West.brom 6.15% Regulatory News (WBS)

19 Dec 2005 16:56

West Bromwich Building Society19 December 2005 WEST BROMWICH BUILDING SOCIETY TODAY ANNOUNCES ITS RESULTS FOR THE HALF YEAR ENDED 30 SEPTEMBER 2005 West Bromwich Building Society has continued to make excellent progress. Thehighlights include: • Growth of 8%, to total assets of £6.4bn • Mortgage assets up 9% to £5.1bn • Gross lending up 8% to £1bn • Group Solvency Ratio at 15.3% • Net savings balances up by £240m • Group pre-tax profit up by 3% from prior period to £20.9m • Group management expenses ratio 0.74% (prior period 0.85%) • Group arrears (2.5% or more) of 0.57% maintained at historic low levels These are outstanding results by any measure. The core Society is performingwell and Group profit also benefits from the particularly strong resultsgenerated by subsidiaries. The results demonstrate that the Group continues tomake good progress in all areas of the business and has built a position ofsubstantial capital strength. The results have been prepared for the first time under International FinancialReporting Standards. The inclusion of investment property revaluation gains hashad a material impact on the reported profit figure but, otherwise, the impactof IFRS has had a lesser effect than for other lenders. This is because theGroup has historically adopted accounting policies that spread mortgageacquisition costs, consistent with IFRS, a policy that is new for many others. Comparison of the results reported with the prior period is complex as not allstandards require previous periods to be restated. However, had the accountingchanges been fully applied to the previous periods, the reported profit beforetax would be around 10% higher than the equivalent period in the previous year. Whilst the Group continues to make good progress with underlying profitabilityremaining strong, the new accounting approach is likely to cause fluctuations inreported profitability from year to year. In particular, this applies toinvestment property revaluation gains. Although overall the interim results arebroadly comparable with last year and we expect further progress in ourunderlying businesses in the second half, the slowdown in the housing marketcould mean that the contribution of our investment properties might not be asgreat as last year. As a consequence, the full year results might not repeat theprevious year's record performance. Commenting on the results Andrew Messenger, Chief Executive of West BromwichBuilding Society said; "Despite fierce competition, increasing regulation and uncertainty over marketsand business conditions, we have performed well and continue to make goodprogress. Both subsidiaries and core member business are performing in line withexpectations and we are building a strong, sustainable mutual building society,providing real member value. The future focus will be on delivering profitable growth, increasing ourfinancial strength and offering exceptional value, service and advice tomembers. Our strategy of maximising returns from subsidiary businesses thatcomplement the Society's operation and provide access to new markets willcontinue. The overriding aim is to make sure we build a trusted brand, deliveringlong-term value and advice beyond member expectation." Consolidated Income Statementfor the six months ended 30 September 2005 Unaudited Unaudited Unaudited 6 months 6 months Year ended ended ended 30-Sep-05 30-Sep-04 31-Mar-05 (restated) (restated) £m £m £m Interest receivable and similar income 164.3 134.3 286.1Interest expense and similar charges (134.2) (108.1) (230.9) Net interest income 30.1 26.2 55.2Fees and commissions income 5.4 6.8 12.7 Fees and commissions expense (4.6) (3.4) (8.3) Gains on revaluation of investment properties 3.5 3.9 7.5 Gains on disposal of investment properties - - 1.7Sundry income 9.1 8.5 15.7 Other operating income 12.6 12.4 24.9 Total operating income 43.5 42.0 84.5Administrative expenses (22.5) (22.1) (43.8)Retirement benefit obligations - - 0.1 Operating profit before provisions 21.0 19.9 40.8 Impairment losses on loans and advances to customers (0.1) 0.3 2.9 Provisions for contingent