RBS 2005 Annual Report Download - page 87

section
01
Operating and
financial review
85
Operating and financial review
Annual Report and Accounts 2005
IFRS compared with US GAAP
The Group’s financial statements are prepared in accordance
with IFRS, which differ in certain material respects from US
GAAP as described on pages 221 to 229.
The net income available for ordinary shareholders under US
GAAP was £4,475 million; £917 million lower than profit
attributable to ordinary shareholders under IFRS of £5,392
million. The principal reasons for the decrease are:
•a reduction of £556 million relating to financial instruments
principally foreign exchange gains on available-for-sale
securities recognised in net income under IFRS but included
directly in equity under US GAAP together with the
adjustment for financial assets and liabilities designated as
at fair value through profit or loss; US GAAP does not permit
such designation.
•higher pension costs under US GAAP compared with IFRS
reflecting the deferral of actuarial gains and losses over the
remaining service lives of current employees under US GAAP;
such gains and losses are recognised in full under IFRS.
US GAAP shareholders’ equity at £40,229 million is £4,794
million higher than IFRS equity of £35,435 million principally
due to the inclusion of certain preference shares, classified
as debt under IFRS, in US GAAP equity; the reinstatement
of goodwill deducted from equity under previous GAAP; and
the effect of deferring and amortising loan origination costs.
Capital resources
The following table analyses the Group’s regulatory capital resources at 31 December:
2005 2004 2003 2002 2001
£m £m £m £m £m
Capital base
Tier 1 capital 28,218 22,694 19,399 17,155 15,052
Tier 2 capital 22,437 20,229 16,439 13,271 11,734
Tier 3 capital —–– — — 172
50,655 42,923 35,838 30,426 26,958
Less: investments in insurance subsidiaries, associated
undertakings and other supervisory deductions (7,282) (5,165) (4,618) (3,146) (2,698)
Total capital 43,373 37,758 31,220 27,280 24,260
Weighted risk assets
Banking book:
On-balance sheet 303,300 261,800 214,400 193,800 176,000
Off-balance sheet 51,500 44,900 36,400 28,700 22,000
Trading book 16,200 17,100 12,900 11,500 12,500
371,000 323,800 263,700 234,000 210,500
Risk asset ratios %%%%%
Tier 1 7.6 7.0 7.4 7.3 7.1
Total 11.7 11.7 11.8 11.7 11.5
Note: The comparative data in the table above are under UK GAAP as previously published and regulated. As from 1 January 2005,
the Group was regulated on an IFRS basis.
It is the Group’s policy to maintain a strong capital base, to
expand it as appropriate and to utilise it efficiently throughout
its activities to optimise the return to shareholders while
maintaining a prudent relationship between the capital base
and the underlying risks of the business. In carrying out this
policy, the Group has regard to the supervisory requirements
of the Financial Services Authority (“FSA”). The FSA uses Risk
Asset Ratio (“RAR”) as a measure of capital adequacy in the
UK banking sector, comparing a bank’s capital resources with
its weighted risk assets (the assets and off-balance sheet
exposures are ‘weighted’ to reflect the inherent credit and
other risks); by international agreement, the RAR should be
not less than 8% with a tier 1 component of not less than 4%.
At 31 December 2005, the Group’s total RAR was 11.7%
(2004 – 11.7%) and the tier 1 RAR was 7.6% (2004 – 7.0%).