LBS.L Regulatory News (LBS)

27 Sep 2005 07:01

Leeds Building Society27 September 2005 Embargoed until 7:00am on 27th September 2005 Record half-year results from Leeds Building Society Unaudited interim results for six months to 30 June 2005 Leeds Building Society, which changed its name from Leeds & Holbeck BuildingSociety earlier this month, today (27 September 2005) announced its half-yearresults. Highlights1 •Assets rise by 9% during the first half of 2005 to a record £6.7bn •Pre-tax profits to £24m •Mortgage completions increase by 8% to a record £881m compared to the same period last year •Savings balances rise by £179m to a record £4.3bn •Another big improvement in efficiency with cost asset ratio falling by 6p to just 60p - one of the lowest of any bank or building society Chief Executive, Ian Ward, said: "We delivered a strong financial performance inthe first half of 2005. Assets grew to a new record level of £6.7bn and recordmortgage completions of £881m have been achieved during a period that has seenthe housing market slowing down. This demonstrates that we are providing ourcustomers with competitively priced mortgages supported by a fast and efficientservice. "We have recently shortened our name to Leeds Building Society but thecornerstones of our success will remain unchanged. These are flexible andinnovative products combined with outstanding customer service and value formoney, which we are able to offer because we are a building society. Ourexcellent range of savings products has delivered record savings balances of£4.3bn. "The increase in half-year pre-tax profits to £24m illustrates that the Societyis delivering profitable growth. This is very important to our members becauseit means we are financially strong, allowing us to invest in the business andcontinue to introduce new products and services. "We have a very disciplined approach to cost control and we, therefore, takegreat care to invest in business activities that generate a significantcontribution for the Society whilst ensuring we do not incur unnecessary extraoverheads. Our cost asset ratio has reduced to only 60p from 66p during the sameperiod last year. "We are determined to remain a successful independent building societydelivering long term value to our members." 1 Figures under 'Highlights' show the performance in the six months to 30 June 2005, compared to the same period in 2004, unless otherwise stated. Note to Editors A copy of the Society's interim results for 2005 is attached. The Society's press office would be happy to arrange interviews with theSociety's Chief Executive, Ian Ward or Deputy Chief Executive & FinanceDirector, David Pickersgill. For further information please contact: Karen Wint (Head of Marketing & PR)0113 225 7731 or 07989 386772 (out of office hours)kwint@leedsbuildingsociety.co.uk Gary Brook (PR Manager)0113 225 7606 or 07866 455111 (out of office hours)gbrook@leedsbuildingsociety.co.uk For further comment on the results please contact: Ian Ward (Chief Executive) - 0113 225 7501 (direct line) David Pickersgill (Deputy Chief Executive & Finance Director) - 0113 225 7502(direct line) Financial Information International Financial Reporting Standards (IFRS) Introduction Leeds Building Society is required to prepare its annual report and accountsunder IFRS for accounting periods commencing on 1 January 2005. As a consequencethe interim results for the six months ended 30 June 2005 are prepared underIFRS. In addition the comparatives for the six months ended 30 June 2004 and thefull year ended 31 December 2004 are restated to comply with IFRS. Basis of preparation The interim results are prepared on the basis of the recognition and measurementrequirements of IFRSs in issue that either are endorsed by the EU and effectiveor are reasonably expected to be endorsed prior to 31 December 2005.Accordingly, the directors have made assumptions about the accounting policiesexpected to be applied, which are summarised in appendix 1. The IFRSs that will be effective in the annual financial statements for the yearending 31 December 2005 are still subject to change and additionalinterpretations cannot be determined with certainty. Accordingly, the accountingpolicies will only be finally determined when the annual financial statementsare prepared for the year ending 31 December 2005. The restated figures for the financial year ended 31 December 2004 are not theGroup's statutory accounts for the financial year. Those accounts, which