liabilities and commitments - - (2.5) Profit before tax 20.9 20.2 41.2 Tax expense (6.3) (6.1) (12.7) Profit for the period 14.6 14.1 28.5 As a percentage of mean total assets Profit for the period 0.48% 0.54% 0.52% Management expenses 0.74% 0.85% 0.80% Consolidated Statement of Recognised Income and Expensefor the six months ended 30 September 2005 Unaudited Unaudited Unaudited 6 months 6 months Year ended ended ended 30-Sep-05 30-Sep-04 31-Mar-05 (restated) (restated) £m £m £m Profit for the period 14.6 14.1 28.5 Recognised upon first time adoption of IAS39 (12.0)Available for sale investments: Valuation gains taken to equity 0.9 - - Actuarial gain/(loss) on retirement benefit obligations - - (1.2) Tax on items taken directly to equity (0.3) - 0.4 Net (cost)/income recognised directly in equity (11.4) - (0.8) Total recognised income and expense for the period 3.2 14.1 27.7 Group Balance Sheetat 30 September 2005 Unaudited Unaudited Unaudited as at as at as at 30-Sep-05 30-Sep-04 31-Mar-05 (restated) (restated) £m £m £mAssets Liquid Assets 1,099.6 835.8 1,015.2 Loans and advances to customers 5,089.6 4,349.2 4,684.7 Derivative financial instruments 10.8 - - Intangible assets 6.2 6.4 7.4 Goodwill 6.1 - 6.1 Property, plant and equipment 21.7 24.0 21.4 Investment property 87.7 68.7 77.5 Prepayments and accrued income and other assets 28.2 30.1 61.0 Total Assets 6,349.9 5,314.2 5,873.3 Liabilities Shares 3,808.6 3,459.5 3,569.2 Other borrowings 798.3 870.0 795.6 Derivative financial instruments 22.6 - - Debt securities in issue 1,230.0 624.7 1,098.1 Other liabilities 36.6 24.7 36.3 Retirement benefit obligations 2.8 2.4 2.8 Subordinated liabilities 108.0 82.5 107.5 Subscribed capital 76.1 - - Reserves 266.9 250.4 263.8 Total Liabilities 6,349.9 5,314.2 5,873.3 As a percentage of shares and borrowings Gross Capital 7.7% 6.7% 6.8% Free Capital 5.9% 5.1% 5.2% Liquid Assets 18.8% 16.9% 18.6% Consolidated Cash Flow Statementfor the six months ended 30 September 2005 Unaudited Unaudited Unaudited 6 months 6 months Year ended ended ended 30-Sep-05 30-Sep-04 31-Mar-05 (restated) (restated) £m £m £mCash flows from operating activities 20.9 20.2 41.2Adjustments for: Depreciation and amortisation 2.8 2.8 5.7 (Profit)/loss on sale of property, plant and equipment - - (0.2) Movement in prepayments and accrued income and other assets 32.8 22.8 (8.1) Movement in other liabilities 0.2 (17.2) (5.6) Net increase in loans and advances made to customers (262.6) (160.7) (360.5) Net increase in shares 239.5 202.2 311.9 Net movement in other borrowings 2.7 (454.8) (529.2) Net movement in debt securities in issue 132.7 528.7 1,002.1 Net movement in other liquid assets (162.5) 6.1 6.0 Other movements (9.7) (6.0) (18.2) Income taxes paid (4.9) (4.2) (9.3) Net cash flows from operating activities (8.1) 139.9 435.8 Net cash flows from investing activities (145.0) (224.9) (366.5) Net cash flows from financing activities 75.0 - 25.0 (Decrease) / increase in cash and cash equivalents (78.1) (85.0) 94.3 Adoption of International Financial Reporting Standards Set out below is a summary of the Society's accounting policies that havechanged as a result of the transition to IFRS. As a result of the Society'sdecision to adopt the exemption from IFRS 1 not to apply IAS 32 and IAS 39 tocomparative information, certain of the accounting policies apply from 1 April2005 only and not to the comparative information. Accounting policies 1. Basis of preparation and consolidation of subsidiaries The half year results are prepared on the basis of the recognition andmeasurement requirements of those IFRSs in issue that have either been endorsedby the EU and are effective, or are reasonably expected to be endorsed andeffective at 31 March 2006. Based on these adopted IFRSs, the Directors havemade assumptions about the accounting policies expected to be applied, which aresummarised below. The adopted IFRS that will be effective in the annual financial statements forthe year ended 31 March 2006 are still subject to change and to additionalinterpretations and therefore cannot be determined with certainty. Accordingly,the accounting policies for that annual