IFRS Restatement - Part 2

Standard Chartered PLC 12 May 2005 PART 2 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL INFORMATION The following pro-forma financial information is provided to illustrate the effects of IAS 39 'Financial instruments: Recognition and measurement' and IAS 32 'Financial instruments: disclosure and presentation' that has been excluded from the restated 2004 results. It does not form part of the restated 2004 results that will be presented as comparatives in the 2005 Interim Report. IAS 32 and 39 will be applied from 1 January 2005, with corresponding adjustments to opening reserves. Basis of preparation This pro-forma financial information complies in full with IAS 32 and 39 as endorsed by the EU. Overview of IAS 32 and 39 IAS 32 and IAS 39 prescribe the accounting for, and financial reporting of, financial instruments. IAS 32 covers disclosure and presentation whilst IAS 39 covers recognition and measurement. The principal changes from UK GAAP are: • reclassification between liabilities and shareholders' funds of certain subordinated securities and preference shares; • recording interest on a 'level yield' or 'effective yield' basis; • recording all derivatives at fair value on the balance sheet; • new classifications of assets and liabilities and related measurement requirements; • recording bad debt charges for time-value discount provisions and portfolio specific provisions; and • grossing up of the balance sheet for financial instruments no longer permitted to be netted. Explanation of pro-forma IAS 32 and 39 income statement and balance sheet adjustments 1. Debt/Equity classification UK GAAP: a) UK GAAP required that where there was an obligation to deliver economic benefits, a financial instrument should be classified as a liability. Preference shares were required to be classified as a non-equity element of shareholders' funds. b) Convertible debt should be recorded as a liability and the conversion to equity should not be anticipated. Interest was recorded at the coupon rate of the debt. IFRS: a) The IFRS definition of a liability is similar to UK GAAP but the legal obligation to deliver cash takes precedence over the judgements of substance used under UK GAAP. Where an obligation to deliver cash can be avoided, an instrument must be classified as equity. b) For convertible debt, the option to convert debt to equity is recognised separately from the host debt instrument. Convertible debt issued with a fixed conversion rate in a currency different to an entity's functional currency should be treated as a derivative liability and be fair valued at each period end. A discount is created when the option element is separated from the host debt and interest is recognised on the liability element at a market rate of interest for similar debt that does not have an option to convert to equity. STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL INFORMATION (continued) Impact: a) The Group has reclassified £300 million 8.103 per cent Step-Up Callable Perpetual Trust Preferred Securities from liabilities to equity. £195 million non-cumulative irredeemable preference shares have been reclassified from equity to liabilities. £200 million 2022 step up notes have been reclassified from liabilities to equity. The net effect is $566 million transfers from liabilities to equity. A net interest expense of $45 million is treated as an appropriation of distributable reserves instead of being presented as an interest expense. b) Interest expense for convertible debt has increased by $12 million. A fair value gain of $23 million was recorded on the conversion option derivative element. However, the Group's €575 million 4.5 per cent 2010 convertible notes were called and repaid by the Group on 18 April 2005 so these effects will not recur after that date. 2. Effective yield UK GAAP: Loan origination costs were generally expensed when incurred. Fees and commissions receivable were spread over the expected life of a loan where in substance they were part of the interest yield. Interest was recorded on an accrual basis, including when customers pay a lower-than-market rate of interest for a fixed period. IFRS: Interest is recognised on a 'level yield' basis, otherwise known as the effective yield. This means that substantially all income and costs that are incremental and directly attributable to loan origination are capitalised and amortised to interest income over the expected life of the loan. Additionally, customer interest rate discounts are spread over the expected life of the loan. If the expected life of loans change, IFRS requires the recalculation of the amortisation. Any cumulative differences between the amount amortised and the amount that should have been amortised under the new expected life must be recorded in the income statement. The 'level yield' basis of interest recognition only changes the timing of recording loan origination income and expenses. It does not change the total net revenue and related cash due to the Group. Impact: The effect of this change is that an additional $12 million has been recognised as net interest income from amortising capitalised fee income and costs. Net fees and commission income has increased by $5 million due to capitalisation of current period fee income and costs. Retained earnings are increased by $109 million, being the accumulated effect of capitalising costs from prior periods in transition to IFRS. The rate of capitalisation of income and costs and amortisation will be affected by the several factors, including the rate of growth in the business, changes in the expected life of assets, and changes in products. STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL INFORMATION (continued) 3. Derivatives and hedging UK GAAP: UK GAAP permitted derivatives that had been designated as being held for hedging purposes to be accounted for in a manner similar to the hedged item. That is, interest from derivative contracts was accrued to net interest income (NII) and revaluation to market or fair value was not required. All other derivative contracts were recorded at fair value ('marked to market' or 'MTM') in other assets and liabilities on the balance sheet. Gains and losses arising from the de-designation of a hedge relationship were deferred and amortised to income over the original contractual period of the derivative or until the item formerly being hedged was sold, at which point the full deferred amount was recognised in income. UK GAAP permitted assets and liabilities, and related income and expense, to be netted where there was a legal right of offset. IFRS: All derivatives must be recorded as assets or liabilities at their fair value and presented in separate lines of the balance sheet. Accounting for changes in fair values depends on the intended use of the derivative. All gains and losses are recorded in the income statement unless it is a derivative contract that is designated as a hedge against variability of cash flows (known as a 'cash flow hedge'). In this case, the MTM gain or loss is recorded in a reserves account until the change in cash flows of the underlying hedged item affects income, at which time it is transferred to the income statement. Gains and losses arising from the de-designation of a cash flow hedge remain in equity and are released to income in line with the formerly hedged item. In respect of fair value hedges that are sold or terminated, fair value adjustments made to the underlying hedged item are amortised to income. IAS 39 has a very strict definition of a qualifying hedge relationship and the recognition of hedge ineffectiveness. This makes it more difficult to establish and maintain hedge accounting. Where hedge accounting is not achieved or fails, earnings volatility results. A description of the types of hedging is set out in Appendix 5, page 48. Under IAS 32, a financial asset and financial liability shall be offset, and the net amount presented in the balance sheet, when an entity currently has a legally enforceable right to set off the recognised amounts and intends to settle on a net basis. Impact: The accounting rules for fair valuing all derivatives is expected to cause some degree of earnings volatility in the future. Hedging relationships (as defined by IAS 39) might not be established even when the economic intent is clearly to hedge e.g. when using derivatives to mitigate risk on a portfolio basis. Although the Group will aim to minimise this volatility, our priority will be to ensure risk is managed effectively. During 2004 the Group was managing risk within the framework of accounting permitted under UK GAAP. The Group has established new processes to evidence the relationship between derivatives and items being hedged. STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL INFORMATION (continued) On this basis, the impact of IAS 39 for 2004 is to decrease net interest income by $6 million (from the net reversal of interest accruals), and reduce net trading income by $4 million (to recognise the net fair value change of derivatives that are not cash flow hedges). Costs increased by $44 million in 2004 because certain foreign exchange hedge contracts taken out in 2002 and 2003 did not meet transitional hedge accounting criteria. $7,592 million and $7,278 million of derivative assets and liabilities have been transferred to separate derivative asset and liability lines on the face of the balance sheet. Additionally, $5,088 million and $4,746 million has been added to derivative assets and liabilities representing the reversal of netting permitted under UK GAAP, and remeasurement. The Group's issued debt has been adjusted by $225 million for fair value changes where fair value hedging has been achieved. A cash flow hedge reserve of $61 million has been created representing the total change in the fair value of cash flow hedge derivatives and hedged financial instruments. 