wereprepared under UK Generally Accepted Accounting Practices (UK GAAP), have beenreported on by the Society's auditors, whose report was unqualified. Transitional arrangements On transition, IFRS is required to be applied retrospectively, except where anexemption is available under IFRS 1, First Time Adoption of IFRS. In thisrespect the Group has adopted the exemption in IFRS 1 to not prepare comparativeinformation in accordance with IAS 32, Financial Instruments: Disclosure andPresentation, and IAS 39, Financial Instruments: Recognition and Measurement. Asa consequence IAS 32 and 39 have been adopted from 1 January 2005 to the extentthat the EUs Regulatory Committee endorsed the standards. Significant Impacts of IFRS To assist with the interpretation of the impact of the transition from UK GAAPto IFRS, the Group has presented its accounting policies under IFRS and thereconciliation of the 2004 results and balance sheets in the appendices. The key accounting impact on the 2004 results is the recognition on the balancesheet of the pension deficit as required by IAS 19 Employee Benefits. This hasreduced the reserves at 31 December 2004 by £8.9m and the total group assetfigure by £1.4m. From I January 2005 the income and expenditure account will be affected by theimplementation of IAS 39, which includes the application of the effectiveinterest method, impairment and hedge accounting, which are explained in thefollowing paragraphs. The effective interest method requires that up front mortgage costs and fees(such as interest rate discounts, cashbacks, application fees and procurationfees) are amortised over the expected life of the mortgage. However, over thelife of mortgage assets, total profitability is not affected even though thetiming of when profit is recognised will change. The methodology for the measurement of the impairment of mortgage loans underIAS 39 has changed (see appendix 1: Significant accounting policies - Impairmentof Financial Assets). IAS 39 requires that derivatives are fair valued and recognised on the balancesheet and as a result will potentially increase the volatility of earnings. Inorder to minimise this volatility the Group has adopted hedge accounting aspermitted by IAS 39. Unaudited Group results for the six months to 30 June 2005Summary ConsolidatedIncome Statement (Unaudited) (Unaudited) (Unaudited) (Restated) (Restated) 6 months to 6 months to Year to 30 June 2005 30 June 2004 31 December 2004 -------------- -------------- ------------------ £M £M £M Interestreceivable and similar income 172.7 135.5 300.2 Interest payableand similar charges (138.5) (103.9) (238.8) ---------- ---------- ---------- Net interest receivable 34.2 31.6 61.4 Fees andcommissions income 9.1 12.3 25.3 Fees andcommissions expense 0.0 (2.7) (5.3) Other netoperating (charges)/income (0.2) 0.2 0.9 ---------- ---------- ---------- Total income 43.1 41.4 82.3 Administrative expenses (19.2) (18.4) (38.3) Impairment lossesonloans and advances to customers 0.1 (1.6) (1.6) ---------- ---------- ---------- Profit before tax 24.0 21.4 42.4 Tax expense (7.4) (6.6) (12.8) ---------- ---------- ----------Profit for the period 16.6 14.8 29.6 ========== ========== ========== SummaryConsolidatedBalance Sheet (Unaudited) (Unaudited) (Unaudited) (Restated) (Restated) 30 June 2005 30 June 2004 31 December 2004 -------------- -------------- ------------------ £M £M £MAssetsLiquid assets 1,353.9 1,244.9 1,194.5 Derivativefinancial 13.4 - -instruments Loans and advancesto customers 5,293.6 4,647.6 4,885.4 Property, plantand 24.3 24.2 25.0equipment Deferred incometax 6.5 9.5 9.9assets Prepayments,accrued 7.5 11.2 13.3income and other ---------- ---------- ----------assets Total assets 6,699.2 5,937.4 6,128.1 ========== ========== ========== LiabilitiesShares 4,268.2 3,812.5 4,089.0 Derivativefinancial instruments 38.2 - - Deposits and securities 1,940.0 1,768.0 1,671.4 Current income taxliabilities 6.6 6.8 5.7 Deferred incometax liabilities 3.2 1.0 0.9 Accruals and otherliabilities 32.2 23.5 20.4 Retirement benefitobligations 7.9 6.7 8.0 Subordinatedliabilities 40.0 - - Subscribed capital 25.0 25.0 25.0 Revaluation reserve 13.4 13.5 13.6 Hedging reserve-cashflow hedges 3.7 - - General reserve 320.8 280.4 294.1 ---------- ---------- ----------Total reserves andliabilities 6,699.2 5,937.4 6,128.1 ========== ========== ========== Statement of Recognised Income and Expense (Unaudited) (Unaudited) (Unaudited) (Restated) (Restated) 30 June 2005 30 