period will only finally be determinedwhen the annual report and accounts are prepared for the year ended 31 March2006. Subsidiaries are entities controlled by the Society. Control exists when theSociety has the power, directly or indirectly, to govern the financial andoperating policies of an entity so as to obtain benefits from its activities. Inassessing control, potential voting rights that presently are exercisable orconvertible are taken into account. The financial statements of the subsidiariesare included in the results from the date that control commences until the datethat control ceases. The Group Accounts consolidate the financial statements ofthe Society and all its subsidiary undertakings. The purchase method ofaccounting has been adopted, under which the results of subsidiary undertakingsacquired or disposed of in a year are included in the Income Statement from thedate of acquisition or up to the date of disposal. 2. Investment properties Investment properties, which comprise properties held for rental, are stated atfair value. Revaluations are carried out annually by a qualified internal valuerand at least every five years by an external valuer on an open market basis.Changes in fair value are included in profit or loss for the period in whichthey arise. Depreciation is not charged on investment properties. 3. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiaryat the date of acquisition or date of implementation of IFRS 3. Goodwill onacquisition of subsidiaries is included in 'Intangible assets'. Goodwill is tested annually for impairment and carried at cost less accumulatedimpairment losses. Computer software Computer software, which is not integral to a related item of hardware, isrecorded as an intangible asset, and amortised over its useful economic life. 4. Financial instruments In accordance with IAS 39, the financial instruments of the Group have beenclassified into the following categories: At fair value through profit The Group uses derivative financial instruments to hedge its exposure to foreignexchange and interest rate risk arising from operational, financing andinvestment activities. In accordance with its treasury policy, the Group doesnot hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are held at fair value in the Balance Sheetwith changes in their fair value going through the Income Statement. However, byapplying the hedge accounting rules set out in IAS 39 the changes in fair valueof derivatives used to hedge particular risks can either be offset in the IncomeStatement or deferred to equity. There are two types of hedge accounting strategies that the Group undertakes andthese are summarised below: Fair value hedges - Where a derivative financial instrument hedges the changesin fair value of a recognised asset or liability or an unrecognised firmcommitment, any gain or loss on the hedging instrument is recognised in theIncome Statement. To the extent that there is an effective hedge relationship,the associated hedged items (e.g. mortgage assets) are stated at fair value inrespect of the hedged risk,with any gain or loss also recognised in the IncomeStatement. As a result the hedging instrument and hedged items offset each otherand reduce profit volatility. However, derivatives that do not qualify for hedge accounting are held at fairvalue with changes in fair value recognised in the Income Statement with nooffset within the Income Statement or deferral to equity. Certain derivatives are embedded within other non-derivative host financialinstruments to create a hybrid instrument. Where the economic characteristicsand risks of the embedded derivatives 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. Available for sale (AFS) The Group's investment securities (e.g. certificates of deposits, gilts, etc)are classified as available-for-sale assets, with changes in fair valuerecognised in equity, except for impairment losses. The premia and discounts arising on the purchase of these assets are amortisedover the period to the maturity date of the security on an effective yieldbasis. Any amounts amortised are charged or credited to the Income Statement inthe