4. Asset classification and fair value UK GAAP: Under UK GAAP, non-trading assets and liabilities (including loans, debt securities, equity investments that are less than 20 per cent of the share capital of the issuing entity, and deposits) were recorded at cost (less impairment in the case of assets). Income was recognised on an accruals basis. Unrealised fair value gains and losses were not recorded on the balance sheet. Trading assets and liabilities were recorded at market value with gains and losses from changes in market values being recorded in dealing profits. UK GAAP permitted assets and liabilities, and related income and expense, to be netted where there was a legal right of offset. IFRS: Under IAS 39 all financial assets are classified as either loans and receivables, held to maturity (HTM), at fair value (either trading or designated), or available for sale (AFS): Loans and receivables: income is recognised on a level yield basis as noted in 2 above. HTM: income is recognised on a level yield basis. At fair value: changes in fair values are recorded in net trading income. AFS: changes in fair values are recorded in reserves until either sold or maturity, at which point realised gains or losses are transferred to the income statement. Where an AFS asset is designated in a fair value hedge relationship, unrealised gains and losses are recorded in income. Foreign exchange gains and losses are recorded directly in income. Where there is objective evidence of impairment, the cumulative loss recognised in equity is transferred to the income statement. Financial liabilities are classified as either at cost or, if they are for trading purposes, at fair value. At present the European Union has prohibited the designation of non-trading liabilities as held at fair value. The IASB is reviewing the criteria for designating non-trading assets and liabilities at fair value. This may change the classification of certain assets and liabilities. STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL INFORMATION (continued) Netting is only permitted where there is an intention to settle on a net basis as well as having the legal right to do so. Impact: Upon transition at 1 January 2005, all loans and advances will be classified as loans and receivables, unless a loan was acquired with the intention to dispose of it in the short term, in which case a loan will be classified as trading. The majority of non-trading debt securities and equity investments will be classified as AFS. Certain non-trading assets will be classified as held at fair value. A summary table of reclassification is set out in appendix 3J. Had this policy been applied in 2004 it would have resulted in a net decrease in income of $2 million for 2004. Retained earnings at 31 December 2004 decrease by $27 million and a new AFS reserve of $87 million is created. Assets and liabilities have increased by $1,121 million in respect of balances that had been netted under UK GAAP. 5. Impairment UK GAAP: UK GAAP required specific provisions to be made where the repayment of an identified loan is in doubt. A general provision was held for the inherent risk of loss in a portfolio which, although not identified separately, was known from experience to be present. Interest was suspended when there was reasonable doubt as to its collectability. IFRS: In addition to making a provision for incurred losses in a similar way to UK GAAP, IFRS requires the time it takes to collect recoverable cash to be recorded by way of a time-value discount provision. This provision unwinds to interest income over the cash collection period. General provisions are not allowed but portfolio specific provisions are required. These portfolio provisions are based on flow rate and historic loss methodology and are likely to fluctuate from period to period. Suspended interest is not relevant under IAS 39 as interest is recognised on the recoverable element of impaired loans (represented by the unwind of the discount noted above). Impact: For 2004, additional revenue of $59 million is recognised from unwinding of discounts and an element of interest that had been suspended under UK GAAP. Additional provision charges for impaired loans and advances of $76 million are made for discounting and movements in portfolio specific provision. Equity is increased and provisions are reduced from the reversal of the UK GAAP general provision, offset by IFRS provision requirements. The rate at which the new discount provisions are created during a period will differ from the rate that provisions created in previous periods unwind to interest income. STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS SUMMARISED CONSOLIDATED BALANCE SHEET As at 31 December 2004 Pro-forma Pro-forma IFRS IFRS 31.12.04 30.06.04 $m $m Assets Cash and balances at central banks 3,960 3,447 Treasury bills and other eligible bills 5,302 6,535 Loans and advances to banks 17,402 17,388 Derivative financial instruments 12,680 7,849 Loans and advances to customers 72,300 63,982 Debt securities 33,101 29,096 Equity shares 304 206 Intangible fixed assets 2,353 2,154 Property, plant and equipment 555 525 Deferred tax assets 172 172 Prepayments, accrued income and other assets 5,265 5,109 Total assets 153,394 136,463 Liabilities Deposits by banks 15,814 17,118 Derivative financial instruments 12,024 7,849 Customer accounts 85,452 78,214 Debt securities in issue 11,629 9,979 Current tax liabilities 296 281 Accruals, deferred income and other liabilities 10,886 8,014 Subordinated liabilities: Undated loan capital 1,588 1,572 Dated loan capital 4,756 3,872 Total liabilities 142,445 126,899 Equity Shareholders' funds 9,989 9,055 Minority interest 960 509 Total equity 10,949 9,564 Total equity and liabilities 153,394 136,463 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) SUMMARISED CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2004 Pro-forma Pro-forma Pro-forma 12 months 6 months 6 months ended ended ended 31.12.04 30.06.04 31.12.04 $m $m $m Interest and similar income 5,350 2,567 2,783 Interest expense and similar charges (2,092) (1,005) (1,087) Net interest income 3,258 1,562 1,696 Other finance income 10 3 7 Fees and commissions income 1,589 779 810 Fees and commissions expense (239) (111) (128) Net trading income 677 337 340 Other operating income 205 175 30 2,232 1,180 1,052 Total operating income 5,500 2,745 2,755 Administrative expenses: Staff (1,559) (793) (766) Premises (321) (158) (163) Other (770) (348) (422) Depreciation and amortisation (238) (123) (115) Total operating expenses (2,888) (1,422) (1,466) Operating profit before provisions 2,612 1,323 1,289 Impairment losses on loans and advances (290) (137) (153) Amounts written off fixed asset investments (68) (69) 1 Operating profit before taxation 2,254 1,117 1,137 Taxation (624) (333) (291) Operating profit after taxation 1,630 784 846 Minority interest (34) (16) (18) Profit for the period attributable to shareholders 1,596 768 828 Dividends on other equity interests (103) (51) (52) Dividends on ordinary equity shares (630) (429) (201) Retained profit 863 288 575 Basic earnings per share 127.3c 61.2c 66.1c Diluted earnings per ordinary share 124.3c 60.1c 64.2c STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2004 Pro-forma Pro-forma 12 months 6 months ended ended 31.12.04 30.06.04 $m $m Cash flow from/(used in) operating activities