June 2004 31 December 2004 -------------- -------------- ------------------ £M £M £M Change in accountingpolicy on adoption ofIAS 39 11.8 - - Valuation gains onrevaluation ofavailable for saleinvestments 0.1 - - Gains on cash flowhedges 3.2 - - Actuarial (loss)/gain on retirement benefitobligations (0.6) 2.0 - Tax on items takendirectly to equity (0.8) (0.6) - --------- ---------- ----------Net incomerecognised directly in equity 13.7 1.4 - Transfer fromrevaluation reserveon disposal 0.1 - - Profit for the period 16.6 14.8 29.6 --------- ---------- ----------Total recognisedincome and expense for the period 30.4 16.2 29.6 ========= ========== ========== Summary Consolidated Cash Flow Statements (Unaudited) (Unaudited) (Unaudited) (Restated) (Restated) 6 months to 6 months to Year to 30 June 30 June 31 December 2005 2004 2004 ---------- --------- ------------ £M £M £M Cash flows from operatingactivities Profit before tax 24.0 21.4 42.4 Adjustments for :(Increase)/decrease inprepayments and accruedincome 2.4 (4.0) (8.3) (Decrease)/increase inaccruals and deferredincome (33.0) (21.2) 30.0 Depreciation andamortisation 0.8 0.9 1.8 Net (increase) in loansand advances tocustomers (391.0) (355.9) (593.8) Net increase in shares 212.6 219.1 448.7 Net increase in amountsowed to creditinstitutions and othercustomers 272.0 379.3 276.1 Net (decrease)/increasein loans and advancesto credit institutions (101.3) 56.0 (59.5) Net increase insubordinated debt 40.0 0.0 0.0 Taxation paid (5.7) (6.3) (13.2) Other movements 29.8 4.3 4.2 ---------- --------- ------------Net cash inflow fromoperating activities 50.6 293.6 128.4 Net cash flows from investingactivities Capital expenditure andfinancial investment (52.3) (293.9) (122.6) Returns on investmentsand servicing offinance (1.7) (1.7) (3.3) Net cash flows from financingactivities Interest on subscribedcapital 1.7 1.7 3.3 ---------- --------- ------------(Decrease)/Increase incash (1.7) (0.3) 5.8 ---------- --------- ------------ Note: The results for the six months to 30 June 2004 and the twelve months to 31December 2004 have been restated for the impact of IAS 19 Employee Benefits andIAS 12 Income taxes (accounting for deferred tax on the revaluation reserve.) INDEPENDENT REVIEW REPORT TO LEEDS BUILDING SOCIETY Introduction We have been instructed by the Society to review the financial information forthe six months ended 30 June 2005 which comprises the statutory consolidatedincome statement, balance sheet, statement of recognised income and expense,cash flow statement and statement of significant accounting policies. We haveread the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. This report is made solely to the Society in accordance with the terms of ourengagement to assist the Society in meeting the requirements of the ListingRules of the Financial Services Authority. Our work has been undertaken so thatwe might state to the Society those matters we are required to state to them inan independent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other thanthe Society, for our review work, for this report, or for the conclusions wehave formed. Directors' Responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. International Financial Reporting Standards As disclosed above, the next annual financial statements of the group will beprepared in accordance with International Financial Reporting Standards asadopted for use in the EU. Accordingly, the interim report has been prepared inaccordance with the recognition and measurement criteria of IFRS and thedisclosure requirements of the Listing Rules. Review Work Performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of Society management andapplying analytical procedures to the financial information and underlyingfinancial data and, based thereon, assessing whether the accounting policies andpresentation have been consistently applied unless otherwise disclosed. A reviewexcludes audit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information. Review Conclusion On the basis of our review we are not aware of any material modification thatshould be made to the financial information as presented for the six monthsended 30 June 2005. Deloitte & Touche LLPChartered AccountantsLeeds Appendices Appendix 1: Significant Accounting Policies Set out below is a summary of the Group's significant accounting policies underIFRS. The adoption of the exemption under IFRS 1 not to restate comparatives forIAS 32 and IAS 39, means that certain accounting policies only apply from 1January 2005 and not to the 2004 comparatives. These policies are denoted withan asterisk. 