relevant financial years. The fair values of AFS assets are based on quoted prices or, if these are notavailable, fair value valuation techniques developed by the Group. Theseinclude, but are not limited to, the use of discounted cash flow models, optionpricing models and recent arm's length transactions. Loans and receivables The Group's loans and advances to customers are classified as 'loans andreceivables' for the purposes of IFRS. Loans and receivables are measured atamortised cost using the effective interest method. In accordance with the effective interest method, up-front costs and fees suchas: cashbacks, mortgage premia paid on acquisition of mortgage books,procuration fees, and completion fees are capitalised and amortised over theexpected life of mortgage assets. Mortgage discounts are also amortised over theexpected life of the mortgage assets. Historical and forecast mortgageredemption data and management judgement are used to estimate the expected livesof mortgage assets. Financial liabilities All financial liabilities including wholesale funds and subordinated liabilitiesheld by the Group are measured at amortised cost using the effective interestmethod, except for those financial liabilities measured at fair value throughprofit or loss, e.g. derivative liabilities. Premia and discounts, together with commissions and other costs incurred in theraising of wholesale funds and subordinated liabilities, are amortised over theperiod to maturity on a straight line basis which approximates the amortisationprofile of the effective interest method. 5. Impairment of mortgage loans and advances The Group assesses at each balance sheet date whether there is objectiveevidence that a financial asset is impaired. Objective evidence of impairmentcan be defined as one or more events occurring after the initial recognition ofthe asset that have an impact on the estimated future cash flows of thefinancial asset that can be reliably estimated. The Group first assesses whether objective evidence of impairment exists forfinancial assets. If the Group determines that no objective evidence ofimpairment exists for an individually assessed financial asset, whethersignificant or not, it includes the asset in a group of financial assets withsimilar credit risk characteristics and collectively assesses them forimpairment. Assets that are individually assessed for impairment, and for whichan impairment loss is or continues to be recognised, are not included in acollective assessment of impairment. If there is objective evidence of an impairment loss of loans and receivables,the amount of the loss is measured as the difference between the asset'scarrying amount and the present value of estimated future cash flows (excludingfuture credit losses that have not been incurred) discounted at the financialasset's original effective interest rate. The carrying amount of the asset isreduced through the use of an allowance account and the amount of the loss isrecognised in the Income Statement. 6. Derecognition of financial assets and liabilities The Group's policy is to derecognise financial assets only when the contractualright to the cash flows from the financial asset expires. The Group alsoderecognises financial assets that it transfers to another party provided thetransfer of the asset also transfers the right to receive the cash flows of thefinancial asset. The Group derecognises financial liabilities only when the obligation specifiedin the contract is discharged, cancelled or has expired. 7. Taxation Income tax on the profits for the year 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 enacted or substantially enacted on the Balance Sheet date, andany adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. 