Operating profit before taxation 2,254 1,117 Adjustment for items not involving cash flow or shown separately Depreciation and amortisation of premises and equipment 238 123 Gain on disposal of tangible fixed assets (4) (5) Gain on disposal of investment securities (164) (159) Amortisation of investments (41) 18 Gain on disposal of subsidiary undertakings - (4) Impairment losses on loans and advances 290 137 Amounts written off fixed asset investments 68 69 Debts written off, net of recoveries (481) (106) Increase(decrease) in accruals and deferred income 80 (156) Increase in prepayments and accrued income (256) (219) Net (increase)/decrease in mark to market adjustment (224) 519 Interest paid on subordinated loan capital 293 231 UK and overseas taxes paid (573) (271) Net cash inflow from trading activities 1,480 1,294 Net increase in cheques in the course of collection (45) (83) Net (increase)/decrease in treasury bills and other eligible bills (78) 52 Net (increase) in loans and advances to banks and customers (11,999) (6,927) Net increase in deposits from banks, customer accounts/debt securities in issue 15,004 12,103 Net increase in dealing securities (2,118) (286) Net increase/(decrease) in other accounts 3,037 (18) Net cash inflow from operating activities 5,281 6,135 Net cash flows from investing activities Purchase of tangible fixed assets (240) (95) Acquisition of subsidiaries, net of cash acquired (333) - Acquisition of treasury bills (9,188) (6,346) Acquisition of debt securities (75,353) (33,931) Acquisition of equity shares (121) (42) Disposal of subsidiaries, associated undertakings and branches 6 6 Disposal of tangible fixed assets 51 53 Disposal and maturity of treasury bills 10,778 5,363 Disposal and maturity of debt securities 71,482 31,788 Disposal of equity shares 356 352 Dividend paid on minority shareholders of subsidiary undertakings (17) (3) Net cash used in investing activities (2,579) (2,855) Net cash inflow from financing activities Interest paid on subordinated loan capital (293) (231) Gross proceeds from issue of subordinated loan capital 499 4 Repayment of subordinated liabilities (25) (21) Dividend paid on other equity interests (103) (51) Equity dividend paid to members of the company (587) (396) Net cash inflow from financing activities (509) (695) Net increase in cash and cash equivalents 2,193 2,585 Cash and cash equivalents at beginning of year 21,773 21,773 Effect of exchange rate changes on cash and cash equivalents 57 (39) Cash and cash equivalents at end of period 24,023 24,319 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 31 December 2004 Pro-forma Pro-forma Pro-forma 12 months 6 months 6 months ended ended ended 31.12.04 30.06.04 31.12.04 $m $m $m Operating profit after taxation 1,630 784 846 Exchange translation differences 96 (66) 162 Actuarial (loss)/gain on retirement benefits (5) 15 (20) Available for sale investments: Gain on revaluation of available for sale investments 11 (22) 33 Gain on revaluation of available for sale investments sold (145) (143) (2) Gain on revaluation of available for sale investments matured (1) 12 (13) Gain on revaluation of cashflow hedges 61 - 61 Deferred tax on items taken directly to reserves 38 71 (33) Recognised income and expense for the period 1,685 651 1,034 Attributable to: Equity holders of the parent 1,651 635 1,016 Minority interest 34 16 18 1,685 651 1,034 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) RECONCILIATION OF SUMMARISED CONSOLIDATED BALANCE SHEET At 31 December 2004 Audited IFRS Debt/ Effective Derivatives/ 31.12.04 Equity yield hedging $m $m $m $m Assets Cash and balances at central banks 3,960 - - - Treasury bills and eligible bills 4,425 - - - Loans and advances to banks 17,382 - - - Derivative financial instruments - - - 12,680 Loans and advances to customers 72,159 - 123 - Debt securities 32,842 - - - Equity shares 253 - - - Intangible fixed assets 2,353 - - - Property, plant and equipment 555 - - - Deferred income tax assets 272 - - - Prepayments, accrued income and other assets 12,877 - (24) (7,592) Total assets 147,078 - 99 5,088 Liabilities Deposits by banks 15,814 - - - Derivative financial instruments - - - 12,024 Customer accounts 85,458 - (6) - Debt securities in issue 11,627 - - 2 Current tax liabilities 295 - - - Accruals, deferred income and other liabilities 17,047 - (4) (7,278) Subordinated liabilities: Undated loan capital 1,588 - - - Dated loan capital 5,180 (649) - 225 Total liabilities and shareholders' funds 137,009 (649) (10) 4,973 Equity Share capital/premium and redemption reserve 3,818 (375) - - Other equity instruments - 941 - - AFS reserve - - - - Cash flow hedge reserve - - - 61 Premises revaluation 76 - - - Own shares in ESOP Trust (8) - - - Profit and loss account 5,219 83 109 58 Minority interest 964 - - (4) Total equity 10,069 649 109 115 Asset Pro-forma classification/ IFRS fair values Impairment Tax 31.12.04 $m $m $m $m Assets Cash and balances at central banks - - - 3,960 Treasury bills and eligible bills 877 - - 5,302 Loans and advances to banks 20 - - 17,402 Derivative financial instruments - - - 12,680 Loans and advances to customers (26) 44 - 72,300 Debt securities 259 - - 33,101 Equity shares 51 - - 304 Intangible fixed assets - - - 2,353 Property, plant and equipment - - - 555 Deferred income tax assets - - (100) 172 Prepayments, accrued income and other assets - 4 - 5,265 Total assets 1,181 48 (100) 153,394 Liabilities Deposits by banks - - - 15,814 Derivative financial instruments - - - 12,024 Customer accounts - - - 85,452 Debt securities in issue - - - 11,629 Current tax liabilities - - 1 296 Accruals, deferred income and other liabilities 1,121 1 (1) 10,886 Subordinated liabilities: Undated loan capital - - - 1,588 Dated loan capital - - - 4,756 Total liabilities and shareholders' funds 1,121 1 - 142,445 Equity Share capital/premium and redemption reserve - - - 3,443 Other equity instruments - - - 941 AFS reserve 87 - (14) 73 Cash flow hedge reserve - - (19) 42 Premises revaluation - - - 76 Own shares in ESOP Trust - - - (8) Profit and loss account (27) 47 (67) 5,422 Minority interest - - - 960 Total equity 60 47 (100) 10,949 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) RECONCILIATION OF SUMMARISED CONSOLIDATED BALANCE SHEET At 30 June 2004 Reviewed IFRS Debt/ Effective Derivatives/ 30.06.04 Equity Yield Hedging $m $m $m $m Assets Cash and balances at central banks 3,447 - - - Treasury bills and eligible bills 5,978 - - - Loans and advances to banks 17,387 - - - Derivative financial instruments - - - 7,849 Loans and advances to customers 63,743 - 120 - Debt securities 28,900 - - - Equity shares 179 - - - Intangible fixed assets 2,154 - - - Property, plant and equipment 525 - - - Deferred tax assets 251 - - - Prepayments, accrued income and other assets 10,084 - (34) (4,945) Total assets 132,648 - 86 2,904 Liabilities Deposits by banks 16,999 - - - Derivative financial instruments - 14 - 7,835 Customer accounts 78,219 - (5) - Debt securities in issue 9,985 - - (6) Current tax liabilities 258 - - - Accruals, deferred income and other liabilities 12,402 - (5) (5,140) Subordinated liabilities: Undated loan capital 1,572 - - - Dated loan capital 4,351 (621) - 142 Total liabilities 123,786 (607) (10) 2,831 Equity Share capital/premium and redemption reserve 3,778 (354) - - Other equity instruments - 888 - - AFS reserve - - - - Cash flow hedge reserve - - - - Premises revaluation 81 - - - Own shares in ESOP Trust (74) - - - Retained earnings 4,447 73 96 75 Minority interest 630 - - (2) Total equity 8,862 607 96 73 Asset Pro-forma classification/ IFRS fair values Impairment Tax 30.06.04 $m $m $m $m Assets Cash and balances at central banks - - - 3,447 Treasury bills and eligible bills 557 - - 6,535 Loans and advances to banks 1 - - 17,388 Derivative financial instruments - - 7,849 Loans and advances to customers 20 99 - 63,982 Debt securities 196 - - 29,096 Equity shares 27 - - 206 Intangible fixed assets - - - 2,154 Property, plant and equipment - - - 525 Deferred tax assets - - (79) 172 Prepayments, accrued income and other assets - 1 3 5,109 Total assets 801 100 (76) 136,463 Liabilities Deposits by banks 119 - - 17,118 Derivative financial instruments - - - 7,849 Customer accounts - - - 78,214 Debt securities in issue - - - 9,979 Current tax liabilities - - 23 281 Accruals, deferred income and other liabilities 780 - (23) 8,014 Subordinated liabilities: Undated loan capital - - - 1,572 Dated loan capital - - - 3,872 Total liabilities 899 - - 126,899 Equity Share capital/premium and redemption reserve - - - 3,424 Other equity instruments - - - 888 AFS reserve 71 - (9) 62 Cash flow