1. Financial Instruments * In accordance with IAS 39, Financial Instruments: Recognition and Measurement,the financial instruments of the Group have been classified into the followingcategories: (a) Loans and receivables The Groups loans and receivables to customers are classified as 'loans and receivables'. Loans and receivables are measured at amortised cost using the effective interest method. In accordance with the effective interest method, upfront costs and fees such as cashbacks, mortgage premia paid on the acquisition of mortgage books, mortgage arrangement and valuation fees and procuration fees are amortised over the expected life of the mortgage. Mortgage discounts are also amortised over the expected life of mortgage assets. (b) Available-for-sale The Group's investment securities are classified as available for sale assets with changes in the fair value recognised in equity, except for impairment losses. The premia and discounts arising from the purchase of these assets are amortised over the period to the maturity date of the security on an effective yield basis. Any amounts amortised are charged or credited to the Income Statement in the relevant financial years. The fair values of quoted investments in active markets are based on current bid prices. If there is no active market then fair value is determined using valuation techniques. (c) Financial liabilities All financial liabilities including wholesale funds and subordinated liabilities held by the Group are measured at amortised cost using the effective interest method, except for those financial liabilities measured at fair value through profit or loss, e.g. derivative liabilities. The premia and discounts, together with commissions and other costs incurred in the raising of wholesale funds and subordinated liabilities, are amortised over the period to maturity using the effective interest rate method. (d) At fair value through profit The Group uses derivative financial instruments to hedge its exposure tointerest rate risk from operational, financing and investment activities. Inaccordance with its treasury policy the Group does not hold derivativeinstruments for trading purposes. Derivatives are initially recognised at fair value on the date on which aderivative contract is entered into, and are subsequently remeasured at theirfair value. All derivatives are carried as assets when fair value is positiveand as liabilities when fair value is negative. Derivatives can be designated as either cash flow or fair value hedges. Cash flow hedges A cash flow hedge is used to hedge exposures to variability in cash flows, suchas variable rate financial assets and liabilities. The effective portion ofchanges in the derivative fair value is recognised in equity. The fair valuegain or loss relating to the ineffective portion is recognised immediately inthe income statement. Amounts accumulated in equity are recognised in the incomestatement in the periods in which the hedged item affects the income statement. Fair value hedges A fair value hedge is used to hedge exposures to variability in the fair valueof financial assets and liabilities, such as fixed rate loans. Changes in thefair value of derivatives that are designated and qualify as fair value hedgesare recorded in the income statement, together with any changes in the fairvalue of the hedged asset or liability that are attributable to the hedged risk.If the hedge no longer meets the criteria for hedge accounting, the adjustmentto the carrying amount of the hedged item is amortised to the income statementover the period to maturity. In respect of hedging, the Society has taken the option to apply the carved outamended IAS 39 standard as adopted by the EU in respect of macro fair valuehedging rules. If derivatives are not designated as hedges then changes in fair values arerecognised immediately in the income statement. Certain derivatives are embedded within other non-derivative host financialinstruments to create hybrid instruments. Where the economic characteristics andrisks of the embedded derivative are not closely related to the economiccharacteristics and risk of the host instrument, and where the hybrid instrumentis not measured at fair value, the embedded derivative is separated from thehost instrument with changes in fair value of the embedded derivative recognisedin the Income Statement. Depending on the classification of the host instrument,the host is then measured in accordance with the relevant IFRS standard. 