Basis of Presentation of Financial Statements
On 2 June 1997 the entire business of Halifax Building Society (‘the Society’), including all property, rights, liabilities and goodwill, but excluding the Society’s shares in Halifax plc (‘the Company’), was transferred to the Company by virtue of the terms of the Transfer Agreement dated 20 December 1996, the Company was authorised by the Bank of England under the Banking Act 1987 and its shares were admitted to the Official List of the London Stock Exchange. This completed the process of conversion to a listed company. The Society’s shares in the Company were then distributed or allocated to qualifying members, qualifying employees, qualifying pensioners and qualifying successors of the Society, and the Society was dissolved.

a. Presentation of Financial Information
The transfer to the Company of the business of the Society has been accounted for in accordance with the principles of merger accounting, although the transfer did not satisfy all the conditions required (see 1b below). These financial statements have therefore been presented as if the Company had been the parent undertaking of the Group and carrying on the business of the Society throughout the current financial year and the previous period.

During 1996, the Group changed its financial year end from 31 January to 31 December; the comparative figures in these financial statements therefore cover the 11 month period ended 31 December 1996. To facilitate comparison with the current year’s results, unaudited comparative figures for the year ended 31 December 1996 have also been presented in section 12 and point 2 of these notes.

These financial statements are presented for the first time in accordance with the special provisions of the Companies Act 1985 laid down specifically for banking groups. Accordingly, the comparative figures have been restated from the format required by the Building Societies (Accounts and Related Provisions) Regulations 1992 utilised in the preparation of the Annual Accounts of the Society for the period to 31 December 1996. The restatement has resulted in increases of £645.9m in both loans and advances to banks and deposits by banks due to the separate categorisation of certain banking items which were in transit at the end of the period.

In addition to the above there has been a change in the presentation of certain expenses relating to the Group’s long term assurance business. The effect of this change has been to reduce both other operating income and ongoing administrative expenses by £53.1m in 1997 (year ended 31 December 1996 £49.6m; 11 month period ended 31 December 1996 £45.5m). There has been no impact on Group profit on ordinary activities before tax as a result of the above change. The treatment of the Group’s captive insurance fund has also been amended, and as a result the opening balances on the provision relating to the captive insurance fund and the general loss provision have been restated, with no impact on Group profit on ordinary activities before tax. These changes bring the accounting treatment of these items into line with best practice in the banking sector.

Other than the changes to accounting presentation outlined above there have been no changes to the accounting policies previously applied by the Society in preparing its Annual Accounts for the period ended 31 December 1996.

b. Merger Accounting
Schedule 4(A) to the Companies Act 1985 and Financial Reporting Standard No. 6, ‘Acquisitions and Mergers’ require acquisition accounting to be adopted where all the conditions laid down for merger accounting are not satisfied. The process of conversion of the Society to a public limited company does not satisfy all the conditions for merger accounting but there is an overriding requirement under section 227(6) of the Companies Act 1985 for financial statements to present a true and fair view of the reporting entity’s results and financial position. In recognition of this requirement, merger accounting principles have been adopted.

The Directors consider that to record this transfer of business as an acquisition by the Company, with consequent adjustments to the fair values of the assets and liabilities transferred to the Company and the reflection of only post conversion results within these financial statements would not give a true and fair view of the Group’s results and financial position. The principal issues supporting this conclusion are set out in the paragraph below.

Substantially all the shareholders of the Company at the time of conversion were members of the Society immediately prior to conversion and accordingly maintained an interest in the Halifax business both before and after its transfer. In addition, the method of conversion is prescribed by the Building Societies Act 1986 such that the successor company stands in the place of the former Society. To attribute fair values to the assets and liabilities transferred to the Company would not be meaningful in the context of these financial statements, as in substance the process of conversion represents a change in legal status rather than an acquisition of a business. The Directors consider that it is not practicable to quantify the effect of this departure from the Companies Act 1985 requirements.