at 1 January 2005 The implementation of all IFRS has resulted in an increase of £113 billion inthe Group's total assets and a reduction in shareholders' funds of £892 million.The rules for offset under IFRS are more restrictive than those in UK GAAP. IAS32's criteria for a financial asset and financial liability to be offset includea requirement that the reporting entity must intend either to settle the assetand liability on a net basis or to realise the asset and settle the liabilitysimultaneously. As a result there is significant gross up of assets andliabilities (£104 billion at 1 January 2005). In addition, there will be anincrease in interest income and a corresponding increase in interest expense(but with no effect on net interest income). The Group's tier 1 capital ratio is 6.7% compared with 7.0% reported under UKGAAP; the total capital ratio is 11.6% compared with 11.7% under UK GAAP. IFRS CONSOLIDATED OPENING BALANCE SHEETAT 1 JANUARY 2005 At Effect At 31 December of IAS 1 January 2004 32/ 2005 IAS 39 £m £m £mAssetsCash andbalances atcentral banks 4,293 - 4,293Items in thecourse ofcollectionfrom otherbanks 2,629 - 2,629Treasury billsand othereligible bills 6,110 (1) 6,109Loans andadvances tobanks 58,444 4,618 63,062Loans andadvances tocustomers 347,251 32,540 379,791Debtsecurities 93,908 (62) 93,846Equity shares 4,723 508 5,231Intangiblefixed assets 19,242 - 19,242Property,plant andequipment 16,428 (3) 16,425Settlementbalances 5,682 - 5,682Other assets 22,438 72,493 94,931Prepaymentsand accruedincome 6,974 (1,685) 5,289 _______ _______ _______Total assets 588,122 108,408 696,530 _______ _______ _______ LiabilitiesDeposits bybanks 99,081 6,143 105,224Items in thecourse oftransmissionto other banks 802 - 802Customeraccounts 283,315 28,852 312,167Debtsecurities inissue 63,999 1,125 65,124Settlementbalances andshortpositions 32,990 164 33,154Otherliabilities 24,784 73,467 98,251Accruals anddeferredincome 16,047 (1,775) 14,272Post-retirementbenefitliabilities 2,940 - 2,940Provisions for liabilities andcharges- deferredtaxationliabilities 2,061 (235) 1,826- otherprovisions 4,340 47 4,387Subordinatedliabilities 20,366 7,044 27,410Minorityinterests 3,492 (2,541) 951Shareholders'funds 33,905 (3,883) 30,022 _______ _______ _______Totalliabilities 588,122 108,408 696,530 _______ _______ _______ ANALYSIS OF IAS 32, IAS 39 AND IFRS 4 IFRS ADJUSTMENTS Pro- Class visio- ifica- ning Hed- Rev- tion/ Emb- & ging enue Insu-1 mea- edded imp- mea- Dere- Re- ranceJanuary Other Debt/ sure- deriva- air- sure- cogni- cogni- cont-2005 Offset IAS 39 equity ment tives ment ment tion tion racts Other Total £m £m £m £m £m £m £m £m £m £m £m £mAssetsCash and - - - - - - - - - - - -balances atcentral banksItems in the - - - - - - - - - - - -course ofcollection fromother banksTreasury billsand othereligible bills - - - (1) - - - - - - - (1)Loans andadvances tobanks 4,425 165 - - - - 4 - - 23 1 4,618Loans andadvances tocustomers 28,566 162 - (31) - (82) 518 4,022 (615) - - 32,540Debtsecurities - 678 - (241) - - 50 (580) - 31 - (62)Equity shares - - - 507 - - - - - - 1 508Intangible - - - - - - - - - - - -fixed assetsProperty,plant andequipment - - - - - - - - (3) - - (3)Settlement - - - - - - - - - - - -balancesOther assets 71,476 - - (18) 114 - 734 302 - (113) (2) 72,493Prepaymentsand accruedincome 4 (1,005) - (1) 3 - (593) 25 (90) (29) 1 (1,685)Total assets 104,471 - - 215 117 (82) 713 3,769 (708) (88) 1 108,408 LiabilitiesDeposits bybanks 4,425 207 - - - - 10 1,501 - - - 6,143Items in the - - - - - - - - - - - -course oftransmission toother banksCustomeraccounts 28,566 160 - (2) (39) - (11) 177 - - 1 28,852Debtsecurities inissue - 79 - (25) - - (1,060) 2,131 - - - 1,125Settlementbalances andshortpositions - 164 - - - - - - - - - 164Otherliabilities 71,476 - (60) 17 158 - 1,614 311 4 (53) - 73,467Accruals anddeferredincome 4 (1,052) - (4) (2) - (651) (181) 220 (109) - (1,775)Post-retirement - - - - - - - - - - - -benefitliabilitiesProvisions forliabilities andcharges- deferredtaxationliabilities - - - 65 - (24) 12 (51) (283) 46 - (235)- otherprovisions 47 - 47Subordinatedliabilities - 442 5,820 - - - 782 - - - - 7,044Minorityinterests - - (2,493) - - - - - - (48) - (2,541)Shareholders'funds - - (3,267) 164 - (58) 17 (119) (649) 29 - (3,883)Totalliabilities 104,471 - - 215 117 (82) 713 3,769 (708) (88) 1 108,408 RECONCILIATION OF SHAREHOLDERS' FUNDS 31 December 2004 £m UK GAAP shareholders' funds 31,865Standards applicable to all periods:Proposed dividend 1,308Goodwill and other intangibles 865Software development costs 551Leasing (319)Share based payments (20)Other (159)Tax effect on above adjustments (77)Deferred tax (109) _______Shareholders' funds under IFRS 33,905 Standards applicable