2. Impairment of Financial Assets * Impairment of mortgage loans and advancesIndividual assessments are made of all mortgage loans in possession and basedupon these assessments an individual impairment reduction of these assets ismade. In addition, an impairment reduction is made against those loans and advanceswhere objective evidence indicates that it is likely that losses may ultimatelybe realised. The impairment value is calculated by applying various factors toeach loan. These factors take into account the Group's experience of default anddelinquency rate, loss emergence periods, regional house price movements andadjustments to allow for forced sale values. Impairment of other loans and advancesImpairment provisions are made to reduce the value of other impaired loans andadvances to the amount that is considered to be ultimately received based uponobjective evidence. 3. Interest income and expense * Interest income and expense on financial assets and liabilities held atamortised cost is measured using the effective interest rate method. Theeffective interest method is a method of allocating the interest income orinterest expense over the relevant period. The effective interest rate is therate that exactly discounts estimated future cash payments or receipts throughthe expected life of the financial instrument. Specifically, for mortgages the effect of this is to spread the impact ofdiscounts, cashbacks, arrangement and valuation fees, and costs directlyattributable and incremental to setting up the loan, over the expected life ofthe mortgage. 4. Fees and commission income Fees and commissions are generally recognised on an accruals basis when theservice has been provided. Fees integral to the loan yield are included within interest income and expenseas part of the effective interest rate calculation. 5. Pension benefits Payments to defined contribution retirement benefit schemes are charged as anexpense as they fall due. For defined benefit retirement benefit schemes, the cost of providing benefitsis determined using the Projected Unit Credit Method, with actuarial valuationsupdated at each year-end. Actuarial gains and losses are recognised in full inthe period in which they occur. They are recognised outside the income statementand presented in the Statement of Recognised Income and Expense. The retirementbenefit obligation recognised in the balance sheet represents the present valueof the defined benefit obligation less the fair value of Scheme assets. 6. Leases Rentals under operating leases are charged to administrative expenses on astraight line basis. Assets acquired under finance leases are capitalised at fair value at the startof the lease, with the corresponding obligations being included in otherliabilities. The finance lease costs charged to the income statement are basedon a constant periodic rate as applied to the outstanding liabilities. 7. Taxation Income tax on the profits for the period comprises current tax and deferred tax.Income tax is recognised in the Income Statement except to the extent that itrelates to items recognised directly in equity, in which case it is recognisedin equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates applicable at the balance sheet date and any adjustment to taxpayable in respect of previous years. Deferred tax liabilities are generally recognised for all taxable temporarydifferences and deferred tax assets are recognised to the extent that it isprobable that taxable profits will be available against which deductibletemporary differences can be utilised. Appendix 2: UK GAAP to IFRS reconciliation The following reconciliations are included as required by IFRS 1: •The income statements for the six months ended 30 June 2004 and the year ended 31 December 2004. •The equity position as at 1 January 2004, 30 June 2004, 31 December 2004 and 1 January 2005. Income Statement reconciliationsfor periods ended in 2004 ------------------ ----------------- 12 months ended 31 December 2004 6 months ended 30 June 2004 Note UK GAAP IFRS IFRS UK GAAP IFRS IFRS Adjustment Adjustment £m £m £m £m £m £m Interestreceivable andsimilar income 300.2 300.2 135.5 135.5 Interestpayable andsimilarcharges (238.8) (238.8) (103.9) (103.9) ------ ------- ------ ------Net interestreceivable 61.4 61.4 31.6 31.6 Fees andcommissionsincome 25.3 25.3 12.1 