hedge reserve - - - - Premises revaluation - - - 81 Own shares in ESOP Trust - - - (74) Retained earnings (50) 100 (67) 4,674 Minority interest (119) - - 509 Total equity (98) 100 (76) 9,564 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) RECONCILIATION OF INCOME STATEMENT For the year ended 31 December 2004 Audited IFRS 12 months ended Debt/ Effective Derivatives/ 31.12.04 Equity yield hedging $m $m $m $m Interest receivable and similar income 5,312 - 11 (19) Interest expense and similar charges (2,130) 33 1 13 Net interest income 3,182 33 12 (6) Other finance income 10 - - - Fees and commissions income 1,614 - (38) - Fees and commissions expense (282) - 43 - Net trading income 651 23 - (4) Other operating income 207 - - (2) 2,190 23 5 (6) Total operating income 5,382 56 17 (12) Administrative expenses: Staff (1,559) - - - Premises (321) - - - Other (731) - 5 (44) Depreciation and amortisation (238) - - - Total operating expenses (2,849) - 5 (44) Operating profit before provisions 2,533 56 22 (56) Impairment losses on loans and advances (214) - - - Amounts written off fixed assets (68) - - - Operating profit before taxation 2,251 56 22 (56) Taxation (630) - - - Operating profit after taxation 1,621 56 22 (56) Minority interest (43) - - - Profit for the period attributable to shareholders 1,578 56 22 (56) Dividends on other equity interests (58) (45) - - Dividends on ordinary equity shares (630) - - - Retained profit 890 11 22 (56) Pro-forma Asset 12 months classification/ ended fair values Impairment Tax 31.12.04 $m $m $m $m Interest receivable and similar income - 46 - 5,350 Interest expense and similar charges (9) - - (2,092) Net interest income (9) 46 - 3,258 Other finance income - - - 10 Fees and commissions income - 13 - 1,589 Fees and commissions expense - - - (239) Net trading income 7 - - 677 Other operating income - - - 205 7 13 - 2,232 Total operating income (2) 59 - 5,500 Administrative expenses: Staff - - - (1,559) Premises - - - (321) Other - - - (770) Depreciation and amortisation - - - (238) Total operating expenses - - - (2,888) Operating profit before provisions (2) 59 - 2,612 Impairment losses on loans and advances - (76) - (290) Amounts written off fixed assets - - - (68) Operating profit before taxation (2) (17) - 2,254 Taxation - - 6 (624) Operating profit after taxation (2) (17) 6 1,630 Minority interest 9 - - (34) Profit for the period attributable to shareholders 7 (17) 6 1,596 Dividends on other equity interests - - - (103) Dividends on ordinary equity shares - - - (630) Retained profit 7 (17) 6 863 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) RECONCILIATION OF INCOME STATEMENT For six months ended 30 June 2004 Reviewed IFRS 6 months ended Debt/ Effective Derivatives/ 30.06.04 Equity yield Hedging $m $m $m $m Interest and similar income 2,568 - 5 (28) Interest expense and similar charges (1,017) 16 1 (1) Net interest income 1,551 16 6 (29) Other finance income 3 - - - Fees and commissions income 793 - (18) - Fees and commissions expense (130) - 19 - Net trading income 333 8 - 5 Other operating income 175 - - - 1,171 8 1 5 Total operating income 2,725 24 7 (24) Administrative expenses: Staff (793) - - - Premises (158) - - - Other (336) - 3 (15) Depreciation and amortisation (123) - - - Total operating expenses (1,410) - 3 (15) Operating profit before provisions 1,315 24 10 (39) Impairment losses on loans and advances (139) - - - Income from joint venture - - - - Amounts written off fixed assets (69) - - - Operating profit before taxation 1,107 24 10 (39) Taxation (331) - - - Operating profit after taxation 776 24 10 (39) Minority interest (20) - - - Profit for the period attributable to shareholders 756 24 10 (39) Dividends on other equity interests (29) (22) - - Dividends on ordinary equity shares (429) - - - Retained profit 298 2 10 (39) Pro-forma Asset 6 months classification/ ended fair values Impairment Tax 30.06.04 $m $m $m $m Interest and similar income (4) 26 - 2,567 Interest expense and similar charges (4) - - (1,005) Net interest income (8) 26 - 1,562 Other finance income - - - 3 Fees and commissions income - 4 - 779 Fees and commissions expense - - - (111) Net trading income (9) - - 337 Other operating income - - - 175 (9) 4 - 1,180 Total operating income (17) 30 - 2,745 Administrative expenses: Staff - - - (793) Premises - - - (158) Other - - - (348) Depreciation and amortisation - - - (123) Total operating expenses - - - (1,422) Operating profit before provisions (17) 30 - 1,323 Impairment losses on loans and advances - 2 - (137) Income from joint venture - - - - Amounts written off fixed assets - - - (69) Operating profit before taxation (17) 32 - 1,117 Taxation - - (2) (333) Operating profit after taxation (17) 32 (2) 784 Minority interest 4 - - (16) Profit for the period attributable to shareholders (13) 32 (2) 768 Dividends on other equity interests - - - (51) Dividends on ordinary equity shares - - - (429) Retained profit (13) 32 (2) 288 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) RECONCILIATION OF EQUITY At 1 January 2004 Audited Asset Pro-forma IFRS Debt/ Effective Derivatives/ classification/ IFRS 01.01.04 equity yield hedging fair values Impairment Tax 01.01.04 $m $m $m $m $m $m $m $m Equity Share capital, share premium and redemption reserve 3,768 (349) - - - - - 3,419 Other components of equity - 877 - - - - - 877 AFS reserve - - - - 227 - (47) 180 Cash flow/hedge reserve - - - - - - - - Premises revaluation 57 - - - - - - 57 Own shares held in ESOP Trusts (60) - - - - - - (60) Retained earnings 4,182 72 86 114 (34) 59 (72) 4,407 Minority interest 620 - - - (129) - - 491 8,567 600 86 114 64 59 (119) 9,371 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) SUMMARISED ASSET CLASSIFICATIONS At 31 December 2004 and 30 June 2004 Designated Pro-forma Held to Available at 31.12.04 maturity Originated for sale Trading fair value Total $m $m $m $m $m $m Treasury bills and other eligible bills 57 - 3,881 1,120 244 5,302 Loans and advances to banks - 16,508 - 894 - 17,402 Loans and advances to customers - 72,101 6 144 49 72,300 Debt securities 983 343 26,272 3,894 1,609 33,101 Equity shares - - 292 12 - 304 1,040 88,952 30,451 6,064 1,902 128,409 Designated Pro-forma Held to Available at 30.06.04 maturity Originated for sale Trading fair value Total $m $m $m $m $m $m Treasury bills and other 127 - 5,119 740 549 6,535 eligible bills Loans and advances to banks - 15,910 - 1,478 - 17,388 Loans and advances to - 63,694 - 288 - 63,982 customers Debt securities 973 294 23,751 2,999 1,079 29,096 Equity shares - - 206 - - 206 1,100 79,898 29,076 5,505 1,628 117,207 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) SEGMENTAL INFORMATION BY GEOGRAPHIC SEGMENT For the year ended 31 December 2004 Other Hong Asia Kong Singapore Malaysia Pacific India Audited IFRS $m $m $m $m $m Operating income 1,406 513 270 825 466 Operating expenses (658) (228) (145) (518) (252) Operating profit before provision 748 285 125 307 214 Charge for debts (125) (33) (2) (40) (22) Impairment/other - - - - 2 Operating profit before taxation 623 252 123 267 194 IAS 32/39 adjustments Operating income 10 4 25 10 20 Operating expenses (4) (4) (2) (6) (1) Operating profit before provision 6 - 23 4 19 Impairment losses on loans and 13 (4) (26) (35) (8) advances Impairment/other - - - - - Operating profit before taxation 19 (4) (3) (31) 11 Pro-forma Operating income 1,416 517 295 835 486 Operating expenses (662) (232) (147) (524) (253) Operating profit before provision 754 285 148 311 233 Impairment losses on loans and (112) (37) (28) (75) (30) advances Impairment/other - - - - 2 Operating profit before taxation 642 248 120 236 205 US, MESA UK & UAE Other Africa Group Total Audited IFRS $m $m $m $m $m Operating income 271 377 584 670 5,382 Operating expenses (100) (170) (360) (418) (2,849) Operating profit before 171 207 224 252 2,533 provision Charge for debts (1) (1) (12) 22 (214) Impairment/other - - - (70) (68) Operating profit before 170 206 212 204 2,251 taxation IAS 32/39 adjustments Operating income (1) 1 6 43 118 Operating expenses (1) (1) (5) (15) (39) Operating profit before (2) - 1 28 79 provision Impairment losses on loans and advances (5) (6) (8) 3 (76) Impairment/other - - - - - Operating profit before (7) (6) (7) 31 3 taxation Pro-forma Operating income 270 378 590 713 5,500 Operating expenses (101) (171) (365) (433) (2,888) Operating profit before 169 207 225 280 2,612 provision Impairment losses on loans and advances (6) (7) (20) 25 (290) Impairment/other - - - (70) (68) Operating profit before 163 200 205 235 2,254 taxation STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) SEGMENTAL