8. Cash and cash equivalents For the purposes of the cash flow statement, cash comprises cash in hand andloans and advances to credit institutions repayable on demand. Cash equivalentscomprise highly liquid investments that are convertible into cash with aninsignificant risk of changes in value, with original maturities of three monthsor less. 9. Employee Benefits The Group provides both a defined benefit and a defined contribution scheme onbehalf of directors and staff. The defined benefit scheme is funded bycontributions partly from the employees and partly from the Society at ratesassessed by independent actuaries. These contributions are invested separatelyfrom the Group's assets. The Scheme assets are measured at market value at eachBalance Sheet date and the liabilities are measured using the projected unitvaluation method, discounted using a corporate bond rate. The resulting pensionscheme surplus or deficit is recognised immediately on the Balance Sheet, net ofdeferred tax. Any resulting actuarial gains and losses are recognisedimmediately in the Statement of Recognised Income and Expense. There is no change under IFRS in the accounting treatment for definedcontribution plans. Income statement reconciliation for 6 months ended 30 September 2004 Note 6 months ended 30 September 2004 UK GAAP Change in Other IFRS IFRS presentation of adjustments securitisations £m £m £m £m Interest receivable and similar income 128.7 5.6 - 134.3 Interest expense and similar charges (102.8) (5.3) - (108.1) Net interest income 25.9 0.3 - 26.2 Fees and commissions income 6.8 - - 6.8 Fees and commissions expense (3.4) - - (3.4) Gains on revaluation of investment properties 3 - - 3.7 3.7 Gains on disposal of investment properties - - - - Sundry income 8.7 - - 8.7 Other operating income 8.7 - 3.7 12.4 Total operating income 38.0 0.3 3.7 42.0 Administrative expenses 4 (21.9) (0.3) 0.1 (22.1) Retirement benefit obligations - - - - Operating profit before provisions 16.1 - 3.8 19.9 Impairment losses on loans and advances to customers 0.3 - - 0.3 Provisions for contingent liabilities and commitments - - - - Profit before tax 16.4 - 3.8 20.2 Tax expense 5 (4.9) - (1.2) (6.1) Profit for the period 11.5 - 2.6 14.1 Income statement reconciliation for the year ended 31 March 2005 Note Full year ended 31 March 2005 UK GAAP Change in Other IFRS IFRS presentation of adjustments securitisations £m £m £m £m Interest receivable and similar income 272.9 13.2 - 286.1 Interest expense and similar charges (218.6) (12.3) - (230.9) Net interest income 54.3 0.9 - 55.2 Fees and commissions income 12.7 - - 12.7 Fees and commissions expense (8.3) - - (8.3) Gains on revaluation of investment properties 3 - - 7.5 7.5 Gains on disposal of investment properties 1.7 - - 1.7 Sundry income 15.7 - - 15.7 Other operating income 17.4 - 7.5 24.9 Total operating income 76.1 0.9 7.5 84.5 Administrative expenses (42.9) (0.9) - (43.8) Retirement benefit obligations 0.1 - - 0.1 Operating profit before provisions 33.3 - 7.5 40.8 Impairment losses on loans and advances to customers 2.9 - - 2.9 Provisions for contingent liabilities and commitments (2.5) - - (2.5) Profit before tax 33.7 - 7.5 41.2 Tax expense 5 (10.5) - (2.2) (12.7) Profit for the period 23.2 - 5.3 28.5 Notes to the above reconciliations Securitisations 1. Change in presentation of Securitisations Under UK GAAP, the securitised assets and their results were presented using thelinked presentation method, with profit recognised as a single line item. UnderIFRS, the securitised assets and their results are fully consolidated. Other IFRS adjustments 2. Interest expense and receivables Under IFRS, this includes interest in respect of securitised assets andliabilities which, under UK GAAP, were presented using the linked presentationmethod, as required for quasi-subsidiaries under FRS 5. It also reflects fairvalue movements on financial assets at fair value through profits or loss. 3. Revaluation gains on investment properties Under UK GAAP, in accordance with SSAP 19, revaluation gains and losses wererecognised in the STRGL. All revaluation gains or losses under the fair valuemodel of IAS 40 are included in profit or loss for the period in which theyarise. These gains or losses have been included in 'Other operating income'. 4. Administrative expenses In accordance with IFRS 3, Business Combinations, goodwill is not amortised butis tested for impairment on an annual basis. In accordance with the transitionalprovisions of IFRS 1, First-time adoption of IFRS, the Group has elected toapply IFRS 3 from 1 April 2004. 