12.1 Fees andcommissionsexpense (5.3) (5.3) (2.7) (2.7) Otheroperatingincome/charge 1 0.5 0.4 0.9 0.2 0.2 0.4 ------ ------- ------ ------Total income 81.9 0.4 82.3 41.2 0.2 41.4 Administrativeexpenses 2 (38.6) 0.3 (38.3) (18.6) 0.2 (18.4) Impairmentlosses onloans andadvances tocustomers (1.6) (1.6) (1.6) (1.6) ------ ------- ------ ------Profit beforetax 41.7 0.7 42.4 21.0 0.4 21.4 Tax expense 3 (12.6) (0.2) (12.8) (6.5) (0.1) (6.6) ------ ------- ------ ------Profit for theperiod 29.1 0.5 29.6 14.5 0.3 14.8 ====== ======= ====== ====== ------ --- ----- ---- ------- ------ --- ----- ---- ------ 1. Other operating income/charges Under UK GAAP interest on pension scheme liabilities and expected return on pension assets were not recognised in the financial statements. In accordance with IAS 19, Employee Benefits, both these items are recognised within operating profit. 2. Administrative expenses Under UK GAAP the regular pension cost of the defined benefit pension scheme was charged to the income statement with any variations from this regular pension cost, arising from experience of surpluses/deficits, changes in actuarial assumptions etc, spread over the expected remaining lives of the current employees. The calculation of the pension cost under IAS 19 is on a different basis as noted in the accounting policies and represents the current service cost. The £0.3m for the full year to 31 December 2004 and the £0.2m for the six months to 30 June are the net impact of this change. 3. Tax expense The adjustment reflects the effect on the profit before tax arising from theadoption of IAS 19 as noted in 1. and 2. above. Balance Sheet reconciliation for 1 January 2004 to 1 January 2005 1 January 2005 31 December 2004 Note IFRS IFRS IFRS UK GAAP IFRS IFRS Except Adjustment Adjustment IAS 32/39 £m £m £m £m £m £mASSETSLiquid assets 1 1,194.5 1.0 1,195.5 1,194.5 1,194.5Derivative Financial Instruments 2 10.9 10.9Loans and advances to customers 3 4,885.4 28.7 4,914.1 4,885.4 4,885.4Property, plant and equipment 25.0 25.0 25.0 25.0Deferred income tax asset 4 9.9 (2.7) 7.2 6.5 3.4 9.9Prepayments, accrued incomeand other assets 5 13.3 (2.4) 10.9 17.2 (3.9) 13.3 Total assets 6,128.1 35.5 6,163.6 6,128.6 (0.5) 6,128.1 LIABILITIES Shares 6 4,089.0 0.6 4,089.6 4,089.0 4,089.0Derivative financial instruments 7 15.1 15.1Deposits and securities 8 1,671.4 (0.1) 1,671.3 1,671.4 1,671.4Current income tax 5.7 5.7 5.7 5.7Deferred income tax liabilities 4 0.9 2.3 3.2 0.9 0.9Accruals and other liabilities 9 20.4 5.8 26.2 20.9 (0.5) 20.4Retirement benefit obligations 10 8.0 8.0 0.0 8.0 8.0Subscribed capital 25.0 25.0 25.0 25.0Revaluation reserve 11 13.6 13.6 13.5 0.1 13.6Hedging reserve - cashflow hedges 12 1.5 1.5Reserves 13 294.1 10.3 304.4 303.1 (9.0) 294.1Total reserves and liabilities 6,128.1 35.5 6,163.6 6,128.6 (0.5) 6,128.1 30 June 2004 1 January 2004 UK GAAP IFRS IFRS UK GAAP IFRS IFRS Adjustment Adjustment £m £m £m £m £m £mASSETSLiquid assets 1,244.9 1,244.9 1,008.1 1,008.1Derivative Financial InstrumentsLoans and advances to customers 4,647.6 4,647.6 4,293.4 4,293.4Property, plant and equipment 24.2 24.2 24.4 24.4Deferred income tax asset 6.5 3.0 9.5 6.4 3.6 10.0Prepayments, accrued incomeand other assets 15.0 (3.8) 11.2 10.7 (3.8) 6.9Total assets 5,938.2 (0.8) 5,937.4 5,343.0 (0.2) 5,342.8 LIABILITIESShares 3,812.5 3,812.5 3,621.4 3,621.4Derivative financial instrumentsDeposits and securities 1,768.0 1,768.0 1,383.5 1,383.5Current income tax 6.8 6.8 6.3 6.3Deferred income tax liabilities 1.0 1.0 1.0 1.0Accruals and other liabilities 23.9 (0.4) 23.5 19.3 (0.4) 18.9Retirement benefit obligations - 6.7 6.7 0.0 8.7 8.7Subscribed capital 25.0 25.0 25.0 25.0Revaluation reserve 13.4 0.1 13.5 13.4 0.1 13.5Hedging reserve - cashflow hedgesReserves 288.6 (8.2) 280.4 274.1 (9.6) 264.5Total reserves and liabilities 5,938.2 (0.8) 5,937.4 5,343.0 (0.2) 5,342.8 Notes to the above reconciliations 1. Liquid assets Debt securities are a component of liquid assets. The Group has classed debt securities as available for sale assets. Under IAS 39 these assets are recognised on the Balance Sheet at their fair market value with changes in their value posted to the Statement of Recognised Income and Expenses. The IFRS adjustment represents the difference between the historical cost of the debt securities and their fair value. 