INFORMATION BY CLASS OF BUSINESS For the year ended 31 December 2004 Corporate Consumer Wholesale items not Banking Banking allocated Total Audited IFRS $m $m $m $m Total operating income 2,700 2,574 108 5,382 Total operating expenses (1,400) (1,426) (23) (2,849) Operating profit before provisions 1,300 1,148 85 2,533 Charge for debts (242) 28 - (214) Amounts written off fixed assets - (1) (67) (68) Operating profit before taxation 1,058 1,175 18 2,251 IAS32/39 adjustments Total operating income 73 45 - 118 Total operating expenses (17) (22) - (39) Operating profit before provisions 56 23 - 79 Impairment losses on loans and advances (53) (23) - (76) Amounts written off fixed assets - - - - Operating profit before taxation 3 - - 3 Pro-forma Total operating income 2,773 2,619 108 5,500 Total operating expenses (1,417) (1,448) (23) (2,888) Operating profit before provisions 1,356 1,171 85 2,612 Impairment loss on loans and advances (295) 5 - (290) Amounts written off fixed assets - (1) (67) (68) Operating profit before taxation 1,061 1,175 18 2,254 STANDARD CHARTERED PLC - PRO-FORMA FINANCIAL STATEMENTS (continued) EARNINGS PER ORDINARY SHARE 12 months ended 6 months ended 31.12.04 30.06.04 Average Average IFRS number IFRS number Profit of shares Cents Profit of shares Cents Earnings per Ordinary Share $m ('000) per share $m ('000) per share Basic earnings per ordinary share 1,493 1,172,921 127.3 717 1,170,699 61.2 Effect of dilutive potential ordinary shares: Convertible bonds 12 34,488 9 34,488 Options - 3,444 - 2,252 Diluted earnings per ordinary share 1,505 1,210,853 124.3 726 1,207,439 60.1 Normalised earnings per ordinary share The Group measures earnings per share on a normalised basis. The following table shows the calculation of normalised earnings per share, i.e. based on the Group's results excluding amounts written off fixed assets, profits /losses of a capital nature and profits/losses on repurchase of capital instruments. 12 months 6 months ended ended 31.12.04 30.06.04 $m $m Profit attributable to ordinary shareholders, as above 1,493 717 Profit on sale of shares in - KorAm (95) (95) - Bank of China (36) (36) Premium and costs paid on repurchase of subordinated debt 23 21 Cost of Hong Kong incorporation 18 18 Tsunami donation 5 - Profit on sale of tangible fixed assets (4) (4) Profit on disposal of subsidiary undertakings (4) (4) Amounts written off fixed assets 68 69 Normalised earnings 1,468 686 Normalised earnings per ordinary share 125.2c 58.6c STANDARD CHARTERED PLC ACCOUNTING POLICIES AS REVISED UNDER IFRS The following is a summary of Standard Chartered PLC's significant influence but not control, new Group accounting policies under IFRS. Where generally accompanying a shareholding of between 20 policies have changed under IFRS this is indicated by per cent and 50 per cent of the voting rights. *. No adjustments have been made for any changes in Investments in associates are accounted for by the estimates made at the time of approval of the UK GAAP equity method of accounting and are initially financial statements. recognised at cost. The Group's investment in associates includes goodwill (net of any accumulated impairment loss) identified Basis of accounting on acquisition. The Group's share of its associates' post-acquisition profits or losses is recognised in the income As set out on page 4 in the Basis of Preparation, the statement, and its share of post-acquisition movements restated financial information has been prepared in in reserves is recognised in reserves. The cumulative accordance with International Accounting Standards post-acquisition movements are adjusted against the (IAS) and International Financial Reporting Standards carrying amount of the investment. When the Group's (IFRS) as endorsed by the EU or expected to be share of losses in an associate equals or exceeds its applicable at 31 December 2005. interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Critical accounting policies Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates. Unrealised losses Standard Chartered PLC's management considers the are also eliminated unless the transaction provides following to be the most important accounting policies evidence of an impairment of the asset transferred. in the context of the Group's operations. b) Interest in Joint Ventures * 1 Accounting convention* The Company and Group's consolidated financial statements have been prepared in accordance with Interests in jointly controlled entities are International Financial Reporting Standards (IFRS), as recognised using proportionate consolidation whereby required by European Directives. The the assets, liabilities, income and expenses are financial statements have been prepared under the combined line by line with similar items in the historical cost convention, as modified by the Group's financial statements. revaluation of certain fixed assets and dealing positions. The preparation of financial statements in 3 Foreign currency translation* conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of a) Functional and presentation currency items applying the Company's accounting policies. included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). 2 Consolidation * Subsidiaries are all entities (including special The consolidated financial statements are purpose entities) over which the Group has the power presented in US dollars, which is the Group's to govern the financial and operating policies functional and presentation currency. generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated b) Transactions and balances from the date that control ceases. The purchase method of accounting is used to account Foreign currency transactions are translated into the for the acquisition of subsidiaries by the Group. The functional currency using the exchange rates cost of an acquisition is measured as the fair value prevailing at the dates of the transactions. Foreign of the assets given, equity instruments issued and exchange gains and losses resulting from the liabilities incurred or assumed at the date of settlement of such transactions and from the exchange, plus costs directly attributable to the translation at year-end exchange rates of monetary acquisition. Identifiable assets acquired are fair assets and liabilities denominated in foreign valued at the acquisition date, irrespective of the currencies are recognised in the income statement. extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is c) Group companies less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. The results and financial position of all the Inter-company transactions, balances and unrealised Group entities that have a functional currency gains on transactions between Group companies are different from the eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. a) Associates are all entities over which the Group has presentation currency are translated into the b) Computer software presentation Acquired computer software licenses are capitalised on currency as follows. the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives (three to five years). i) assets and Costs associated with developing or maintaining liabilities for each balance sheet presented are computer software programs are recognised as an translated at the closing rate at the balance sheet expense as incurred. date. 6 Property, plant and equipment* ii) income and expenses for each income statement are translated at average Land and buildings comprise mainly branches and of exchange rates; and offices. All property, plant and equipment is stated at cost less depreciation. Cost includes expenditure that is directly attributable to the acquisition of the items. iii) all resulting exchange differences are recognised as a separate Subsequent costs are included in the asset's carrying component of equity. amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item On consolidation, exchange differences arising from will flow to the Group and the cost of the the translation of the net investment in foreign item can be measured reliably. All other repairs and entities, and of borrowings and other currency maintenance are charged to the income statement during instruments designated as hedges of such investments, the financial period in which they are are taken to shareholders' equity. When a foreign incurred. operation is sold, such exchange differences are recognised in the income statement as part of the gain Land is not depreciated. Depreciation on other assets or loss on sale. is calculated using the straight-line method to allocate their cost to their residual values over Goodwill and fair value adjustments