5. Tax expense This adjustment reflects the effect of the recognition of the movements in fairvalue of investment properties. Reconciliation of equity as at 1 April 2004 Note 01-Apr-04 UK GAAP IFRS adjustments IFRS £m £m £mAssets Liquid Assets 926.9 - 926.9 Loans and advances to customers 3,965.1 - 3,965.1 Derivative financial instruments - - - Intangible assets 2 - 7.3 7.3 Goodwill - - - Property, plant and equipment 4 96.1 (73.0) 23.1 Investment property 3 - 65.7 65.7 Prepayments and accrued income and other assets 52.9 - 52.9 Total Assets 5,041.0 - 5,041.0 Liabilities Shares 3,257.3 - 3,257.3 Other borrowings 1,324.8 - 1,324.8 Derivative financial instruments - - - Debt securities in issue 96.0 - 96.0 Other liabilities 5 37.2 4.7 41.9 Retirement benefit obligations 2.4 - 2.4 Subordinated liabilities 82.5 - 82.5 Subscribed capital - - - Reserves 240.8 (4.7) 236.1 Total Liabilities 5,041.0 - 5,041.0 Reconciliation of equity as at 30 September 2004 Note 30-Sep-04 UK GAAP Change in Other IFRS IFRS presentation of adjustments securitisations £m £m £m £mAssets Liquid Assets 802.6 33.2 - 835.8 Loans and advances to customers 4,123.9 225.3 - 4,349.2 Derivative financial instruments - - - - Intangible assets 2 - - 6.4 6.4 Goodwill - - - - Property, plant and equipment 4 99.1 - (75.1) 24.0 Investment property 3 - - 68.7 68.7 Prepayments and accrued income and other assets 33.3 (3.2) - 30.1 Total Assets 5,058.9 255.3 - 5,314.2 Liabilities Shares 3,459.5 - - 3,459.5 Other borrowings 870.0 - - 870.0 Derivative financial instruments - - - - Debt securities in issue 8 370.0 254.7 - 624.7 Other liabilities 5 18.2 0.6 5.9 24.7 Retirement benefit obligations 2.4 - - 2.4 Subordinated liabilities 82.5 - - 82.5 Subscribed capital - - - - Reserves 256.3 - (5.9) 250.4 Total Liabilities 5,058.9 255.3 - 5,314.2 Reconciliation of equity as at 31 March 2005 Note 31-Mar-05 UK GAAP Change in Other IFRS IFRS pre presentation of adjustments IAS39 securitisations £m £m £m £m Assets Liquid Assets 1,000.7 14.5 - 1,015.2 Loans and advances to customers 4,463.2 221.5 - 4,684.7 Derivative financial instruments - - - - Intangible assets 2 6.7 - 0.7 7.4 Goodwill 9 - - 6.1 6.1 Property, plant and equipment 4 105.7 - (84.3) 21.4 Investment property 3 - - 77.5 77.5 Prepayments and accrued income and other assets 64.4 (3.4) - 61.0 Total Assets 5,640.7 232.6 - 5,873.3 Liabilities Shares 3,569.2 - - 3,569.2 Other borrowings 795.6 - - 795.6 Derivative financial instruments - - - - Debt securities in issue 864.5 233.6 - 1,098.1 Other liabilities 5 30.2 (1.0) 7.1 36.3 Retirement benefit obligations 2.8 - - 2.8 Subordinated liabilities 107.5 - - 107.5 Subscribed capital - - - - Reserves 270.9 - (7.1) 263.8 Total Liabilities 5,640.7 232.6 - 5,873.3 Reconciliation of equity as at 1 April 2005, including IAS 39 adjustments Note 01-Apr-05 IFRS except Change in Other IFRS IFRS IAS32/39 presentation of adjustments securitisations £m £m £m £m Assets Liquid Assets 1,015.2 - 0.4 1,015.6 Loans and advances to customers 7 4,684.7 4.5 (6.0) 4,683.2 Derivative financial instruments 10 - - 3.1 3.1 Intangible assets 7.4 - - 7.4 Goodwill 6.1 - - 6.1 Property, plant and equipment 21.4 - - 21.4 Investment property 77.5 - - 77.5 Prepayments and accrued income and other assets 61.0 - (10.2) 50.8 Total Assets 5,873.3 4.5 (12.7) 5,865.1 Liabilities Shares 11 3,569.2 - (0.1) 3,569.1 Other borrowings 11 795.6 - (0.1) 795.5 Derivative financial instruments 12 - 1.4 11.8 13.2 Debt securities in issue 8 1,098.1 3.2 (4.0) 1,097.3 Other liabilities 5 36.3 - (7.8) 28.5 Retirement benefit obligations 2.8 - - 2.8 Subordinated liabilities 13 107.5 - (0.5) 107.0 Subscribed capital - - - - Reserves 263.8 (0.1) (12.0) 251.7 Total Liabilities 5,873.3 4.5 (12.7) 5,865.1 Notes to the above reconciliations Securitisations 1. Change in presentation of Securitisations Under UK GAAP, the securitised assets and their results were presented using thelinked presentation method appropriate for quasi-subsidiaries under FRS 5.Under IFRS, the securitised assets and their results are now fully consolidatedresulting in increases to both total assets and total liabilities. Other IFRS adjustments 2. Intangible assets Under UK GAAP capitalised software (including deferred development costsrelating to external expenditure) was included within fixed assets. Under IAS38, Intangible Assets, the Group is required to capitalise any expenditure thatis incurred on software development work and purchased software which, in theopinion of the Directors, meets the criteria of intangible assets. The IFRSadjustment is the transfer of capitalised software items from property, plantand equipment to the intangible assets caption. 