Trading Stmt/IFRS Report-Pt.2
Royal Bank of Scotland Group PLC
08 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 interest
income (21) (18) (70) 4 (1) 16 - - (47) - - (137)
Non-interest
income 22 27 (138) 25 (29) - - (85) 251 - (2) 71
Insurance net
premium income - - - 109 - - - - 594 - - 703
Total income 1 9 (208) 138 (30) 16 - (85) 798 - (2) 637
Operating
expenses 5 49 (74) 74 2 27 36 (83) 106 (5) (2) 135
Insurance net
claims - - - 78 - - - - 702 - - 780
Operating
profit before
provisions (4) (40) (134) (14) (32) (11) (36) (2) (10) 5 - (278)
Provisions - - (27) - 1 - - - - - - (26)
Profit before
intangibles
amortisation
and
integration
costs (4) (40) (107) (14) (33) (11) (36) (2) (10) 5 - (252)
Intangible
assets
amortisation - - - - - - - - - (870) - (870)
Integration
costs - - - - - 251 - - - - - 251
Profit before
tax (4) (40) (107) (14) (33) (262) (36) (2) (10) 875 - 367
ANALYSIS OF IFRS ADJUSTMENTS EXCLUDING IAS 32, IAS 39 AND IFRS 4
Half 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 interest
income (11) (6) (37) 2 - 6 - - (21) - - (67)
Non-interest
income 9 17 (59) 14 (1) - - (24) 47 - 2 5
Insurance net
premium income - - - 49 - - - - 242 - (1) 290
Total income (2) 11 (96) 65 (1) 6 - (24) 268 - 1 228
Operating
expenses (2) 29 (38) 28 - (4) 15 (23) 52 - 1 58
Insurance net
claims - - - 37 - - - - 231 - (1) 267
Operating
profit before
provisions - (18) (58) - (1) 10 (15) (1) (15) - 1 (97)
Provisions - - (13) - - - - - - - - (13)
Profit before
intangibles
amortisation
and
integration
costs - (18) (45) - (1) 10 (15) (1) (15) - 1 (84)
Intangible
assets
amortisation - - - - - - - - - (409) - (409)
Integration
costs - - - - - 121 - - - - - 121
Profit before
tax - (18) (45) - (1) (111) (15) (1) (15) 409 1 204
ANALYSIS OF IFRS ADJUSTMENTS EXCLUDING IAS 32, IAS 39 AND IFRS 4
Divisional 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
Corporate
Banking and
Financial
Markets - (39) - (14) (31) (21) - - - - (1) (106)
Retail Banking - - - - - 1 - - (9) - - (8)
Retail Direct - - (107) - (1) (7) - - - - - (115)
Manufacturing - - - - - 27 - - - - - 27
Wealth
Management - (1) - - (1) (15) - - - - - (17)
RBS Insurance (4) - - - - 6 - - (1) - - 1
Ulster Bank - - - - - (2) - - - - - (2)
Citizens - - - - - - - - - - - -
Central items - - - - - - (36) (2) - 5 1 (32)
Profit before
intangibles
amortisation
and
integration
costs (4) (40) (107) (14) (33) (11) (36) (2) (10) 5 - (252)
Intangible
assets
amortisation - - - - - - - - - (870) - (870)
Integration
costs - - - - - 251 - - - - - 251
Profit before
tax (4) (40) (107) (14) (33) (262) (36) (2) (10) 875 - 367
ANALYSIS OF IFRS ADJUSTMENTS EXCLUDING IAS 32, IAS 39 AND IFRS 4
Divisional 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
Corporate
Banking and
Financial
Markets - (18) - - (1) - - - - - - (19)
Retail Banking - - - - 1 - - (14) - - (13)
Retail Direct - - (45) - - - - - - 1 - (44)
Manufacturing - - - - - 16 - - - - - 16
Wealth
Management - - - - - (6) - - - 1 - (5)
RBS Insurance - - - - - - - - (1) - - (1)
Ulster Bank - - - - - (1) - - - - - (1)
Citizens - - - - - - - - - - - -
Central items - - - - - - (15) (1) - (2) 1 (17)
Profit before
intangibles
amortisation
and
integration
costs - (18) (45) - (1) 10 (15) (1) (15) - 1 (84)
Intangible
assets
amortisation - - - - - - - - - (409) - (409)
Integration
costs - - - - - 121 - - - - - 121
Profit before
tax - (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 ware
31 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 at
central
banks
Items in the - - - - - - - - - - - - - -
course of
collection
from other
banks
Treasury bills - - - - - - - - - - - - - -
and other
eligible
bills
Loans and
advances to
banks - - - - (2) - - - - - - 186 - 184
Loans and
advances to
customers - - - (132) (1,340) (41) 4,554 - (449) - - (810) - 1,782
Debt
securities - - - - - 153 465 - - - - 2,079 - 2,697
Equity - - - - - - - - - - - 1,763 - 1,763
shares
Intangible
fixed assets - - - - - - - 725 - - - - 941 1,666
Property,
plant and
equipment - - (60) (153) (8) 75 - (168) 447 - - 1 - 134
Settlement - - - - - - - - - - - - - -
balances
Other assets - - - (12) - 34 25 - - - (4) 216 (76) 183
Prepayments
and accrued
income - - - 3 (12) 15 19 - 1 - - 20 - 46
Long-term
assurance
assets - - - - - - - - - - - (3,800) - (3,800)
Total assets - - (60) (294) (1,362) 236 5,063 557 (1) - (4) (345) 865 4,655
Liabilities
Deposits by - - - - - - - - - - - - - -
banks
Items in the - - - - - - - - - - - - - -
course of
transmission
to other
banks
Customer
accounts - - - - (1,015) - - - - - - (732) - (1,747)
Debt
securities in
issue - - - - - - 5,039 - - - - - - 5,039
Settlement - - - - - - - - - - - - - -
balances and
short
positions
Other
liabilities (1,308) - - 6 (16) 31 (166) - - - - 85 - (1,368)
Accruals and
deferred
income - - - 19 (3) 198 214 - - 20 - 11 - 459
Post-retirement
benefit
liabilities - - - - - 14 - - - - 1,025 - - 1,039
Provisions for
liabilities
and charges
- deferred
taxation
liabilities - 109 - (90) 6 3 - 164 1 (6) (1,008) 12 (3) (812)
- other
provisions - - - - - - - - - - - 4,142 - 4,142
Subordinated - - - - - - - - - - - - - -
liabilities
Minority
interests - - - - (334) - - 6 - - - (9) - (337)
Shareholders'
funds 1,308 (109) (60) (229) - (10) (24) 387 (2) (14) (21) (54) 868 2,040
Long-term
assurance
liabilities - - - - - - - - - - (3,800) - (3,800)
Total
liabilities - - (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 ware
30 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 and
balances at
central banks - - - - - - 1 - - - - 16 - 17
Items in the - - - - - - - - - - - - - -
course of
collection
from other
banks
Treasury bills - - - - - - - - - - - - - -
and other
eligible
bills
Loans and
advances to
banks - - - - (2) - 75 - - - - 118 - 191
Loans and
advances to
customers - - - (120) (1,327) (48) 3,949 - (417) - - (586) - 1,451
Debt
securities - - - - - 123 89 - - - - 1,999 - 2,211
Equity - - - - - - - - - - - 1,695 - 1,695
shares
Intangible
fixed assets - - - - - - - 822 - - - (1) 410 1,231
Property,
plant and
equipment - - - (130) (7) 79 - (114) 415 - - - - 243
Settlement - - - - - - - - - - - - - -
balances
Other assets - - - (23) - 40 (8) - - - (3) 227 - 233
Prepayments
and accrued
income - - - - (4) 15 16 - 1 - - 13 - 41
Long-term
assurance
assets - - - - - - - - - - - (3,531) - (3,531)
Total assets - - - (273) (1,340) 209 4,122 708 (1) - (3) (50) 410 3,782
Liabilities
Deposits by
banks - - - - - - - - - - - 3 - 3
Items in the - - - - - - - - - - - - - -
course of
transmission
to other
banks
Customer
accounts - - - - (990) - - - - - (595) - (1,585)
Debt
securities in
issue - - - - - - 3,838 - - - - - - 3,838
Settlement - - - - - - - - - - - - - -
balances and
short
positions
Other
liabilities (529) - - 2 (27) 27 267 - - - - 336 - 76
Accruals and
deferred
income - - - 20 12 176 15 - - 12 - 2 - 237
Post-retirement
benefit
liabilities - - - - - - - - - - 618 - - 618
Provisions for
liabilities
and charges
- deferred
taxation
liabilities - 109 - (82) 7 6 - 209 - (4) (603) (1) - (359)
- other
provisions - - - - - - - - - - - 3,818 - 3,818
Subordinated - - - - - - - - - - - - - -
liabilities
Minority
interests - - - - (342) - 6 - - - (12) - (348)
Shareholders'
funds 529 (109) - (213) - - 2 493 (1) (8) (18) (70) 410 1,015
Long-term
assurance
liabilities - - - - - - - - - - - (3,531) - (3,531)
Total
liabilities - - - (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 at
central
banks
Items in the - - - - - - - - - - - - - -
course of
collection
from other
banks
Treasury bills - - - - - - - - - - - - - -
and other
eligible
bills
Loans and
advances to
banks - - - - (2) - - - - - - 1,013 - 1,011
Loans and
advances to
customers - - - (147) (1,310) (55) 3,163 - (448) - - (541) - 662
Debt
securities - - - - - 111 12 - - - - 1,076 - 1,199
Equity - - - - - - - - - - - 1,745 - 1,745
shares
Intangible
fixed assets - - - - - - - 896 - - - - - 896
Property,
plant and
equipment - - - (127) (7) 83 - (78) 448 - - 1 - 320
Settlement - - - - - - - - - - - - - -
balances
Other assets - - - - - 49 - - - - (10) 208 - 247
Prepayments
and accrued
income - - - - (4) 16 11 1 - - - 8 - 32
Long-term
assurance
assets - - - - - - - - - - - (3,557) - (3,557)
Total assets - - - (274) (1,323) 204 3,186 819 - - (10) (47) - 2,555
Liabilities
Deposits by - - - - - - - - - - - - - -
banks
Items in the - - - - - - - - - - - - - -
course of
transmission
to other
banks
Customer
accounts - - - - (1,002) - - - - - (495) - (1,497)
Debt
securities in
issue - - - - - - 3,129 - - - - - - 3,129
Settlement - - - - - - - - - - - - - -
balances and
short
positions
Other
liabilities (1,059) - - (8) (23) 29 (156) - - - - 198 - (1,019)
Accruals and
deferred
income - - - 10 8 169 211 - - 6 - - - 404
Post-retirement
benefit
liabilities - - - - - - - - - - 591 - - 591
Provisions for
liabilities
and charges
- deferred
taxation
liabilities - 109 - (75) 7 6 - 243 - (2) (584) (4) - (300)
- other
provisions - - - - - - - - - - - 3,882 - 3,882
Subordinated - - - - - - - - - - - - - -
liabilities
Minority
interests - - - - (313) - - 5 - - - (13) - (321)
Shareholders'
funds 1,059 (109) - (201) - - 2 571 - (4) (17) (58) - 1,243
Long-term
assurance
liabilities - - - - - - - - - - - (3,557) - (3,557)
Total
liabilities - - - (274) (1,323) 204 3,186 819 - - (10) (47) - 2,555
NOTES ON 2004 RESULTS
1. IFRS Earnings per share