from 1 January 2005:Non-equity shares reclassified to debt (3,192)Revenue recognition (932)Derecognition (170)Securities 229Other (53)Tax effect on cumulative IFRS adjustments 235 _______Shareholders' funds under IFRS 30,022Equity - minority interests 951 _______Equity under IFRS at 1 January 2005 30,973 _______ REGULATORY RATIOS The regulatory capital ratios for the Group at 1 January 2005 are set out below.These incorporate adjustments arising from the first time adoption of all IFRS,including IAS 32 and IAS 39 and have been computed in accordance with the FSA'spolicy statement 05/5. UK GAAP IFRS Tier 1 capital (£ million) 22,694 21,612 _______ _______ Total capital (£ million) 37,758 37,679 _______ _______ Tier 1 capital ratio (%) 7.0 6.7 _______ _______ Total capital ratio (%) 11.7 11.6 _______ _______ An analysis of the movement in Tier 1 capital ratio is set out below. % Tier 1 ratio: reported under UK GAAP at 31 December 2004 7.0 IFRS transitional adjustments (0.40) Non-specific provisions (0.05) Dividend 0.40 Pensions (0.25) (0.3) Tier 1 ratio: at 1 January 2005 under IFRS 6.7 SECTION 4 The bases of preparation of the IFRS results is shown on page 49. The Group's provisional IFRS accounting policies are set out on pages 50 to 58of this Report. A description of the key differences between UK GAAP and IFRS accountingpolicies is shown on pages 59 to 64. The IFRS financial information has been examined by the Group's auditors,Deloitte & Touche LLP, and their special purpose reports are set out on page 67to 69. Note Financial information contained in this document does not constitute statutoryaccounts within the meaning of section 240 of the Companies Act 1985 ("theAct"). The statutory accounts for the year ended 31 December 2004 will be filedwith the Registrar of Companies and have been reported on by the auditors undersection 235 of the Act. The report of the auditors was unqualified and did notcontain a statement under section 237(2) or (3) of the Act BASES OF PREPARATION First time adoption of International Financial Reporting Standards ('IFRS') The Group prepared its 2004 consolidated financial statements in accordance withaccounting standards issued by the UK Accounting Standards Board, thepronouncements of the Urgent Issues Task Force, relevant Statements ofRecommended Accounting Practice and in compliance with the Companies Act 1985. The Group will henceforth prepare its consolidated financial statements inaccordance with International Financial Reporting Standards, InternationalAccounting Standards and interpretations issued by the International FinancialReporting Interpretation Committee and its predecessor body (together 'IFRS').The standards applied, which will be adopted for the first time for the purposeof preparing consolidated financial statements for the year ending 31 December2005, will be those issued by the International Accounting Standards Board('IASB') and endorsed by the European Union (or where there is a reasonableexpectation of endorsement) as at 31 December 2005. The EU has not endorsed IAS 39 as issued by the IASB. The EU has relaxed some ofthe hedging requirements and introduced a prohibition on the designation ofnon-trading financial liabilities at fair value through profit or loss. TheGroup has not applied the relaxed hedge accounting requirements nor has itdesignated any non-trading financial liabilities at fair value through profit orloss. The financial information in this announcement has therefore been preparedin accordance with all extant IFRS. The IASB has proposed amendments to the fair value option in IAS 39. The EU isexpected to accept these amendments and endorse later this year a revisedstandard that would permit, subject to certain restrictions, designation ofnon-trading financial liabilities at fair value through profit or loss. It isanticipated that the transitional arrangements for the revised fair value optionwill permit designation from 1 January 2005 for companies applying the standardfor the first time from that date. If endorsed by the EU, the Group willconsider, at that time, applying the fair value option in respect of certainissued structured notes which contain embedded derivatives. As required by IFRS 1, the Group has applied IFRS expected to be extant at 31December 2005 in preparing its preliminary consolidated financial statementswith effect from 1 January 2004. As permitted by IFRS 1 the Group has notrestated its 2004 profit and loss account and balance sheet for the standardsrelating to financial instruments and insurance contracts (IAS 32, IAS 39 andIFRS 4). Further standards and interpretations may be issued that could be applicable forfinancial years beginning on or after 1 January 2005 or that are