3. Investment property Under UK GAAP all land and buildings, whether or not occupied by the Group forits own activities, were included within fixed assets. IAS 40, InvestmentProperty, and IAS 1, Presentation of Financial Statements, requires thatproperties that are owned and not occupied for the Group's own activities andare held to earn rentals or for capital appreciation or both, must be disclosedseparately on the face of the Balance Sheet as investment property. Theadjustment reflects the transfer of land and buildings from property, plant andequipment to investment property. 4. Property, plant and equipment The reclassification of investment property from property, plant and equipmentto intangibles is reflected here. See note 2 and note 3 above for details. 5. Other liabilities The adjustments relate to movement in the tax liability due to IFRS adjustments.The IFRS adjustments reflect the deferred tax impact of the introduction ofIFRS and include the removal of discounts applied to deferred tax liabilitiesunder UK GAAP, the replacement of historic costs with fair value and deemed costoptions and flows relating to the application of effective yield methodology. 6. Liquid assets Debt securities are a component of liquid assets. The Group has classed debtsecurities (i.e. certificates of deposit, gilts, mortgage-backed securities andfloating rate notes) as Available-for-Sale (AFS) assets. AFS assets arerecognised on the Balance Sheet at their fair value with changes in their fairvalue posted to the Statement of Recognised Income and Expense. The IFRSadjustment represents the difference between the historical cost of debtsecurities and their fair value. 7. Loans and advances to customers The IFRS adjustments relate to the difference between the historic and amortisedcost valuations of the mortgage assets. Loans and advances to customers aremeasured at amortised cost using the effective interest rate method. 8. Debt securities in issue The IFRS adjustments from 1 April 2005 relate to the recognition of the fairvalue of the debt securities in issue that arise from the application of fairvalue hedge accounting. 9. Goodwill Under UK GAAP goodwill is amortised over its useful economic life. Under IFRSgoodwill is not amortised but is tested for impairment on an annual basis.Goodwill has been transferred out of intangible assets and shown on the face ofthe balance sheet. 10. Derivative financial instruments Under UK GAAP, derivative financial instruments such as interest rate swaps thatare used by the Society in balance sheet risk management were disclosed in thefinancial statements but were not recognised on the Balance Sheet i.e. they were'off balance sheet' items. In accordance with the requirements of IAS 39, witheffect from 1 April 2005, all derivative financial instruments held by theSociety are now included on the Balance Sheet at their fair values. 11. Shares and other borrowings The IFRS adjustments relate to the recognition of the fair value of the hedgeditems that arise from the application of fair value hedge accounting to certainfinancial instrument liabilities. 12. Derivative financial instruments (Liabilities) The IFRS adjustment within the 1 April 2005 Balance Sheet relates to therecognition of the fair value of derivative financial instrument liabilities.See note 10 above for further details. 13. Subordinated liabilities The IFRS adjustments relate to the recognition of the fair value of theSubordinated liabilities that arise from the application of fair value hedgeaccounting. This information is provided by RNS The company news service from the London Stock Exchange