Earnings per share have been calculated based on the following:
Full year First half
2004 2004
(unaudited)
£m £m
Earnings
Profit attributable to ordinary shareholders 4,856 2,401
Add back dividends on dilutive convertible
securities 66 -
_______ _______
Diluted earnings attributable to ordinary
shareholders 4,922 2,401
_______ _______
Weighted average number of ordinary shares
In issue during the period 3,085 3,013
Effect of dilutive share options and convertible
non-equity shares 73 18
_______ _______
Diluted weighted average number of ordinary shares
during 3,158 3,031
the period
_______ _______
Basic earnings per share 157.4p 79.7p
Intangibles amortisation 1.2p 0.1p
Integration 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 26,098
Standards applicable to all periods:
Proposed dividend 1,308 529 1,059
Goodwill and other
intangibles 865 410 -
Software development
costs 551 702 814
Leasing (319) (295) (276)
Share based payments (20) (12) (6)
Other (159) (83) (72)
Tax effect on above
adjustments (77) (127) (167)
Deferred tax (109) (109) (109)
_______ _______ _______
Shareholders' funds
under IFRS 33,905 31,422 27,341
_______ _______ _______
SECTION 3
2005 Results
The financial information on pages 42 to 47 shows the effects of implementing
IAS 32, IAS 39 and IFRS 4 on 1 January 2005. This therefore reflects all
retrospective and prospective adjustments.
2005 results
The implementation of IFRS has had a limited effect on the Group's restated
results for 2004 and on its balance sheet as at 31 December 2004. However, the
Group's 2005 results will also be affected by IAS 32 'Financial Instruments:
Disclosure and Presentation', IAS 39 'Financial Instruments: Recognition and
Measurement' and IFRS 4 'Insurance Contracts' which the Group has implemented
from 1 January 2005. The key aspects of these standards, which are expected to
have a more significant effect on the Group, are discussed below.
Hedging - IAS 39 contains detailed criteria that must be met for derivatives to
be accounted for as hedges and limits the circumstances in which hedge
accounting is available. Hedge accounting is permitted for three types of hedge
relationship: fair value hedge - the hedge of changes in the fair value of a
recognised asset or liability or firm commitment; cash flow hedge - the hedge of
variability in cash flows from a recognised asset or liability or a forecasted
transaction; and the hedge of a net investment in a foreign entity. The Group
has designated derivatives in both fair value and cash flow hedges. The Group,
however, has not amended its overall approach to asset and liability management
and its other hedging activities in the light of IFRS. It continues to use
derivatives to hedge risk positions if economically beneficial even where hedge
accounting conditions are not met. As IAS 39 requires all derivatives to be
measured at fair value, such 'economic hedges' will introduce volatility into
the Group's results. Even where transactions qualify for hedge accounting, IAS
39 will give greater volatility than UK GAAP - in income from hedge
ineffectiveness and in shareholders' funds reflecting changes in the fair value
of derivatives in cash flow hedges taken to equity.
Loan impairment - the significant change, on implementation of IAS 39, in the
way loan losses are measured is the explicit requirement to discount expected
recoveries. As a result provisions are higher initially but the difference
between the discounted and undiscounted amounts emerges as interest income over
the recovery period.
Effective interest - under UK GAAP, loan origination fees were recognised when
received unless charged in lieu of interest. Interest income and expense were
recognised on an accruals basis. IAS 39 requires the amortised cost of a
financial instrument to be calculated using the effective interest method. The
effective interest rate is the rate that discounts estimated future cash flows
over an instrument's expected life to its net carrying value. It takes into
account all fees and points paid that are an integral part of the yield,
transaction costs and all other premiums and discounts. This GAAP difference
results in certain lending fees being deferred over the life of the asset and
changes the way interest is recognised to a constant yield basis.
Capital instruments - IAS 32 does not contain the UK GAAP concept of 'non-equity
shares'. Instruments that have the characteristics of debt must be classified as
liabilities. As a result, most of the Group's preference shares and non-equity
minority interests have been reclassified as liabilities on implementation of
IAS 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 hedge
accounting, loan impairment and effective interest calculations are expected to
lead to a reduction in the Group's profit before tax.
We estimate that the total impact on 2004 adjusted earnings per share, had all
IFRS applied, would have been a reduction of around 5%. We expect a similar IFRS
impact 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 in
the 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. IAS
32's criteria for a financial asset and financial liability to be offset include
a requirement that the reporting entity must intend either to settle the asset
and liability on a net basis or to realise the asset and settle the liability
simultaneously. As a result there is significant gross up of assets and
liabilities (£104 billion at 1 January 2005). In addition, there will be an
increase 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 UK
GAAP; the total capital ratio is 11.6% compared with 11.7% under UK GAAP.
IFRS CONSOLIDATED OPENING BALANCE SHEET
AT 1 JANUARY 2005
At Effect At
31 December of IAS 1 January
2004 32/ 2005
IAS 39
£m £m £m
Assets
Cash and
balances at
central banks 4,293 - 4,293
Items in the
course of
collection
from other
banks 2,629 - 2,629
Treasury bills
and other
eligible bills 6,110 (1) 6,109
Loans and
advances to
banks 58,444 4,618 63,062
Loans and
advances to
customers 347,251 32,540 379,791
Debt
securities 93,908 (62) 93,846
Equity shares 4,723 508 5,231
Intangible
fixed assets 19,242 - 19,242
Property,
plant and
equipment 16,428 (3) 16,425
Settlement
balances 5,682 - 5,682
Other assets 22,438 72,493 94,931
Prepayments
and accrued
income 6,974 (1,685) 5,289
_______ _______ _______
Total assets 588,122 108,408 696,530
_______ _______ _______
Liabilities
Deposits by
banks 99,081 6,143 105,224
Items in the
course of
transmission
to other banks 802 - 802
Customer
accounts 283,315 28,852 312,167
Debt
securities in
issue 63,999 1,125 65,124
Settlement
balances and
short
positions 32,990 164 33,154
Other
liabilities 24,784 73,467 98,251
Accruals and
deferred
income 16,047 (1,775) 14,272
Post-retirement
benefit
liabilities 2,940 - 2,940
Provisions for liabilities and
charges
- deferred
taxation
liabilities 2,061 (235) 1,826
- other
provisions 4,340 47 4,387
Subordinated
liabilities 20,366 7,044 27,410
Minority
interests 3,492 (2,541) 951
Shareholders'
funds 33,905 (3,883) 30,022
_______ _______ _______
Total
liabilities 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- rance
January 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 £m
Assets
Cash and - - - - - - - - - - - -
balances at
central banks
Items in the - - - - - - - - - - - -
course of
collection from
other banks
Treasury bills
and other
eligible bills - - - (1) - - - - - - - (1)
Loans and
advances to
banks 4,425 165 - - - - 4 - - 23 1 4,618
Loans and
advances to
customers 28,566 162 - (31) - (82) 518 4,022 (615) - - 32,540
Debt
securities - 678 - (241) - - 50 (580) - 31 - (62)
Equity shares - - - 507 - - - - - - 1 508
Intangible - - - - - - - - - - - -
fixed assets
Property,
plant and
equipment - - - - - - - - (3) - - (3)
Settlement - - - - - - - - - - - -
balances
Other assets 71,476 - - (18) 114 - 734 302 - (113) (2) 72,493
Prepayments
and accrued
income 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
Liabilities
Deposits by
banks 4,425 207 - - - - 10 1,501 - - - 6,143
Items in the - - - - - - - - - - - -
course of
transmission to
other banks
Customer
accounts 28,566 160 - (2) (39) - (11) 177 - - 1 28,852
Debt
securities in
issue - 79 - (25) - - (1,060) 2,131 - - - 1,125
Settlement
balances and
short
positions - 164 - - - - - - - - - 164
Other
liabilities 71,476 - (60) 17 158 - 1,614 311 4 (53) - 73,467
Accruals and
deferred
income 4 (1,052) - (4) (2) - (651) (181) 220 (109) - (1,775)
Post-retirement - - - - - - - - - - - -
benefit
liabilities
Provisions for
liabilities and
charges
- deferred
taxation
liabilities - - - 65 - (24) 12 (51) (283) 46 - (235)
- other
provisions 47 - 47
Subordinated
liabilities - 442 5,820 - - - 782 - - - - 7,044
Minority
interests - - (2,493) - - - - - - (48) - (2,541)
Shareholders'
funds - - (3,267) 164 - (58) 17 (119) (649) 29 - (3,883)
Total
liabilities 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 31,865
Standards applicable to all periods:
Proposed dividend 1,308
Goodwill and other intangibles 865
Software development costs 551
Leasing (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 229
Other (53)
Tax effect on cumulative IFRS adjustments 235
_______
Shareholders' funds under IFRS 30,022
Equity - 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's
policy 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 58
of this Report.