applicable tolater accounting periods but with an option for earlier adoption. The Group'sfirst annual financial statements under IFRS may, therefore, be prepared usingdifferent accounting policies than those used in preparing the financialinformation in this announcement. Furthermore, IFRS is currently being appliedin the EU and other jurisdictions for the first time. It contains many new andrevised standards, and practice in applying these standards and theirinterpretation is still developing. It should be noted therefore that thefinancial information included in this announcement is subject to change. The relevant UK tax legislation has not yet been finalised and it is possiblethat the tax estimates included in this announcement will have to be revised asrelevant elections are made in respect of the large number of UK companies inthe Group. PROVISIONAL ACCOUNTING POLICIES 1. Adoption of International Financial Reporting Standards The consolidated financial statements have, for the first time, been prepared inaccordance with International Financial Reporting Standards (IFRS) adopted bythe International Accounting Standards Board (IASB), and interpretations issuedby the International Financial Reporting Interpretations Committee of the IASB.The date of transition to IFRS for the Group and the date of its opening IFRSbalance sheet was 1 January 2004. On initial adoption of IFRS, the Group appliedthe following exemptions from the requirements of IFRS and from theirretrospective application as permitted by IFRS 1 'First-time Adoption ofInternational Financial Reporting Standards' (IFRS 1): Business combinations - the Group has applied IFRS 3 'Business Combinations' tobusiness combinations that occurred on or after 1 January 2004. Businesscombinations before that date have not been restated. Under previous GAAP ('UKGAAP'), goodwill arising on acquisitions after 1 October 1998 was capitalisedand amortised over its estimated useful economic life. Goodwill arising onacquisitions before 1 October 1998 was deducted from equity. The carrying amountof goodwill in the Group's opening IFRS balance sheet was £13,131 million, itscarrying value under UK GAAP as at 31 December 2003. Fair value or revaluation as deemed cost - under UK GAAP, the Group's freeholdand long leasehold property occupied for its own use was recorded at valuationon the basis of existing use value. The Group has elected to use this valuationas at 31 December 2003 as deemed cost for its opening IFRS balance sheet. Atthis date, the carrying value under UK GAAP of freehold and long leaseholdproperty occupied for own use was £2,391 million. Compound financial instruments - the Group has not separated compoundinstruments between liability and equity components, as required by IAS 32,where the liability component was not outstanding at 1 January 2004. UK GAAPdoes not permit compound instruments to be separated between liability andequity components on issue. Derecognition - the Group has applied the derecognition requirements of IAS 39to transactions occurring on or after 1 January 1992. Share based payments - IFRS 2 'Share-based Payment' has been applied to equityinstruments granted after 7 November 2002. Implementation of IAS 32, IAS 39 and IFRS 4 - as allowed by IFRS 1, the Grouphas not restated its 2004 consolidated income statements and balance sheets tocomply with IAS 32, IAS 39 and IFRS 4. In preparing the Group's 2004 full year and half year consolidated incomestatements and balance sheets, UK GAAP principles then current have been appliedto financial instruments. The main differences between UK GAAP and IFRS onfinancial instruments are summarised on pages 59 to 64. 2. Accounting convention The financial statements have been prepared on the historical cost basis exceptthat the following assets and liabilities are stated at their fair value:derivative financial instruments, held for trading financial assets andfinancial liabilities, financial assets that are designated at fair valuethrough profit or loss, available-for-sale financial assets and investmentproperty. Recognised financial assets and financial liabilities in fair valuehedges are adjusted for changes in fair value in respect of the risk that ishedged. PROVISIONAL ACCOUNTING POLICIES (continued) 3. Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe holding company (The Royal Bank of Scotland Group plc) and entities(including certain special purpose entities) controlled by the Group (itssubsidiaries). Control exists where the Group has the power to govern thefinancial and operating policies of the entity; generally conferred by holding amajority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities andcontingent liabilities are included in the consolidated accounts at their fairvalue. Any excess of the cost (the fair value of assets given, liabilitiesincurred or assumed and equity instruments issued by the Group plus any directlyattributable costs) of an acquisition over the fair value of the net assetsacquired is recognised as goodwill. The interest of minority shareholders isstated at their share of the fair value of the subsidiary's net assets. The results of subsidiaries acquired are included in the consolidated incomestatement from the date control passes to the Group. The results of subsidiariessold are included up until the Group ceases to control them. All intra-group balances, transactions, income and expenses are eliminated onconsolidation. The consolidated accounts are prepared using uniform accountingpolicies. 4. Revenue recognition Interest income on financial assets that are classified as loans andreceivables, available-for-sale or held-to-maturity and interest expense onfinancial liabilities other than those at fair value through profit or loss isdetermined using the effective interest rate method. The effective interest ratemethod is a method of calculating the amortised cost of a financial asset orfinancial liability (or group of financial assets or liabilities) and ofallocating the interest income or interest expense over the expected life of theasset or liability. The effective interest rate is the rate that exactlydiscounts estimated future cash flows to the instrument's initial carryingamount. Calculation of the effective interest rate takes into account feesreceivable, that are an integral part of the instrument's yield, premiums ordiscounts on acquisition or issue, early redemption fees and transaction costs.All contractual terms of a financial instrument are considered when estimatingfuture cash flows. Financial assets and financial liabilities held for trading and financial assetsdesignated as fair value through profit or loss are recorded at fair value.Changes in fair value are recognised in profit or loss together with dividendsand interest receivable and payable. Commitment and utilisation fees are determined as a percentage of theoutstanding facility. If it is unlikely that a specific lending arrangement willbe entered into, such fees are taken to profit or loss over the life of thefacility otherwise they are deferred and included in the effective interest rateon the advance. Fees in respect of services are recognised as the right to consideration accruesthrough the provision of the service to the customer. The arrangements aregenerally contractual and the cost of providing the service is incurred as theservice is rendered. The price is usually fixed and always determinable. Theapplication of this policy to significant fee types is outlined below. Payment services: this comprises income received for payment services includingcheques cashed, direct debits, Clearing House Automated Payments (the UKelectronic settlement system) and BACS payments (the automated clearing housethat processes direct debits and direct credits). These are generally charged ona per transaction basis. The income is earned when the payment or transactionoccurs. Payment services income is usually charged to the customer's account,monthly or quarterly in arrears. Accruals are raised for services provided butnot charged at period end. Card related services: fees from credit card business include: Commission received from retailers for processing credit and debit cardtransactions: income is accrued to the income statement as the service isperformed. Interchange received: as issuer, the Group receives a fee (interchange) eachtime a cardholder purchases goods and services. The Group also receivesinterchange fees from other card issuers for providing cash advances through itsbranch and Automated Teller Machine networks. These fees are accrued once thetransaction has taken place. An annual fee payable by a credit card holder is charged at the beginning ofeach year but is deferred and taken to profit or loss over the period of theservice i.e. 12 months. Insurance brokerage: this is made up of fees and commissions received from theagency sale of insurance. Commission on the sale of an insurance contract isearned at the inception of the policy as the insurance has been arranged andplaced. However, provision is made where commission is refundable in the eventof policy cancellation in line with estimated cancellations. Investment management fees: fees charged for managing investments are recognisedas revenue as the services are provided. Incremental costs that are directlyattributable to securing an investment management contract are deferred andcharged as expense as the related revenue is recognised. 