2. Derivative financial instruments Under UK GAAP derivative financial instruments that are held by the Group to manage the exposure of specific interest rate risk, were disclosed in the financial statements as off balance sheet items and not included in the balance sheet. IAS 39 requires that all derivative instruments are now recognised on the balance sheet at their fair value. The IFRS adjustment reflects the fair value of the derivative assets on 1 January 2005. 3. Loans and advances to customers The adjustment to loans and advances consists of 4 items as follows. Under UK GAAP mortgage assets were held at historic cost. In accordance with IAS 39 these assets are measured at amortised cost using the effective interest rate method. In accordance with the effective interest method, mortgage discounts and upfront fees and costs such as cashbacks, mortgage premia paid on the acquisition of mortgage books, procuration fees and completion fees are capitalised and amortised over the expected life of the mortgage assets. IAS 39 requires that derivatives are fair valued and recognised on the balance sheet and as a result will potentially increase the volatility of earnings. In order to minimise this volatility the Group has adopted hedge accounting as permitted by IAS 39. Where a fair value hedge meets the criteria contained in IAS 39 the fair value movement of the swap can be matched by the change in fair value of the underlying fixed rate mortgage being hedged. The change in the fair value of the underlying mortgage is included in loans and advances to customers. A reduction in the impairment provision against loans and advances to customers reflecting the adoption of the revised basis for the calculation of Impairment of Financial Assets and the high quality of the Groups outstanding loans and advances to customers. Mortgage premia arising on the purchase of a mortgage book has been reclassified from prepayments, accrued income and other assets to loans and advances to customers. 4. Deferred income tax asset and liabilities The adjustment to the deferred tax asset relates to those IFRS changes which do not incur a current tax charge. In addition the deferred tax liabilities include a provision for the potential tax on the surplus arising from the revaluation of freehold and long leasehold properties. No equivalent provision was required under UK GAAP. 5. Prepayments, accrued income and other assets. Mortgage premia arising on the purchase of a mortgage book has been reclassified from prepayments, accrued income and other assets to loans and advances to customers at 1 January 2005. In addition the adjustments in 2004 reflect the release of the pension prepayment following adoption of IAS 19 Employee Benefits. 6. Shares The IFRS adjustment related to the fair value of the hedged item that arises from the application of hedge accounting to certain fixed rate liabilities. The Group has applied hedge accounting, as permitted under IAS 39, to reduce the volatility of earnings. 7. Derivative financial instruments - liabilities The IFRS adjustment relates to the recognition of the fair value of derivative financial instrument liabilities. See note 2. 8. Deposits and securities The IFRS adjustment relates to the fair value of the hedged item that arises from the application of fair value accounting to certain deposits and debt securities. 9. Accruals and other liabilities The adjustments relate to the requirement of IAS 19 for all pension liabilities to be separately disclosed and the reclassification of certain provisions. 10. Retirement benefit obligations IAS 19 requires that pension deficits be recognised on the balance sheet. The deficit is calculated as the difference between the fair value of the defined benefit scheme assets and the present value of the obligation at the balance sheet date together with adjustments for any unrecognised actuarial gains/loss and past service costs. 11. Revaluation reserve The adjustment of the revaluation reserve is in respect of a deficit on the revaluation on certain properties, which is required to be reflected directly in reserves. 12. Hedging reserve - cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability the effective part of any gain or loss on the derivative instrument is recognised directly in equity. The hedging reserve adjustment reflects the effective portion of the fair value of the cash flow hedges at 1 January 2005. 13. Reserves The movement in reserves reflects the impact of the adjustments noted in points 1 to 11 above. This information is provided by RNS The company news service from the London Stock Exchange