A description of the key differences between UK GAAP and IFRS accounting
policies 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 67
to 69.
Note
Financial information contained in this document does not constitute statutory
accounts within the meaning of section 240 of the Companies Act 1985 ('the
Act'). The statutory accounts for the year ended 31 December 2004 will be filed
with the Registrar of Companies and have been reported on by the auditors under
section 235 of the Act. The report of the auditors was unqualified and did not
contain 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 with
accounting standards issued by the UK Accounting Standards Board, the
pronouncements of the Urgent Issues Task Force, relevant Statements of
Recommended Accounting Practice and in compliance with the Companies Act 1985.
The Group will henceforth prepare its consolidated financial statements in
accordance with International Financial Reporting Standards, International
Accounting Standards and interpretations issued by the International Financial
Reporting Interpretation Committee and its predecessor body (together 'IFRS').
The standards applied, which will be adopted for the first time for the purpose
of preparing consolidated financial statements for the year ending 31 December
2005, will be those issued by the International Accounting Standards Board
('IASB') and endorsed by the European Union (or where there is a reasonable
expectation of endorsement) as at 31 December 2005.
The EU has not endorsed IAS 39 as issued by the IASB. The EU has relaxed some of
the hedging requirements and introduced a prohibition on the designation of
non-trading financial liabilities at fair value through profit or loss. The
Group has not applied the relaxed hedge accounting requirements nor has it
designated any non-trading financial liabilities at fair value through profit or
loss. The financial information in this announcement has therefore been prepared
in accordance with all extant IFRS.
The IASB has proposed amendments to the fair value option in IAS 39. The EU is
expected to accept these amendments and endorse later this year a revised
standard that would permit, subject to certain restrictions, designation of
non-trading financial liabilities at fair value through profit or loss. It is
anticipated that the transitional arrangements for the revised fair value option
will permit designation from 1 January 2005 for companies applying the standard
for the first time from that date. If endorsed by the EU, the Group will
consider, at that time, applying the fair value option in respect of certain
issued structured notes which contain embedded derivatives.
As required by IFRS 1, the Group has applied IFRS expected to be extant at 31
December 2005 in preparing its preliminary consolidated financial statements
with effect from 1 January 2004. As permitted by IFRS 1 the Group has not
restated its 2004 profit and loss account and balance sheet for the standards
relating to financial instruments and insurance contracts (IAS 32, IAS 39 and
IFRS 4).
Further standards and interpretations may be issued that could be applicable for
financial years beginning on or after 1 January 2005 or that are applicable to
later accounting periods but with an option for earlier adoption. The Group's
first annual financial statements under IFRS may, therefore, be prepared using
different accounting policies than those used in preparing the financial
information in this announcement. Furthermore, IFRS is currently being applied
in the EU and other jurisdictions for the first time. It contains many new and
revised standards, and practice in applying these standards and their
interpretation is still developing. It should be noted therefore that the
financial information included in this announcement is subject to change.
The relevant UK tax legislation has not yet been finalised and it is possible
that the tax estimates included in this announcement will have to be revised as
relevant elections are made in respect of the large number of UK companies in
the Group.
PROVISIONAL ACCOUNTING POLICIES
1. Adoption of International Financial Reporting Standards
The consolidated financial statements have, for the first time, been prepared in
accordance with International Financial Reporting Standards (IFRS) adopted by
the International Accounting Standards Board (IASB), and interpretations issued
by the International Financial Reporting Interpretations Committee of the IASB.
The date of transition to IFRS for the Group and the date of its opening IFRS
balance sheet was 1 January 2004. On initial adoption of IFRS, the Group applied
the following exemptions from the requirements of IFRS and from their
retrospective application as permitted by IFRS 1 'First-time Adoption of
International Financial Reporting Standards' (IFRS 1):
Business combinations - the Group has applied IFRS 3 'Business Combinations' to
business combinations that occurred on or after 1 January 2004. Business
combinations before that date have not been restated. Under previous GAAP ('UK
GAAP'), goodwill arising on acquisitions after 1 October 1998 was capitalised
and amortised over its estimated useful economic life. Goodwill arising on
acquisitions before 1 October 1998 was deducted from equity. The carrying amount
of goodwill in the Group's opening IFRS balance sheet was £13,131 million, its
carrying value under UK GAAP as at 31 December 2003.
Fair value or revaluation as deemed cost - under UK GAAP, the Group's freehold
and long leasehold property occupied for its own use was recorded at valuation
on the basis of existing use value. The Group has elected to use this valuation
as at 31 December 2003 as deemed cost for its opening IFRS balance sheet. At
this date, the carrying value under UK GAAP of freehold and long leasehold
property occupied for own use was £2,391 million.
Compound financial instruments - the Group has not separated compound
instruments between liability and equity components, as required by IAS 32,
where the liability component was not outstanding at 1 January 2004. UK GAAP
does not permit compound instruments to be separated between liability and
equity components on issue.
Derecognition - the Group has applied the derecognition requirements of IAS 39
to transactions occurring on or after 1 January 1992.
Share based payments - IFRS 2 'Share-based Payment' has been applied to equity
instruments granted after 7 November 2002.
Implementation of IAS 32, IAS 39 and IFRS 4 - as allowed by IFRS 1, the Group
has not restated its 2004 consolidated income statements and balance sheets to
comply with IAS 32, IAS 39 and IFRS 4.
In preparing the Group's 2004 full year and half year consolidated income
statements and balance sheets, UK GAAP principles then current have been applied
to financial instruments. The main differences between UK GAAP and IFRS on
financial instruments are summarised on pages 59 to 64.
2. Accounting convention
The financial statements have been prepared on the historical cost basis except
that the following assets and liabilities are stated at their fair value:
derivative financial instruments, held for trading financial assets and
financial liabilities, financial assets that are designated at fair value
through profit or loss, available-for-sale financial assets and investment
property. Recognised financial assets and financial liabilities in fair value
hedges are adjusted for changes in fair value in respect of the risk that is
hedged.
PROVISIONAL ACCOUNTING POLICIES (continued)
3. Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the holding company (The Royal Bank of Scotland Group plc) and entities
(including certain special purpose entities) controlled by the Group (its
subsidiaries). Control exists where the Group has the power to govern the
financial and operating policies of the entity; generally conferred by holding a
majority of voting rights.
On acquisition of a subsidiary, its identifiable assets, liabilities and
contingent liabilities are included in the consolidated accounts at their fair
value. Any excess of the cost (the fair value of assets given, liabilities
incurred or assumed and equity instruments issued by the Group plus any directly
attributable costs) of an acquisition over the fair value of the net assets
acquired is recognised as goodwill. The interest of minority shareholders is
stated at their share of the fair value of the subsidiary's net assets.
The results of subsidiaries acquired are included in the consolidated income
statement from the date control passes to the Group. The results of subsidiaries
sold are included up until the Group ceases to control them.
All intra-group balances, transactions, income and expenses are eliminated on
consolidation. The consolidated accounts are prepared using uniform accounting
policies.
4. Revenue recognition
Interest income on financial assets that are classified as loans and
receivables, available-for-sale or held-to-maturity and interest expense on
financial liabilities other than those at fair value through profit or loss is
determined using the effective interest rate method. The effective interest rate
method is a method of calculating the amortised cost of a financial asset or
financial liability (or group of financial assets or liabilities) and of
allocating the interest income or interest expense over the expected life of the
asset or liability. The effective interest rate is the rate that exactly
discounts estimated future cash flows to the instrument's initial carrying
amount. Calculation of the effective interest rate takes into account fees
receivable, that are an integral part of the instrument's yield, premiums or
discounts on acquisition or issue, early redemption fees and transaction costs.
All contractual terms of a financial instrument are considered when estimating
future cash flows.
Financial assets and financial liabilities held for trading and financial assets
designated as fair value through profit or loss are recorded at fair value.
Changes in fair value are recognised in profit or loss together with dividends
and interest receivable and payable.
Commitment and utilisation fees are determined as a percentage of the
outstanding facility. If it is unlikely that a specific lending arrangement will
be entered into, such fees are taken to profit or loss over the life of the
facility otherwise they are deferred and included in the effective interest rate
on the advance.
Fees in respect of services are recognised as the right to consideration accrues
through the provision of the service to the customer. The arrangements are
generally contractual and the cost of providing the service is incurred as the
service is rendered. The price is usually fixed and always determinable. The
application of this policy to significant fee types is outlined below.
Payment services: this comprises income received for payment services including
cheques cashed, direct debits, Clearing House Automated Payments (the UK
electronic settlement system) and BACS payments (the automated clearing house
that processes direct debits and direct credits). These are generally charged on
a per transaction basis. The income is earned when the payment or transaction
occurs. Payment services income is usually charged to the customer's account,
monthly or quarterly in arrears. Accruals are raised for services provided but
not charged at period end.
Card related services: fees from credit card business include:
Commission received from retailers for processing credit and debit card
transactions: income is accrued to the income statement as the service is
performed.
Interchange received: as issuer, the Group receives a fee (interchange) each
time a cardholder purchases goods and services. The Group also receives
interchange fees from other card issuers for providing cash advances through its
branch and Automated Teller Machine networks. These fees are accrued once the
transaction has taken place.
An annual fee payable by a credit card holder is charged at the beginning of
each year but is deferred and taken to profit or loss over the period of the
service i.e. 12 months.