arising on the their estimated useful lives, as follows: acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated Buildings up to 50 years at the closing rate. Leasehold improvements life of lease, up to 50 years 4 Sale and repurchase agreements* Equipment and motor vehicles 3 to 15 years Securities sold subject to repurchase agreements The assets' residual values and useful lives are ('repos') are reclassified in the reviewed, and adjusted if appropriate, at each balance financial statements as pledged assets when the sheet date. transferee has the right by contract or custom to sell or repledge the collateral; the counterparty liability is included in amounts due to other banks, deposits from banks, other deposits or deposits due to Gains and losses on disposals are included in the customers, as appropriate. Securities purchased under income statement. agreements to resell ('reverse repos') are recorded as loans and advances to other banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued 7 Leases* over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial statements. a) Where a Group company is the lessee Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, in which case the purchase and sale are The leases entered into by the Group are primarily recorded with the gain or loss included in trading operating leases. The total payments made under income. operating leases are charged to the income statement on a straight-line basis over the period of the lease. 5 Intangible assets* a) Goodwill When an operating lease is terminated before the lease Goodwill represents the excess of the cost of an period has expired, any payment required to be made to acquisition over the fair value of the Group's share the lessor by way of penalty is recognised as an of the net identifiable assets of the acquired expense in the period in which termination takes subsidiary/associate at the date of acquisition. place. Goodwill on acquisitions of subsidiaries is included in 'intangible assets'. Goodwill on acquisitions of associates is included in 'investments in associates'. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. b) Where a Group company is the lessor on the employees remaining in service for a specified period of time (the vesting period). In When assets are held subject to a finance this case, the past-service costs are amortised on a lease, the present value of the lease payments is straight-line basis over the vesting period. recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of b) For defined contribution plans, the the lease using the net investment method (before Group pays contributions to publicly or privately tax), which reflects a constant periodic rate administered pension insurance plans on a mandatory, of return. contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. 8 Cash and cash equivalents* For the purposes of the cash flow statement, b) Share-based compensation * cash and cash equivalents comprise balances with less than three months' maturity from the date of The Group operates equity-settled, share-based acquisition, including: cash and balances with central compensation plan with specific cash settled elements. banks, treasury bills and other eligible bills, loans The fair value of the employee services received in and advances to banks, amounts due from other banks exchange for the grant of the options is recognised as and short-term government securities. an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of 9 Provisions any non-market vesting conditions (for example, profitability and sales growth targets). Provisions for restructuring costs and legal claims Non-market vesting conditions are included in are recognised when: the Group has a present legal or assumptions about the number of options that are constructive obligation as a result of past events; it expected to become exercisable. At each balance sheet is more likely than not that an outflow of date, the entity revises its estimates of the number resources will be required to settle the obligation; of options that are expected to become exercisable. It and the amount has been reliably estimated. recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining 10 Employee benefits vesting period. The proceeds received net of any directly attributable a) Pension obligations transaction costs are credited to share capital (nominal value) and share premium when the options are The liability recognised in the balance sheet in exercised. respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with 11 Deferred income tax* adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit Deferred income tax is provided in full, using the obligation is calculated annually by liability method, on temporary differences arising independent actuaries using the projected unit credit between the tax bases of assets and liabilities and method. The present value of the defined benefit their carrying amounts in the consolidated obligation is determined by discounting financial statements. Deferred income tax is determined the estimated future cash outflows using using tax rates (and laws) that have been enacted interest rates of high-quality corporate bonds that or substantially enacted by the balance sheet date and are denominated in the currency in which the benefits are expected to apply when the related deferred income will be paid, and that have terms to tax asset is realised or the deferred income tax maturity approximating to the terms of the related liability is settled. pension liability. Actuarial gains and losses arising from experience The principal temporary differences arise from adjustments and changes in actuarial assumptions are depreciation of property, plant and equipment, charged or credited to income over the employees' revaluation of certain financial expected average remaining working lives. Past-service assets and liabilities including derivative contracts, costs are recognised immediately in income, unless the provisions changes to the pension plan are conditional for pensions and other post-retirement benefits 13 Share capital* and tax losses carried forward; and, in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base. a) Share issue costs The rates enacted or substantively enacted at the balance sheet date are used to determine deferred Incremental costs directly attributable to the issue income tax. However, the deferred income tax is not of new shares or options or to the acquisition of a accounted for if it arises from initial recognition of business are shown in equity as a deduction, net of an asset or liability in a transaction other than a tax, from the proceeds. business combination that at the time of the transaction affects neither accounting nor taxable pro profit or loss. b) Dividends on ordinary shares Deferred tax assets are recognised where it is Dividends on ordinary shares are recognised in equity probable that future taxable profit will be in the period in which they are approved by the available against which the temporary differences can Company's shareholders. Dividends for the year that be utilised. are declared after the balance sheet date are dealt with in the subsequent events note. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by c) Treasury shares the Group and it is probable that the difference will not reverse in the foreseeable future. Where the Company or other members of the consolidated Group purchases the Company's equity share capital, the consideration paid is deducted from total shareholders' equity as treasury shares until they are Income tax payable on profits, based on the cancelled. Where such shares are subsequently sold or applicable tax law in each jurisdiction, is recognised reissued, any consideration received is included in as an expense in the period in which profits shareholders' equity. arise. The tax effects of income tax losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be 14 Fiduciary activities* utilised. The Group commonly acts as trustees and in other fiduciary capacities that result in the Deferred tax related to items which are charged or holding or placing of assets on behalf of individuals, credited directly to equity, is credited or charged trusts, retirement benefit plans and other directly to equity and is subsequently recognised in institutions. These assets and income arising thereon the income statement together with the deferred gain are excluded from these financial statements, or loss. as they are not assets of the Group. 