5. Pensions and other post-retirement benefits The Group provides post-retirement benefits in the form of pensions andhealthcare plans to eligible employees. The cost of defined benefit pensionschemes and healthcare plans is assessed by independent professionally qualifiedactuaries and recognised on a systematic basis over employees' service lives. For defined benefit schemes, scheme liabilities are measured on an actuarialbasis using the projected unit credit method and discounted at a rate thatreflects the current rate of return on a high quality corporate bond ofequivalent term and currency to the scheme liabilities. Scheme assets aremeasured at their fair value. Any surplus or deficit of scheme assets overliabilities is recognised in the balance sheet as an asset (surplus) orliability (deficit). The current service cost and any past service coststogether with the expected return on scheme assets less the unwinding of thediscount on the scheme liabilities is charged to operating expenses. Actuarialgains and losses are recognised in full in the period in which they occuroutside profit or loss and presented in the statement of recognised income andexpense. Contributions to defined contribution pension schemes are recognised in theincome statement when payable. 6. Intangible assets and goodwill Intangible assets that are acquired by the Group are stated at cost lessaccumulated amortisation and impairment losses. Amortisation is charged toprofit or loss using methods that best reflect the economic benefits over theirestimated useful economic lives and included in Depreciation and amortisation.The estimated useful economic lives are as follows: Core deposit intangibles 7 years Computer software 3-5 years Other 5-10 years Expenditure on internally generated goodwill and brands is written off asincurred. Acquired goodwill being the excess of the cost of an acquisition overthe Group's interest in the net fair value of the identifiable assets,liabilities and contingent liabilities of the subsidiary, associate or jointventure acquired is initially recognised at cost and subsequently at cost lessany accumulated impairment losses. Goodwill arising on the acquisition ofsubsidiaries is included in the balance sheet caption 'Intangible fixed assets'and that on associates and joint ventures within their carrying amounts. Thegain or loss on the disposal of a subsidiary, associate or joint ventureincludes the carrying value of any related goodwill. PROVISIONAL ACCOUNTING POLICIES (continued) 7. Property, plant and equipment Items of property, plant and equipment are stated at cost less accumulateddepreciation (see below) and impairment losses. Where an item of property, plantand equipment comprises major components having different useful lives, they areaccounted for separately. Property that is being constructed or developed forfuture use as investment property is classified as property, plant and equipmentand stated at cost until construction or development is complete, at which timeit is reclassified as investment property. Depreciation is charged to profit or loss on a straight-line basis so as towrite off the depreciable amount of property, plant and equipment (includingassets owned and let on operating leases (except investment property - see note20)) over their estimated useful lives. The depreciable amount is the cost of anasset less its residual value. Land is not depreciated. Estimated useful livesare as follows: Freehold and long leasehold buildings 50 years Short leaseholds unexpired period of the lease Property adaptation costs 10 to 15 years Computer equipment up to 5 years Other equipment 4 to 15 years 8. Impairment of intangible assets and property, plant and equipment At each reporting date, the Group assesses whether there is any indication thatits intangible assets or property, plant and equipment are impaired. If any suchindication exists, the Group estimates the recoverable amount of the asset andthe impairment loss if any. Irrespective of any indications of impairment,intangible assets (excluding goodwill) with indefinite useful lives are testedannually for impairment by comparing their carrying value with their recoverableamount. Goodwill is tested for impairment annually or more frequently if eventsor changes in circumstances indicate that it might be impaired. If an asset doesnot generate cash flows that are independent from those of other assets orgroups of assets, recoverable amount is determined for the cash-generating unitto which the asset belongs. The recoverable amount of an asset is the higher ofits fair value less costs to sell and its value in use. Value in use is thepresent value of future cash flows from the asset or cash-generating unitRelated Shares:
RBS.L