Insurance brokerage: this is made up of fees and commissions received from the
agency sale of insurance. Commission on the sale of an insurance contract is
earned at the inception of the policy as the insurance has been arranged and
placed. However, provision is made where commission is refundable in the event
of policy cancellation in line with estimated cancellations.
Investment management fees: fees charged for managing investments are recognised
as revenue as the services are provided. Incremental costs that are directly
attributable to securing an investment management contract are deferred and
charged 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 and
healthcare plans to eligible employees. The cost of defined benefit pension
schemes and healthcare plans is assessed by independent professionally qualified
actuaries and recognised on a systematic basis over employees' service lives.
For defined benefit schemes, scheme liabilities are measured on an actuarial
basis using the projected unit credit method and discounted at a rate that
reflects the current rate of return on a high quality corporate bond of
equivalent term and currency to the scheme liabilities. Scheme assets are
measured at their fair value. Any surplus or deficit of scheme assets over
liabilities is recognised in the balance sheet as an asset (surplus) or
liability (deficit). The current service cost and any past service costs
together with the expected return on scheme assets less the unwinding of the
discount on the scheme liabilities is charged to operating expenses. Actuarial
gains and losses are recognised in full in the period in which they occur
outside profit or loss and presented in the statement of recognised income and
expense.
Contributions to defined contribution pension schemes are recognised in the
income statement when payable.
6. Intangible assets and goodwill
Intangible assets that are acquired by the Group are stated at cost less
accumulated amortisation and impairment losses. Amortisation is charged to
profit or loss using methods that best reflect the economic benefits over their
estimated 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 as
incurred. Acquired goodwill being the excess of the cost of an acquisition over
the Group's interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities of the subsidiary, associate or joint
venture acquired is initially recognised at cost and subsequently at cost less
any accumulated impairment losses. Goodwill arising on the acquisition of
subsidiaries is included in the balance sheet caption 'Intangible fixed assets'
and that on associates and joint ventures within their carrying amounts. The
gain or loss on the disposal of a subsidiary, associate or joint venture
includes 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 accumulated
depreciation (see below) and impairment losses. Where an item of property, plant
and equipment comprises major components having different useful lives, they are
accounted for separately. Property that is being constructed or developed for
future use as investment property is classified as property, plant and equipment
and stated at cost until construction or development is complete, at which time
it is reclassified as investment property.
Depreciation is charged to profit or loss on a straight-line basis so as to
write off the depreciable amount of property, plant and equipment (including
assets owned and let on operating leases (except investment property - see note
20)) over their estimated useful lives. The depreciable amount is the cost of an
asset less its residual value. Land is not depreciated. Estimated useful lives
are 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 that
its intangible assets or property, plant and equipment are impaired. If any such
indication exists, the Group estimates the recoverable amount of the asset and
the impairment loss if any. Irrespective of any indications of impairment,
intangible assets (excluding goodwill) with indefinite useful lives are tested
annually for impairment by comparing their carrying value with their recoverable
amount. Goodwill is tested for impairment annually or more frequently if events
or changes in circumstances indicate that it might be impaired. If an asset does
not generate cash flows that are independent from those of other assets or
groups of assets, recoverable amount is determined for the cash-generating unit
to which the asset belongs. The recoverable amount of an asset is the higher of
its fair value less costs to sell and its value in use. Value in use is the
present value of future cash flows from the asset or cash-generating unit
discounted at a rate that reflects market interest rates adjusted for risks
specific to the asset that have not been reflected in the estimation of future
cash flows. If the recoverable amount of an intangible or tangible asset is less
than its carrying value, an impairment loss is recognised immediately in profit
or loss and the carrying value of the asset reduced by the amount of the loss. A
reversal of an impairment loss on intangible assets (excluding goodwill) or
property, plant and equipment is recognised as it arises provided the increased
carrying value does not exceed that which it would have been had no impairment
loss been recognised. Impairment losses on goodwill are not reversed.
9. Foreign currencies
The Group's consolidated financial statements are presented in sterling which is
the functional currency of the Company.
Transactions in foreign currencies are translated into sterling at the foreign
exchange rate ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated into sterling at
the rates of exchange ruling at the balance sheet date. Foreign exchange
differences arising on translation are recognised in profit or loss except for
differences arising on financial liabilities hedging net investments in foreign
operations. Non-monetary items denominated in foreign currencies that are stated
at fair value are translated into sterling at foreign exchange rates ruling at
the dates the values were determined. Translation differences arising on
non-monetary items measured at fair value are recognised in profit or loss
except for differences arising on available-for-sale non-monetary financial
assets, for example equity shares, which are included in the fair value reserve
in equity unless the asset is the hedged item in a fair value hedge.
PROVISIONAL ACCOUNTING POLICIES (continued)
The assets and liabilities of foreign operations, including goodwill and fair
value adjustments arising on acquisition, are translated into sterling at
foreign exchange rates ruling at the balance sheet date. The revenues and
expenses of foreign operations are translated into sterling at average exchange
rates unless these do not approximate to the foreign exchange rates ruling at
the dates of the transactions. Foreign exchange differences arising on
translation of foreign operations are recognised directly in equity.
10. Leases
Contracts to lease assets are classified as finance leases if they transfer
substantially all the risks and rewards of ownership of the asset to the
customer. Other contracts to lease assets are classified as operating
leases.
Finance lease receivables are stated in the balance sheet at the amount of the
net investment in the lease being the minimum lease payments and any
unguaranteed residual value discounted at the interest rate implicit in the
lease. Finance lease income is allocated to accounting periods so as to give a
constant periodic rate of return before tax on the net investment. Unguaranteed
residual values are subject to regular review to identify potential impairments.
If there has been a reduction in the estimated unguaranteed residual value, the
income allocation is revised and any reduction in respect of amounts accrued is
recognised immediately.
Rental income from operating leases is credited to the income statement on a
receivable basis over the term of the lease. Operating lease assets are included
within Property, plant and equipment and depreciated over their useful lives
(see note 7).
11. Insurance
General insurance
General insurance comprises short-duration contracts and includes principally
property and liability insurance contracts. Due to the nature of the products
sold - retail based property and casualty, motor, home and personal health
insurance contracts - the insurance protection is provided on an even basis
throughout the term of the policy.
Premiums from general insurance contracts are recognised in the accounting
period in which they begin. Unearned premiums represent the proportion of the
net premiums that relate to periods of insurance after the balance sheet date
and are calculated over the period of exposure under the policy, on a daily
basis, 24th's basis or allowing for the estimated incidence of exposure under
policies which are longer than twelve months. Provision is made where necessary
for the estimated amount of claims over and above unearned premiums including
that in respect of future written business on discontinued lines under the
run-off of delegated underwriting authority arrangements. It is designed to meet
future claims and related expenses and is calculated across related classes of
business on the basis of a separate carry forward of deferred acquisition
expenses after making allowance for investment income.
Acquisition expenses relating to new and renewed business for all classes are
deferred over the period during which the premiums are unearned. The principal
acquisition costs so deferred are commissions payable, costs associated with the
telesales and underwriting staff and prepaid claims handling costs in respect of
delegated claims handling arrangements for claims which are expected to occur
after the balance sheet date. Claims and the related reinsurance are recognised
in the accounting period in which the loss occurs. Provision is made for the
full cost of settling outstanding claims at the balance sheet date, including
claims estimated to have been incurred but not yet reported at that date, and
claims handling expenses. The related reinsurance receivable is recognised at
the same time.
Life assurance
The Group's long-term assurance contracts include whole-life, term assurance,
endowment assurances, flexible whole life, pension and annuity contracts that
are expected to remain in force for an extended period of time. Contracts under
which the Group does not accept significant insurance risk are classified as
investment contracts.
The value placed on the Group's long-term life assurance business, comprising
those contracts that involve significant insurance risk together with the
related assets, represents the present value of profits inherent in in-force
policies. In calculating the value of in-force policies, future surpluses
expected to emerge are estimated using appropriate assumptions as to future
mortality, persistency and levels of expenses, which are then discounted at a
risk-adjusted rate. Changes in this value, which is determined on a post-tax
basis, are included in operating profit.
The Group has reinsurance treaties that transfer significant insurance risk.
Within net assets, the reinsurance cash flows are recognised when they become
payable. For most contracts this effectively spreads the cost of reinsurance
over the life of the reinsured contracts.
12. Taxation
Provision is made for taxation at current enacted rates on taxable profits,
arising in income or in equity, taking into account relief for overseas
taxation where appropriate. Deferred taxation is accounted for in full for
all temporary differences between the carrying amount of an asset or
liability for accounting purposes and its carrying amount for tax purposes,
except in relation to overseas earnings where remittance is controlled by
the Group, and goodwill
Deferred tax assets are only recognised to the extent that it is probable that
they will be recovered.
13. Financial assets
Financial assets are classified into held-to-maturity investments;
available-for-sale financial assets; held for trading; designated as fair value
through profit or loss; or loans and receivables.
Held-to-maturity investments - a financial asset is classified as
held-to-maturity investments only if it has fixed or determinable payments, a
fixed maturity and the Group has the positive intention and ability to hold to
maturity. Held-to-maturity investments are initially recognised at fair value
plus directly related transaction costs. They are subsequently measured at
amortised cost using the effective interest method (see note 4 above) less any
impairment losses.
Held-for-trading - a financial asset is classified as held-for-trading if it is
acquired principally for the purpose of the selling in the near term, or forms
part of a portfolio of financial instruments that are managed together and for
which there is evidence of short-term profit taking, or it is a derivative (not
in a qualifying hedge relationship). Held-for-trading financial assets are
recognised at fair value with transaction costs being recognised in profit or
loss. Subsequently they are measured at fair value. Gains and losses on
held-for-trading financial assets are recognised in profit or loss as they
arise.
Designated at fair value through profit or loss - financial assets that the
Group designates on initial recognition as being at fair value through profit
and loss are recognised at fair value with transaction costs being recognised in
profit or loss and are subsequently measured at fair value. Gains and losses on
financial assets that are designated at fair value through profit or loss are
recognised in profit or loss as they arise.