12 Borrowings* 15 Bad and doubtful debts Borrowings are recognised initially at fair value, being their issue proceeds (fair value of Provisions for bad and doubtful debts are held in consideration received) net of transaction costs respect of loans and advances, including cross border incurred. Borrowings are subsequently stated at exposures. The provisions comprise two elements - amortised cost; any difference between proceeds net of specific and general. transaction costs and the redemption value is Provisions against loans and advances are based on an recognised in the income statement over the period of appraisal of the loan portfolio. Specific provisions the borrowings using the effective interest method. are made where the repayment of identified loans is in doubt and reflect an estimate of the amount of loss expected. The general provision is for the inherent risk of losses which, although they have not been Preference shares, which carry a mandatory coupon, or separately identified, are known from experience to be are redeemable on a specific date or at the present in any loan portfolio and to other material option of the shareholder, are classified as uncertainties where specific provisioning is not financial liabilities and are presented in appropriate. The amount of the general provision other borrowed funds. The dividends on these reflects past experience and judgements about current preference shares are recognised in the income conditions in particular locations or business statement as interest expense on an amortised cost sectors. basis using the effective interest method. If the Group purchases its own debt, it is removed from the balance sheet, and the difference between the Provisions are made against cross border exposures carrying amount of a liability and the consideration where a country may experience or has experienced paid is included in net trading income. external liquidity problems and doubts exist as to whether full recovery will be achieved. Provisions are applied to write off advances, in part 17 Off-Balance Sheet Financial Instruments or in whole, when they are considered wholly or partly irrecoverable. Off-balance sheet financial instruments are valued with reference to market prices and the resultant Interest on loans and advances is accrued to income profit or loss is included in the profit and loss until such account, except where the position in the instrument has been designated as a hedge when the profit or loss time as reasonable doubt exists about its resulting from marking them to market is dealt with in collectability; thereafter, and until all or part of the same way as the accounting treatment applied to the loan is written off, interest continues to accrue the position hedged. on customers' accounts, but is not included in income. Such suspended interest is deducted from loans and advances on the balance sheet. Trading positions are valued at market rates, and non-trading positions are valued on the same basis as the items being hedged. Netting occurs where 16 Debt Securities, Equity Shares and Treasury transactions with the same counterparty meet the Bills following requirements. The balances must be determinable and in freely convertible currencies, the Securities, including equity shares and treasury Standard Chartered entity can insist on net bills, which are intended for use on a continuing settlement, and this ability is beyond doubt. basis in the Group's activities are classified as investment securities. They include portfolios of securities held in countries where the Group is required to maintain a stock of liquid assets. 18 Fees and commissions Investment securities are stated at cost less any provision for permanent diminution in value. The cost Fees or commissions which represent a payment for a of dated investment securities is adjusted to reflect service provided in setting up a transaction, are the amortisation of accretion of premiums and credited to the profit and loss account once they are discounts on acquisition on a straight-line basis over receivable. the residual period to maturity. The amortisation and accretion of premiums and discounts are included in Fees or commissions which in substance amount to an interest income. additional interest charge, are recognised over the life of the underlying transaction on a level yield basis. Securities other than investment securities are classified as dealing securities and are held at market value. Where the market value of such securities is higher than cost, the original cost is not disclosed as its determination is not practicable. STANDARD CHARTERED PLC ADDITIONAL ACCOUNTING POLICIES RELATING TO PRO-FORMA FINANCIAL INFORMATION The pro-forma financial information has been prepared a hedged item for which the effective interest method using the same accounting policies as set out in is used is amortised to profit or loss over appendix 4 with the exception that the following the period to maturity. The adjustment to the carrying policies have been amended by the application of IAS32 amount of a hedged equity security remains in retained and IAS39 (as endorsed by the EU) as set out in this earnings until the disposal of the equity security. Appendix: b) Cash flow hedge • Bad and Doubtful Debts The effective portion of changes in the fair value of • Debt Securities, Equity Shares and Treasury derivatives that are designated and qualify as cash Bills flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is • Off Balance Sheet Financial Instruments recognised immediately in the income statement. • Fees and Commissions Amounts accumulated in equity are recycled to the income statement in the periods in which the hedged item will affect profit or loss. 1 Derivative financial instruments and When a hedging instrument expires or is sold, or when hedge accounting* a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in Derivatives are initially recognised at fair value on equity at that time remains in equity and is the date on which a derivative contract is entered recognised when the forecast transaction is ultimately into and are subsequently remeasured at their fair recognised in the income statement. When a forecast value. Fair values are obtained from quoted market transaction is no longer expected to occur, the prices in active markets, including recent market cumulative gain or loss that was reported in equity is transactions, and valuation techniques, including immediately transferred to the income statement. discounted cash flow models and options pricing models, as appropriate. All derivatives are carried as assets when fair value is positive and as c) Net investment hedge liabilities when fair value is negative. Hedges of net investments in foreign operations are The best evidence of the fair value of a derivative at accounted for similarly to cash flow hedges. initial recognition is the transaction price (i.e., Any gain or loss on the hedging instrument relating to the fair value of the consideration given or received) the effective portion of the hedge is recognised in unless the fair value of that instrument is evidenced equity; the gain or loss relating to the ineffective by comparison with other observable current market portion is recognised immediately in the income transactions in the same instrument (i.e., without statement. Gains and losses accumulated in equity are modification or repackaging) or based on a included in the income statement when the foreign valuation technique whose variables include only data operation is disposed of. from observable markets. Certain derivatives embedded in other d) Derivatives that do not qualify for hedge financial instruments, such as the conversion option in accounting a convertible bond, are treated as separate derivatives when their economic characteristics and Certain derivative instruments do not qualify for risks are not closely related to those of the host hedge accounting. Changes in the fair value of any contract and the host contract is not carried at fair derivative instrument that does not qualify for hedge value through profit or loss. These embedded accounting are recognised immediately in the income derivatives are measured at fair value with changes in statement. fair value recognised in the income statement. The method of recognising the resulting fair value gain or loss depends on whether the derivative is 2 Interest income and expense* designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates Interest income and expense are recognised in the certain derivatives as either: (1) hedges of the fair income statement for all instruments measured at value of recognised assets or liabilities or amortised cost using the effective interest method. firm commitments (fair value hedge); or, (2) hedges of