Notes to the Financial Statements
Accounting Policies
Financial Statements
The financial statements of HBOS plc comprise the Consolidated Income Statement and the Consolidated and Company Balance Sheets, Cash Flow Statements and Statements of Recognised Income and Expense together with the related Notes to the Accounts. The notes include information contained in the Business Review on pages 21 to 22, 29 to 30, 47, 49, 53, 56, 76, 77, 89 to 102 and 103 that are cross-referenced into the financial statements. These disclosures are required under IAS 1 ‘Presentation of Financial Statements’ relating to the management of capital and under IFRS 4 ‘Insurance Contracts’ and IFRS 7 ‘Financial Instruments: Disclosures’ relating to the nature of risks and their management. These disclosures form an integral part of the financial statements and are prefaced as such on the respective pages.
Statement of Compliance
The financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) and interpretations issued by the International Financial Reporting Interpretations Committee (‘IFRIC’) as adopted by the European Union. The Group has not utilised the “carve-out” provisions in respect of full fair value and portfolio hedging of core deposits in IAS 39 ‘Financial Instruments: Recognition and Measurement’ as adopted by the European Union and consequently, the financial statements comply with International Financial Reporting Standards. The standards applied by the Group and Company are those endorsed by the European Union and effective at the date the financial statements are approved by the Board.
The financial statements also comply with the relevant provisions of Part VII of the Companies Act 1985, as amended by the Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004. Additionally the Group has applied Financial Reporting Standard 27 ‘Life Assurance’ issued by the UK Accounting Standards Board as appropriate.
Basis of Preparation
The financial statements have been prepared under the historical cost basis, except that the following assets and liabilities are stated at their fair values: derivatives, financial instruments held for trading, financial instruments designated at fair value through the income statement, financial instruments classified as available for sale and investment properties. In addition insurance contracts, investment contracts with discretionary participation features and value of in-force long term assurance business included in the insurance and investment business are prepared on the basis set out in the applicable accounting policy.
IFRS Applied in 2007
The following IFRS standards and IFRIC interpretations have been applied in 2007: IFRS 7 ‘Financial Instruments: Disclosures’, the amendment to IAS 1 ‘Presentation of Financial Statements’ on capital disclosure, IFRIC 7 ‘Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies’, IFRIC 8 ‘Scope of IFRS 2 Share-based Payment’, IFRIC 9 ‘Reassessment of Embedded Derivatives’ and IFRIC 10 ‘Interim Financial Reporting and Impairment’. There is no material financial impact arising from the application of these standards and interpretations. The financial statements have been updated to include new disclosures arising from these standards and interpretations.
IFRS Not Yet Applied
The following standards and interpretations have been adopted by the European Union but are not effective for the year ended 31 December 2007 and have not been applied in preparing the financial statements:
IFRS 8 ‘Operating Segments’ which is applicable for periods commencing on or after 1 January 2009. The application of this standard in 2007 would not have had any financial impact. During 2008 the Group will be assessing the standard against its business model and the disclosures will be revised accordingly in the 2009 financial statements.
IFRIC 11 ‘Group and Treasury Share Transactions’ which is effective for periods commencing on or after 1 March 2007. The application of this interpretation in 2007 would not have affected the Group consolidated financial statements because the interpretation deals with accounting for share-based payments at subsidiary level. At Company level no material adjustment arises since these costs are already recharged.
The following standards and interpretations have not yet been adopted by the European Union, are not effective for the year ended 31 December 2007 and have not been applied in preparing the financial statements. Where appropriate disclosures will be revised in the financial statements in the year in which the standard or interpretation becomes applicable.
IAS 1 ‘Presentation of Financial Statements’ which is effective for periods commencing on or after 1 January 2009. The application of this revised standard in 2007 would not have had any financial impact on the financial statements. It will impact the presentation and format of the primary statements and notes and these disclosures will be revised accordingly in the 2009 financial statements.
Revised IAS 23 ‘Borrowing Costs’ which is applicable to borrowing costs related to qualifying assets for which the commencement date for capitalisation is on or after 1 January 2009. The application of this revised standard in 2007 would not have had a material impact on the financial statements.
IFRIC 12 ‘Service Concession Arrangements’ which is effective for periods commencing on or after 1 January 2008. The application of this interpretation in 2007 would not have had a material impact on the financial statements.
IFRIC 13 ‘Customer Loyalty Programmes’ which is effective for periods commencing on or after 1 July 2008. The application of this interpretation in 2007 would not have had a material impact on the financial statements.
IFRIC 14 ‘Defined Benefit Assets and Minimum Funding Requirements’ which is effective for periods commencing on or after 1 January 2008. The application of this interpretation in 2007 would not have affected the financial statements given the financial position, funding profile, maturity and rules of the Group’s defined benefit schemes.
The following standards have been issued during 2008, have not been endorsed by the European Union, are not effective for the year ended 31 December 2007 and have not been applied in preparing the financial statements.
IFRS 2 ‘Share-based Payments’ amendment on ‘Vesting Conditions and Cancellations’ which is effective for periods commencing on or after 1 January 2009.
Revised IFRS 3 ‘Business Combinations (2008)’ and Revised IAS 27 ‘Consolidated and Separate Financial Statements (2008)’ are effective for periods commencing on or after 1 July 2009.
Amendments to IAS 32 ‘Financial Instruments: Presentation’ and IAS 1 ‘Presentation of Financial Statements’ – Puttable Financial Instruments and Obligations Arising on Liquidation are effective for periods commencing on or after 1 January 2009.
The Group has been monitoring the progress of these revised standards through the discussion papers and exposure drafts issued and will assess their impact on the financial statements of the Group during 2008.
The accounting policies below have been consistently applied to all periods presented in these financial statements. Certain comparative amounts have been reclassified to conform to the current year’s presentation.