Loans and receivables - non-derivative financial assets with fixed or
determinable repayments that are not quoted in an active market are classified
as loans and receivables except those that are classified as held-to-maturity,
held for trading or designated as fair value through profit or loss. Loans and
receivables are initially recognised at fair value plus directly related
transaction costs. They are subsequently measured at adjusted cost using the
effective interest method (see note 4 above) less any impairment losses.
Available-for-sale - financial assets that are not classified as held-to-
maturity; held for trading; designated at fair value through profit or loss; or
loans and receivables are classified as available for sale. Financial assets can
be designated as available-for-sale on initial recognition. Available-for-sale
financial assets are initially recognised at fair value plus directly related
transaction costs. They are subsequently measured at fair value. Exchange
differences resulting from retranslating the amortised cost of currency monetary
available-for-sale financial assets are recognised in profit or loss. Other
changes in the fair value of available-for-sale financial assets are reported in
a separate component of shareholders' equity. Interest calculated using the
effective interest rate (see note 4 above) is recognised in profit or loss.
Regular way purchases of financial assets classified as loans and receivables
are recognised on settlement date; all other regular way purchases are
recognised on trade date.
Fair value for a net open position in a financial asset that is quoted in an
active market is the current bid price times the number of units of the
instrument held. Fair values for financial assets not quoted in an active market
are determined using appropriate valuation techniques including discounting
future cash flows, option pricing models and other methods that are consistent
with accepted economic methodologies for pricing financial assets.
14. Impairment of financial assets
The Group assesses at each balance sheet date whether there is any objective
evidence that a financial asset or group of financial assets classified as
held-to-maturity, available-for-sale or loans and receivables is impaired. A
financial asset or portfolio of financial assets is impaired and an impairment
loss incurred if there is objective evidence that an event or events since
initial recognition of the asset have adversely affected the amount or timing of
future cash flows from the asset.
Financial assets carried at amortised cost - if there is objective evidence that
an impairment loss on a financial asset or group of financial assets classified
as loans and receivable or as held-to-maturity investments has been incurred,
the Group measures the amount of the loss as the difference between the carrying
amount of the asset or group of assets and the present value of estimated future
cash flows from the asset or group of assets discounted at the effective
interest rate of the instrument at initial recognition. Impairment losses are
assessed individually for financial assets that are individually significant and
individually or collectively for assets that are not individually significant.
In making collective assessment of impairment, financial assets are grouped into
portfolios on the basis of similar risk characteristics. Future cash flows from
these portfolios are estimated on the basis of the contractual cash flows and
historical loss experience for assets with similar credit risk characteristics.
Historical loss experience is adjusted, on the basis of current observable data,
to reflect the effects of current conditions not affecting the period of
historical experience.
Impairment losses are recognised in profit or loss and the carrying amount of
the financial asset or group of financial assets reduced by establishing an
allowance for impairment losses. If in a subsequent period the amount of the
impairment loss reduces and the reduction can be ascribed to an event after the
impairment was recognised, the previously recognised loss is reversed by
adjusting the allowance. Once an impairment loss has been recognised on a
financial asset or group of financial assets, interest income is recognised on
the carrying amount using the rate of interest at which estimated future cash
flows were discounted in measuring impairment.
Financial assets carried at fair value - when a decline in the fair value of a
financial asset classified as available-for-sale has been recognised directly in
equity and there is objective evidence that the asset is impaired, the
cumulative loss is removed from equity and recognised in profit or loss. The
loss is measured as the difference between the amortised cost of the financial
asset and its current fair value. Impairment losses on available-for-sale equity
instruments are not reversed through profit or loss, but those on
available-for-sale debt instruments are reversed, if there is an increase in
fair value that is objectively related to a subsequent event.
15. Financial liabilities
A financial liability is classified as held-for-trading if it is incurred
principally for the purpose of selling in the near term, or forms part of a
portfolio of financial instruments that are managed together and for which there
is evidence of short-term profit taking, or it is a derivative (not in a
qualifying hedge relationship). Held-for-trading financial liabilities are
recognised at fair value with transaction costs being recognised in profit or
loss. Subsequently they are measured at fair value. Gains and losses are
recognised in profit or loss as they arise. All other financial liabilities are
measured at amortised cost using the effective interest method (see note 4
above).
Fair value for a net open position in a financial liability that is quoted in an
active market is the current offer price times the number of units of the
instrument held or issued. Fair values for financial liabilities not quoted in
an active market are determined using appropriate valuation techniques including
discounting future cash flows, option pricing models and other methods that are
consistent with accepted economic methodologies for pricing financial
liabilities.
16. Sale and repurchase transactions
Securities which have been sold with an agreement to repurchase continue to be
shown on the balance sheet and the sale proceeds recorded as a deposit where the
Group retains substantially all the risks and rewards of ownership of the
securities. Securities acquired in reverse sale and repurchase transactions are
not recognised on the balance sheet and the purchase price is treated as a loan
if the Group is not exposed to the risks and rewards of ownership.
17. Capital instruments
The Group classifies a financial instrument that it issues as a financial asset,
financial liability or an equity instrument in accordance with the substance of
the contractual arrangement. An instrument is classified as a liability if it is
a contractual obligation to deliver cash or another financial asset, or to
exchange financial assets or financial liabilities on potentially unfavourable
terms. An instrument is classified as equity if it evidences a residual interest
in the assets of the Group after the deduction of liabilities. The components of
a compound financial instrument issued by the Group are classified and accounted
for separately as financial assets, financial liabilities or equity as
appropriate.
18. Derivatives and hedging
Derivative financial instruments are recognised initially, and subsequently
measured, at fair value. Derivative fair values are determined from quoted
prices in active markets where available. Where there is no active market for an
instrument, fair value is derived from prices for the derivative's components
using appropriate pricing or valuation models.
A derivative embedded in a contract is accounted for as stand-alone derivative
if its economic characteristics are not closely related to the economic
characteristics of the host contract; unless the entire contract is carried at
fair value through profit or loss.
Gains and losses arising from changes in fair value of a derivative are
recognised as they arise in profit or loss unless the derivative is the hedging
instrument in a qualifying hedge. The Group enters into three types of hedge
relationship: hedges of changes in the fair value of a recognised asset or
liability or firm commitment (fair value hedges); hedges of the variability in
cash flows from a recognised asset or liability or a forecast transaction (cash
flow hedges); and hedges of the net investment in a foreign entity.
Hedge relationships are formally documented at inception. The documentation
includes identification of the hedged item and the hedging instrument, details
the risk that is being hedged and the way in which effectiveness will be
assessed at inception and during the period of the hedge. If the hedge is not
highly effective in offsetting changes in fair values or cash flows attributable
to the hedged risk, consistent with the documented risk management strategy,
hedge accounting is discontinued.
Fair value hedge - in a fair value hedge, the gain or loss on the hedging
instrument is recognised in profit or loss. The gain or loss on the hedged item
attributable to the hedged risk is recognised in profit or loss and adjusts the
carrying amount of the hedged item. Hedge accounting is discontinued if the
hedge no longer meets the criteria for hedge accounting or if the hedging
instrument expires or is sold, terminated or exercised or if hedge designation
is revoked. If the hedged item is one for which the effective interest rate
method is used, any cumulative adjustment is amortised to profit or loss over
the life of the hedged item using a recalculated effective interest rate. If the
hedged item is an equity share, the adjustment remains in equity until the share
is sold.
Cash flow hedge - where a derivative financial instrument is designated as a
hedge of the variability in cash flows of a recognised asset or liability or a
highly probable forecast transaction, the effective portion of the gain or loss
on the hedging instrument is recognised directly in equity. The ineffective
portion is recognised in profit or loss. When the forecast transaction results
in the recognition of a financial asset or financial liability, the cumulative
gain or loss is reclassified from equity in the same periods in which the asset
or liability affects profit or loss. Otherwise the cumulative gain or loss is
removed from equity and recognised in profit or loss at the same time as the
hedged transaction. Hedge accounting is discontinued if the hedge no longer
meets the criteria for hedge accounting; if the hedging instrument expires or is
sold, terminated or exercised; if the forecast transaction is no longer expected
to occur; or if hedge designation is revoked. On the discontinuance of hedge
accounting (except where a forecast transaction is no longer expected to occur),
the cumulative unrealised gain or loss recognised in equity is recognised in
profit or loss when the hedged cash flow occurs or, if the forecast transaction
results in the recognition of a financial asset or financial liability, in the
same periods during which the asset or liability affects profit or loss. Where a
forecast transaction is no longer expected to occur, the cumulative unrealised
gain or loss is recognised in profit or loss immediately.
Hedge of net investment in a foreign operation - where a foreign currency
liability hedges a net investment in a foreign operation, the portion of foreign
exchange differences arising on translation of the liability determined to be an
effective hedge is recognised directly in equity. Any ineffective portion is
recognised in profit or loss.
19. Share-based payments
The Group grants options over shares in The Royal Bank of Scotland Group plc to
its employees under various share option schemes. The Group has applied IFRS 2
'Share-based Payment' to grants under these schemes after 7 November 2002 that
had not vested on 1 January 2005. The expense for these transactions is measured
based on the fair value on the date the options are granted. The fair value is
estimated using valuation techniques which take into account the option's
exercise price, its term, the risk free interest rate and the expected
volatility of the market price of The Royal Bank of Scotland Group plc's shares.
Vesting conditions are not taken into account when measuring fair value, but are
reflected by adjusting the number of options included in the measurement of the
transaction such that the amount recognised reflects the number that actually
vest. The fair value is expensed on a straight-line basis over the vesting
period.
20. Investment property
Investment property comprises freehold and leasehold properties that are held to
earn rentals or for capital appreciation or both. It is stated at fair value
based on valuations by independent registered valuers. Fair value is based on
current prices in an active market for similar properties in the same location
and condition. Any gain or loss arising from a change in fair value is
recognised in profit or loss. Rental income from investment property is
recognised on a straight-line basis over the term of the lease. Lease incentives
granted are recognised as an integral part of the total rental income.
SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND IFRS ACCOUNTING POLICIES
UK GAAP IFRS
(a) Goodwill
Goodwill arising on acquisitions after Goodwill is recorded at cost
1 October 1998 is capitalised and less any accumulated impairment
amortised over its estimated useful losses. Goodwill is tested
economic life. Goodwill arising on annually for impairment or more
acquisitions before 1 October 1998 was frequently if events or changes
deducted from equity. Goodwill is in circumstances indicate that
reviewed for impairment at the end of it might be impaired.
the first full year following an The carrying amount of goodwill
acquisition and subsequently if events in the Group's opening IFRS
or changes in circumstances indicated balance sheet (as at 1 January
that its carrying value might not be 2004) was £13,131 million, its
recoverable, carrying value under UK GAAP as
at 31 December 2003.
(b) Intangibles other than goodwill
Computer software development costs
Most computer software development Computer software development
costs are written off as incurred. costs are capitalised if they
create an identifiable
intangible asset. They are
amortised over their estimated
useful life of three years. Net
computer software development
costs of £818 million were
recognised on transition to
IFRS.
Other intangibles
An intangible asset acquired in a An intangible asset is
business combination is capitalised recognised as an asset
separately from goodwill only if it can separately from goodwill if it
be disposed of separately from the is separable or it arises from
revenue-earning activity to which it contractual or other legal
contributes and its value can be rights regardless of whether
measured reliably. these rights are transferable or
separable.
Core deposit intangibles of £268
million, mortgage servicing
rights of £81 million, customer
relationships of £162 million
and other intangibles of £18
million were recognised in
business combinations that took
place in 2004.
(c) Leasing
Finance lease income is recognised so IFRS requires a level rate of
as to give a level rate of return on return on the net investment in
the net cash investment in the lease; the lease. Tax cash flows are
tax cash flows are taken into account not reflected in the pattern of
in allocating income. income recognition.
Assets held under operating leases are Assets held on operating leases
depreciated on a straight-line or are depreciated on a
reverse-annuity basis. straight-line basis.
(d) Dividends
Dividends payable on ordinary shares Dividends are recorded in the
are recorded in the period to which period in which they are
they relate. declared.
(e) Consolidation
UK GAAP requires consolidation of All entities controlled by the
entities controlled by the reporting Group are consolidated together
entity. Control is the ability to with special purpose entities
direct the financial and operating (SPEs) where the substance of
policies of an entity. the relationship between the
reporting entity and the SPE
indicates that it is controlled
by the reporting entity.
SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND IFRS
ACCOUNTING POLICIES (continued)
(f) Life assurance
To reflect the distinct nature of Assets, liabilities, income and
long-term assurance assets and expense of life assurance business
liabilities attributable to are consolidated on a line-by-line
policyholders, they are shown basis.
separately on the consolidated
balance sheet; the results of life
assurance business are presented
as a single contribution to profit Movements in embedded value are not
before tax. grossed up i.e. they are included net
Changes in embedded value of tax in profit before tax.
determined on a post-tax basis are
grossed up for inclusion in the
income statement.
(g) Associates and joint
ventures
An associate is an entity in which The definitions of associate and
the reporting entity holds a joint venture are similar to those in
participating interest and over UK GAAP. However, significant
whose operating and financial influence is defined as the power to
policies it exercises a participate in the financial and
significant influence in practice. operating policies of the associate.
A joint venture is an entity in A joint venture is an entity where
which the reporting entity in the strategic financial and operating
practice shares control with other decisions require the unanimous
investors. Associates are consent of the parties sharing
accounted for using the equity control. Associates are accounted for
method and joint ventures using using the equity method. The Group
the gross equity method. proportionately consolidates its
joint ventures.
(h) Property, plant and equipment
The Group's freehold and long The Group's freehold and long
leasehold property occupied for leasehold property occupied for its
its own use is recorded at own use is recorded at cost less
valuation on the basis of existing depreciation.
use value.
The Group has elected to use the UK
GAAP valuation as at 31 December 2003
as deemed cost for freehold and long
leasehold property occupied for its
own use in its opening IFRS balance
sheet (1 January 2004).
(i) Investment property
Investment property is revalued Investment property is stated at fair
annually to open market value and value. Any gain or loss arising from
changes in market value reflected a change in fair value is recognised
in the Statement of Total in profit or loss.
Recognised Gains and Losses.
(j) Share-based payments
No expense is recognised for The Group has applied IFRS 2
options over The Royal Bank of 'Share-based Payment' to grants of
Scotland Group plc shares granted options over shares after 7 November
to employees. 2002 that had not vested on 1 January
2005. The expense for these
transactions is measured based on the
fair value on the date the options
are granted. The fair value is
expensed on a straight-line basis
over the vesting period.
(k) Pensions
Pension scheme assets are measured Pension scheme assets are measured at
at fair value using mid-market fair value using bid prices.
prices.
(l) Income tax
Deferred tax is not accounted for Deferred tax is provided on fixed
in relation to revaluations of asset revaluations and on taxable
fixed assets where there is no gains and losses on fixed asset sales
commitment to dispose of the asset rolled over into the tax cost of
or in relation to taxable gains or replacement assets.
losses on sales of fixed assets
that are rolled over into the tax
cost of replacement fixed
assets.
SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND IFRS
ACCOUNTING POLICIES (continued)
IMPLEMENTATION OF IAS 32, IAS 39 and IFRS 4
UK GAAP IFRS
(m) Financial instruments:
financial assets
Loans are measured at cost Under IAS 39, financial assets are
less provisions for bad and classified into held-to-maturity;
doubtful debts, derivatives available-for-sale; held for trading;
held for trading are carried designated as fair value through profit or
at fair value and hedging loss; and loans and receivables. Financial
derivatives are accounted for assets classified as held-to-maturity or
in accordance with the as loans and receivables are carried at
treatment of the item being amortised cost. Other financial assets are
hedged (see Derivatives and measured at fair value. Changes in the
hedging below). fair value of available-for-sale financial
Debt securities and equity assets are reported in a separate
shares intended for use on a component of shareholders' equity. Changes
continuing basis in the in the fair value of financial assets held
Group's activities are for trading or designated as fair value
classified as investment are taken to profit or loss. Financial
securities are stated at cost assets can be classified as
less provision for any held-to-maturity only if they have a fixed
permanent diminution in maturity and the reporting entity has the
value. The cost of dated positive intention and ability to hold to
investment securities is maturity. Trading financial assets are
adjusted for the amortisation held for the purpose of selling in the
of premiums or discounts. near term. IFRS allows any financial asset
Other debt securities and to be designated as fair value through
equity shares are carried at profit or loss on initial recognition.
fair value. Unquoted debt financial assets that are
not classified as held-to-maturity, held
for trading or designated as fair value
through profit or loss are categorised as
loans and receivables. All other financial
assets are classified as
available-for-sale.
(n) Financial instruments:
financial liabilities
Under UK GAAP, short IAS 39 requires all financial liabilities
positions in securities and to be measured at amortised cost except
trading derivatives are those held for trading and those that were
carried at fair value; all designated as fair value through profit or
other financial liabilities loss on initial recognition.
are recorded at amortised On implementation of IAS 39, no financial
cost. liabilities were designated at fair value
through profit or loss.
SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND IFRS
ACCOUNTING POLICIES (continued)
IMPLEMENTATION OF IAS 32, IAS 39 and IFRS 4 (continued)
(o) Liabilities and equity
Under UK GAAP all shares were There is no concept of non-equity
classified as shareholders' funds. shares in IFRS. Instruments are
An analysis of shareholders' funds classified between equity and
between equity and non-equity liabilities in accordance with the
interests is given. substance of the contractual
arrangements. A non-derivative
instrument is classified as equity if
it does not include a contractual
obligation either to deliver cash or
to exchange financial instruments
with another entity under potentially
unfavourable conditions, and, if the
instrument will or may be settled by
the issue of equity, settlement does
not involve the issue of a variable
number of shares. On implementation
of IAS 32, non-equity shares with a
balance sheet value of £3,192 million
and £2,568 million of non-equity
minority interests were reclassified
as liabilities.
(p) Effective interest rate and
lending fees
Under UK GAAP, loan origination IAS 39 requires the amortised cost of
fees are recognised when received a financial instrument to be
unless they are charged in lieu of calculated using the effective
interest. interest method. The effective
interest rate is the rate that
discounts estimated future cash flows
over an instrument's expected life to
its net carrying value. It takes into
account all fees and points paid that
are an integral part of the yield,
transaction costs and all other
premiums and discounts.
On implementation of IAS 39, the
carrying value of financial assets
was reduced by £708 million and
financial liabilities increased by
£224 million, deferred tax was
reduced by £283 million and
shareholder's equity reduced by £649
million.
(q) Derivatives and hedging
Under UK GAAP non-trading Under IAS 39, all derivatives are
derivatives are accounted for on measured at fair value. Hedge
an accruals basis in accordance accounting is permitted for three
with the accounting treatment of types of hedge relationship: fair
the underlying transaction or value hedge - the hedge of changes in
transactions being hedged. If a the fair value of a recognised asset
non-trading derivative transaction or liability or firm commitment; cash
is terminated or ceases to be an flow hedge - the hedge of variability
effective hedge, it is re-measured in cash flows from a recognised asset
at fair value and any gain or loss or liability or a forecasted
amortised over the remaining life transaction; and the hedge of a net
of the underlying transaction or investment in a foreign entity. In a
transactions being hedged. If a fair value hedge the gain or loss on
hedged item is derecognised the the derivative is recognised in
related non-trading derivative is profit or loss as it arises offset by
remeasured at fair value and any the corresponding gain or loss on the
gain or loss taken to the income hedged item attributable to the risk
statement. hedged. In a cash flow hedge and in
the hedge of a net investment in a
foreign entity, the element of the
derivative's gain or loss that is an
effective hedge is
SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND IFRS
ACCOUNTING POLICIES (continued)
IMPLEMENTATION OF IAS 32, IAS 39 and IFRS 4 (continued)
(q) Derivatives and hedging
(continued)
Embedded derivatives are not recognised directly in equity. The
bifurcated from the host ineffective element is taken to the
contract. income statement. Certain conditions
must be met for a relationship to
qualify for hedge accounting. These
include designation, documentation and
prospective and actual hedge
effectiveness. On implementation of IAS
39, non-trading derivatives were
remeasured at fair value.
A derivative embedded in a contract is
accounted for as stand-alone derivative
if its economic characteristics are not
clearly and closely related to the
economic characteristics of the host
contract; unless the entire contract is
carried at fair value through profit or
loss.
(r) Loan impairment
Under UK GAAP provisions for bad IFRS require impairment losses on
and doubtful debts are made so financial assets carried at amortised
as to record impaired loans at cost to be measured as the difference
their ultimate net realisable between the asset's carrying amount and
value. the present value of estimated future
Specific provisions are cash flows discounted at the asset's
established against individual original effective interest rate. There
advances or portfolios of is no concept of specific and general
smaller balance homogeneous provision - under IFRS impairment is
advances and the general assessed individually for individually
provision covers advances significant assets but can be assessed
impaired at the balance sheet collectively for other assets. Once an
date but which have not been impairment loss has been recognised on
identified as such. Interest a financial asset or group of financial
receivable from loans and assets, interest income is recognised
advances is credited to the on the carrying amount using the rate
income statement as it accrues of interest at which estimated future
unless there is significant cash flows were discounted in measuring
doubt that it can be impairment.
collected.
(s) Offset
Under UK GAAP an intention to For a financial asset and financial
settle net is not a requirement liability to be offset, IFRS require
for set off; the entity must that an entity must intend to settle on
have the ability to insist on a net basis or to realise the asset and
net settlement and that ability settle the liability simultaneously.
is assured beyond doubt. On implementation of IAS 32, the
balance sheet value of financial assets
and financial liabilities increased by
£104 billion.
SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND IFRS
ACCOUNTING POLICIES (continued)
IMPLEMENTATION OF IAS 32, IAS 39 and IFRS 4 (continued)
(t) Insurance contracts
All contracts within the life IFRS 4 requires life assurance
assurance business are accounted products to be classified between
for as insurance contracts and the insurance contracts and investment
obligations to policyholders contracts. The latter are accounted
presented as Long-term assurance for in accordance with IAS 39.
liabilities attributable to Insurance contracts continue to be
policyholders. accounted for using the embedded
value methodology.
The value placed on in-force The value of in-force policies
policies includes future excludes any amounts that reflect
investment margins. future investment margins.
(u) Linked presentation
FRS 5 'Reporting the Substance of There is no linked presentation under
Transactions' allows qualifying IFRS. If substantially all the risks
transactions to be presented using and rewards have been retained, the
the linked presentation. gross assets and related funding are
presented separately.
(v) Extinguishment of
liabilities
Under UK GAAP, recognition of a A financial liability is removed from
financial liability ceases once the balance sheet when, and only
any transfer of economic benefits when, it is extinguished i.e. when
to the creditor is no longer the obligation specified in the
likely. contract is discharged or cancelled
or expires.
Tesco Personal Finance (TPF)
TPF is a business partnership with Tesco PLC. In the Group's UK GAAP financial
information, this company was treated as a subsidiary and fully consolidated.
The Group has been in discussions with the Financial Reporting Review Panel
(FRRP) about how this company should be accounted for under UK GAAP. The view of
the FRRP is that TPF meets the UK GAAP definition of a joint venture and the
Group should account for it using the gross equity method. Such a change in the
treatment of TPF is not material in the context of the Group's financial
statements and has no effect on profit attributable to ordinary shareholders and
earnings per ordinary share. In the discussion of divisional performance in the
Group's 2004 Operating and Financial Review, the effect is confined to the
Retail Direct Division of which TPF forms part.
Under IFRS, TPF qualifies as a joint venture and the Group will account for it
from 1 January 2004 using proportionate consolidation; the gross equity method
is not available under IFRS. The table below illustrates the effect on the
Group's 2004 UK GAAP financial information of accounting for TPF using the gross
equity method. Also shown is the effect on the Group's 2004 financial
information of incorporating TPF using proportionate consolidation (ignoring all
other adjustments arising from the transition to IFRS).
Summary profit Year ended 31 December 2004
and loss account
Per the Including TPF Including TPF
Group's using the using
statutory equity method proportionate
accounts consolidation
£m £m £m
Net interest
income 9,208 9,069 9,138
Non-interest
income 13,546 13,376 13,408
Total 22,754 22,445 22,546
income
Operating
expenses 10,846 10,699 10,772
Operating
profit before
provisions 8,428 8,266 8,294
Provisions 1,511 1,456 1,484
Profit on
ordinary
activities
before tax 6,917 6,810 6,810
Tax on profit
on ordinary
activities 2,155 2,125 2,125
Minority
interests
(including
non-equity) 250 173 173
Profit
attributable
to ordinary
shareholders 4,256 4,256 4,256
Retained
profit 2,419 2,419 2,419
Basic earnings
per ordinary
share 138.0p 138.0p 138.0p
Adjusted
earnings per
ordinary share 172.5p 172.5p 172.5p
Tesco Personal Finance (TPF) (continued)
Summary balance sheet 31 December 2004
Per the Including TPF Including TPF
Group's using the using
statutory equity proportionate
accounts method consolidation
£m £m £m
Loans and
advances to
customers 345,469 342,790 344,129
Other
assets 22,255 22,486 22,255
Total
assets 583,467 581,077 582,105
Customer
accounts 285,062 283,032 284,047
Minority
interests 3,829 3,494 3,495
Total
liabilities 583,467 581,077 582,105
SPECIAL PURPOSE AUDIT REPORT TO THE BOARD OF DIRECTORS OF THE ROYAL BANK OF
SCOTLAND GROUP PLC ON THE PRELIMINARY COMPARATIVE FINANCIAL INFORMATION PREPARED
IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS ('IFRS')
We have audited the accompanying preliminary consolidated IFRS balance sheet of
The Royal Bank of Scotland Group plc ('the Company') and its subsidiaries
(together 'the Group') as at 31 December 2004 and the preliminary summary
consolidated IFRS income statement for the year ended 31 December 2004, the
opening balance sheets as at 1 January 2004 and 1 January 2005, the Analysis of
IFRS adjustments and the related Notes set out on pages 9, 11, 13, 33, 35, 37,
39, 40 and 44 to 46 of the IFRS Transition Report ('the preliminary comparative
IFRS financial information').
This report has been prepared for, and only for, the Company for the purpose of
assisting with the Group's transition to IFRS and for no other purpose. Our
audit work was undertaken so that we might state to the Company's board of
directors those matters we are required to state to them in an auditors' report
and for no other purpose. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the Company for our audit
work, for our report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The Company's directors are responsible for ensuring that the Group maintains
proper accounting records and for the preparation of the preliminary comparative
IFRS financial information on the basis set out in the Bases of Preparation
section on page 49, which describes how IFRS will be applied, including the
assumptions the directors have made about the standards and interpretations
expected to be effective, and the policies expected to be adopted, when the
Group prepares its first complete set of IFRS financial statements for the year
ending 31 December 2005.
Our responsibility is to audit the preliminary IFRS financial information in
accordance with relevant United Kingdom legal and regulatory requirements and
auditing standards and report to you our opinion as to whether the preliminary
IFRS financial information is prepared, in all material respects, on the basis
set out in the Bases of Preparation section. We read the other information
contained in the IFRS Transition Report and consider its implications for our
report if we become aware of any apparent misstatements or material
inconsistencies with the preliminary comparative IFRS financial information.
Basis of audit opinion
We conducted our audit in accordance with United Kingdom auditing standards
issued by the Auditing Practices Board. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the preliminary
comparative IFRS financial information. It also includes an assessment of the
significant estimates and judgements made by the directors in the preparation of
the preliminary comparative IFRS financial information and of whether the
accounting policies are appropriate to the circumstances of the Group,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the preliminary
comparative IFRS financial information is free from material misstatement,
whether caused by fraud or other irregularity or error.
Emphasis of matter
Without qualifying our opinion, we draw attention to the fact that the Bases of
Preparation section on page 49 explains why there is a possibility that the
preliminary comparative IFRS financial information may require adjustment before
constituting the final comparative IFRS financial information. Moreover, we
draw attention to the fact that, under IFRS, only a complete set of financial
statements comprising an income statement, balance sheet, statement of changes
in equity, cash flow statement, together with comparative financial information
and explanatory notes, can provide a true and fair presentation of the Group's
financial position, results of operations and cash flows in accordance with
IFRS.
Opinion
In our opinion, the preliminary comparative IFRS financial information has been
prepared, in all material respects, in accordance with the basis set out in the
Bases of Preparation section on page 49, which describes how IFRS will be
applied, including the assumptions the directors have made about the standards
and interpretations expected to be effective, and the policies expected to be
adopted, when Group prepares the first complete set of IFRS financial statements
as at 31 December 2005.
Deloitte & Touche LLP
Chartered Accountants
Edinburgh
7 June 2005
SPECIAL PURPOSE REVIEW REPORT TO THE BOARD OF DIRECTORS OF THE ROYAL BANK OF
SCOTLAND GROUP PLC ON THE PRELIMINARY COMPARATIVE FINANCIAL INFORMATION FOR THE
SIX MONTHS ENDED 30 JUNE 2004 PREPARED IN ACCORDANCE WITH INTERNATIONAL
FINANCIAL REPORTING STANDARDS ('IFRS')
We have reviewed the accompanying preliminary IFRS consolidated financial
information of The Royal Bank of Scotland Group plc (the Company') and its
subsidiaries (together 'the Group') for the six months ended 30 June 2004 which
comprises the summary consolidated income statement, the consolidated balance
sheet, the divisional performance disclosures, the Analysis of IFRS Adjustments
and the related Notes set out on pages 10, 12, 14 to 32, 34, 36, 38 and 40 of
the IFRS Transition Report ('the preliminary half year comparative IFRS
financial information').
Responsibilities of directors and auditors
The Company's directors are responsible for the preparation of the preliminary
half year comparative IFRS financial information on the basis set out in the
Bases of Preparation section on page 49, which describes how IFRS will be
applied, including the assumptions the directors have made about the standards
and interpretations expected to be effective, and the policies expected to be
adopted, when the Group prepares its first complete set of IFRS financial
statements for the year ending 31 December 2005.
Our responsibility is to report our conclusion on the preliminary half year
comparative IFRS financial information based on our review. This report has been
prepared for, and only for, the Company for the purpose of assisting with the
Group's transition to IFRS and for no other purpose. Our review work was
undertaken so that we might state to the Company's board of directors those
matters we are required to state to them in an independent review report and for
no other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the board of directors for our review
work, for this report, or for the conclusions we have formed.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and applying
analytical procedures to the preliminary half year IFRS financial information
and underlying financial data and based thereon, assessing whether the
accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review excludes audit procedures such as tests of control
and verification of assets, liabilities and transactions. It is substantially
less in scope than an audit performed in accordance with United Kingdom auditing
standards and therefore provides a lower level of assurance than an audit.
Accordingly, we do not express an audit opinion on the preliminary half year
comparative IFRS financial information.
Emphasis of matter
Without modifying our review conclusion, we draw attention to the fact that the
Bases of Preparation section on page 49 explains why there is a possibility that
the preliminary comparative IFRS financial information may require adjustment
before constituting the final comparative IFRS financial information. Moreover,
we draw attention to the fact that, under IFRS, only a complete set of financial
statements comprising an income statement, balance sheet, statement of changes
in equity, cash flow statement, together with comparative financial information
and explanatory notes, can provide a true and fair presentation of the Company's
and the Group's financial position, results of operations and cash flows in
accordance with IFRS
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the preliminary half year comparative IFRS financial
information for the six months ended 30 June 2004 which has been prepared in
accordance with the basis set out in the Bases of Preparation section on page
49.
Deloitte & Touche LLP
Chartered Accountants
Edinburgh
7 June 2005
FORWARD-LOOKING STATEMENTS
Certain sections in this document contain 'forward-looking statements' as that
term is defined in the United States Private Securities Litigation Reform Act of
1995, such as statements that include the words 'expect', 'estimate', 'project',
'anticipate', 'should', 'intend', 'plan', 'probability', 'risk', 'Value-at-Risk
('VaR')', 'target', 'goal', 'objective', 'will', 'endeavour', 'outlook',
'optimistic', 'prospects' and similar expressions or variations on such
expressions and sections such as 'Group Chief Executive's review' and 'Financial
review'.
In particular, this document includes forward-looking statements relating, but
not limited, to the Group's potential exposures to various types of market
risks, such as interest rate risk, foreign exchange rate risk and commodity and
equity price risk. Such statements are subject to risks and uncertainties. For
example, certain of the market risk disclosures are dependent on choices about
key model characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk disclosures are only
estimates and, as a result, actual future gains and losses could differ
materially from those that have been estimated.
Other factors that could cause actual results to differ materially from those
estimated by the forward-looking statements contained in this document include,
but are not limited to: general economic conditions in the UK and in other
countries in which the Group has significant business activities or investments,
including the United States; the monetary and interest rate policies of the Bank
of England, the Board of Governors of the Federal Reserve System and other G-7
central banks; inflation; deflation; unanticipated turbulence in interest rates,
foreign currency exchange rates, commodity prices and equity prices; changes in
UK and foreign laws, regulations and taxes; changes in competition and pricing
environments; natural and other disasters; the inability to hedge certain risks
economically; the adequacy of loss reserves; acquisitions or restructurings;
technological changes; changes in consumer spending and saving habits; and the
success of the Group in managing the risks involved in the foregoing.
The forward-looking statements contained in this document speak only as of the
date of this report, and the Group does not undertake to update any
forward-looking statement to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
RESTATEMENTS
During the first half of 2005, the following businesses were transferred between
divisions:
i. The corporate and institutional businesses of The Royal Bank of Scotland
International offshore were moved from Wealth Management to Corporate
Banking and Financial Markets.
ii. Manufacturing now supports certain offshore businesses of Wealth Management.
iii.The cards businesses in the US comprising the credit card business acquired
from People's Bank and Lynk have been transferred from Retail Direct to
Citizens.
iv. The Primeline business has been transferred from Retail Direct to Retail
Banking.
During the second half of 2004, certain activities were transferred from Ulster
Bank to Manufacturing.
Divisional results for 2004 have been restated to reflect these changes which do
not effect the Group's results.
With effect from 1 January 2005, the basis of internal funds transfer pricing
between Group Centre and divisions for certain activities was refined. Prior
year figures have been restated to reflect this change which affects Retail
Banking, Retail Direct, Wealth Management and the Centre.
Figures under UK GAAP
Year ended 31 Previously Transfer of Re-allocation of Restated
December 2004 reported businesses pension costs
£m £m £m £m
Corporate Banking
and Financial
Markets
- Net interest
income 2,545 81 - 2,626
- Non-interest
income 4,964 79 - 5,043
- Staff costs 1,642 22 44 1,708
- Other costs 412 9 - 421
Contribution 4,265 129 (44) 4,350
_______ _______ _______ _______
Retail Banking
- Net interest
income 3,112 11 - 3,123
- Non-interest
income 1,630 27 - 1,657
- Staff costs 834 1 75 910
- Other costs 240 21 - 261
Contribution 3,279 16 (75) 3,220
_______ _______ _______ _______
Retail Direct
- Net interest
income 938 (87) - 851
- Non-interest
income 1,191 (57) - 1,134
- Staff costs 259 (26) 14 247
- Other costs 453 (19) - 434
- Provisions 377 (37) - 340
Contribution 1,040 (62) (14) 964
_______ _______ _______ _______
Manufacturing
- Staff costs 794 26 50 870
- Other costs 1,645 31 - 1,676
Contribution (2,439) (57) (50) (2,546)
_______ _______ _______ _______
Wealth Management
- Net interest
income 497 (94) - 403
- Non-interest
income 451 (81) - 370
- Staff costs 299 (44) 7 262
- Other costs 164 (45) - 119
- Provisions 17 1 - 18
Contribution 468 (87) (7) 374
_______ _______ _______ _______
Ulster Bank
- Staff costs 158 1 17 176
- Other costs 77 - - 77
Contribution 468 (1) (17) 450
_______ _______ _______ _______
Citizens
- Net interest
income 1,540 54 - 1,594
- Non-interest
income 601 51 - 652
- Staff costs 551 21 - 572
- Other costs 473 23 - 496
- Provisions 80 37 - 117
Contribution 1,037 24 - 1,061
_______ _______ _______ _______
Centre
- Funding
costs 284 (17) - 267
- Department
costs 595 (21) (207) 367
Contribution (879) 38 207 (634)
_______ _______ _______ _______
Group profit is unaffected by these changes.
Figures under UK GAAP
Half year ended Previously Transfer of Re-allocation of Restated
30 June 2004 reported businesses pension costs
£m £m £m £m
Corporate Banking
and Financial
Markets
- Net interest
income 1,228 40 - 1,268
- Non-interest
income 2,454 37 - 2,491
- Staff costs 813 11 22 846
- Other costs 210 4 - 214
Contribution 2,041 62 (22) 2,081
_______ _______ _______ _______
Retail Banking
- Net interest
income 1,514 6 - 1,520
- Non-interest
income 817 12 - 829
- Staff costs 403 - 37 440
- Other costs 100 10 - 110
Contribution 1,642 8 (37) 1,613
_______ _______ _______ _______
Retail Direct
- Net interest
income 453 (38) - 415
- Non-interest
income 544 (14) - 530
- Staff costs 120 (6) 7 121
- Other costs 225 (5) - 220
- Provisions 172 (15) - 157
Contribution 480 (26) (7) 447
_______ _______ _______ _______
Manufacturing
- Staff costs 377 31 24 432
- Other costs 745 50 - 795
Contribution (1,122) (81) (24) (1,227)
_______ _______ _______ _______
Wealth Management
- Net interest
income 243 (46) - 197
- Non-interest
income 210 (37) - 173
- Staff costs 141 (22) 4 123
- Other costs 79 (22) - 57
Contribution 231 (39) (4) 188
_______ _______ _______ _______
Ulster Bank
- Staff costs 95 (18) 9 86
- Other costs 68 (33) - 35
Contribution 170 51 (9) 212
_______ _______ _______ _______
Citizens
- Net interest
income 645 21 - 666
- Non-interest
income 244 11 - 255
- Staff costs 242 4 - 246
- Other costs 184 6 - 190
- Provisions 40 15 - 55
Contribution 423 7 - 430
_______ _______ _______ _______
Centre
- Funding
costs 122 (9) - 113
- Department
costs 287 (9) (103) 175
Contribution (409) 18 103 (288)
_______ _______ _______ _______
Group profit is unaffected by these changes.
CONTACTS
Sir Fred Goodwin Group Chief Executive 020 7672 0008
0131 523 2033
Fred Watt Group Finance Director 020 7672 0008
0131 523 2028
Richard O'Connor Head of Investor Relations 020 7672 1758
For media enquiries:
Howard Moody Group Director, Communications 020 7672 1916
07768 033562
Carolyn McAdam Head of Group Communications 020 7672 1915
07796 274968
8 June 2005
END
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