highly probable future cash flows The effective interest method is a method of attributable to a recognised asset or liability, or a calculating the amortised cost of a financial forecasted transaction (cash flow hedge). asset or a financial liability and of Hedge accounting is used for derivatives designated in allocating the interest income or interest expense this way provided certain criteria are met. over the relevant period. The effective interest rate is the rate that discounts estimated future cash The Group documents, at the inception of the payments or receipts through the expected life of the transaction, the relationship between hedging financial instrument or, when appropriate, a instruments and hedged items, as well as its risk shorter period to the net carrying amount of the management objective and strategy for undertaking financial asset or financial various hedge transactions. The Group also documents liability. When calculating the effective interest its assessment, both at hedge inception and on an rate, the Group estimates cash flows ongoing basis, of whether the derivatives that are considering all contractual terms of the used in hedging transactions are highly effective in financial instrument (for example, prepayment options) offsetting changes in fair values or cash but does not consider future credit losses. The flows of hedged items. calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. a) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value 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 adjustment to the carrying amount of Once a financial asset or a group of similar through profit or loss, held to maturity and financial assets has been written down as a available for result of an impairment loss, interest income is recognised using the rate of interest used to discount sale are recognised on trade- date - the date on which the future cash flows for the purpose of measuring the impairment loss. the Group commits to purchase or sell the asset. Loans are recognised when cash is advanced to the borrowers. Financial assets are initially recognised at fair 3 Fee and commission income* value plus transaction costs for all financial assets not carried at fair value through profit and Fees and commissions are generally recognised on an loss account. Financial assets are derecognised when accrual basis when the service has been provided. Loan the rights to receive cash flows from the financial syndication fees are recognised as revenue when the assets have expired or where the Group has transferred syndication has been completed and the Group retained substantially all risks and rewards of ownership. no part of the loan package for itself or retained a part at the same effective interest rate for the other participants. Portfolio and other management advisory and service fees are recognised based on the Available-for-sale financial assets and applicable service contracts, usually on a financial assets at fair value through profit time-apportionate basis. or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the 4 Financial assets* effective interest method. Gains and losses arising from changes in the fair value of the 'financial The Group classifies its financial assets at fair value through profit or assets in the following categories: financial loss' category are included in the income statement in assets at fair value through profit or loss; the period in which they arise. Gains and losses loans and receivables; held-to-maturity investments; arising from changes in the fair value of and available-for-sale financial assets. available-for-sale financial assets are Management determines the classification of recognised directly in equity, until the its investments at initial recognition. financial asset is derecognised or impaired at which time the cumulative gain or loss previously recognised in equity should be recognised in profit or loss. However, interest calculated using the effective a) Financial assets at fair value through profit interest method is recognised in the income statement. or loss Dividends on available-for-sale equity instruments are recognised in the income statement when the entity's This category has two sub-categories: right to receive payment is established. financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally The fair values of quoted investments in active for the purpose of selling in the short term or if so markets are based on current bid prices. If the market designated by management. Derivatives are also for a financial asset is not active (and for categorised as held for trading unless they are unlisted securities), the Group establishes fair value designated as hedges. by using valuation techniques. These include the use of recent arm's length transactions, discounted cash flow analysis, option pricing models and other b) Loans and receivables valuation techniques commonly used by market participants. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services 5 Offsetting financial instruments* directly to a debtor with no intention of trading the receivable. Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net c) Held-to-maturity basis, or realise the asset and settle the liability simultaneously. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention 6 Impairment of financial assets* and ability to hold to maturity. Were the Group to sell other than an insignificant amount of held-to-maturity assets, the entire category would be a) Assets carried at amortised cost tainted and reclassified as available for sale. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of d) Available-for-sale financial assets is impaired and impairment losses are incurred if, and only if, there is Available-for-sale investments are those intended to objective evidence of impairment as a result of one or be held for an indefinite period of time, more events that occurred after the initial which may be sold in response to needs for liquidity recognition of the asset (a 'loss event') and that or changes in interest rates, exchange rates or equity loss event (or events) has an impact on the estimated prices. future cash flows of the financial asset or group of financial assets that can be reliably estimated. Purchases and sales of financial assets at fair value The Group first assesses whether objective Estimates of changes in future cash flows for evidence of impairment exists individually for groups of assets should reflect and be financial assets that are individually significant, directionally consistent with changes in related and individually or collectively for observable data from period to period (for example, financial assets that are not individually changes in unemployment rates, property prices, significant. If the Group determines that no payment status, or other factors indicative of changes objective evidence of impairment exists for an in the probability of losses in the group and their individually assessed financial asset, whether magnitude). The methodology and assumptions used for significant or not, it includes the asset in a estimating future cash flows are reviewed group of financial assets with similar credit regularly by the Group to reduce any differences risk characteristics and collectively assesses them between loss estimates and actual loss experience. for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. When a loan is uncollectable, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the If there is objective evidence that an impairment loss loss has been determined. Subsequent recoveries of on loans and receivables or held-to-maturity amounts previously written off decrease the amount of investments carried at amortised cost has been the provision for loan impairment in the income incurred, the amount of the loss is measured as the statement. If, in a subsequent period, the amount of difference between the asset's carrying amount and the the impairment loss decreases and the decrease can be present value of estimated future cash flows related objectively to an event occurring after the (excluding future credit losses that have not been impairment was recognised (such as an improvement in incurred) discounted at the financial asset's the debtor's credit rating), the previously recognised original effective interest rate. The carrying amount impairment loss is reversed by adjusting the allowance of the asset is reduced through the use of an account. The amount of the reversal is recognised in allowance account and the amount of the loss is the income statement. recognised in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined b) Assets carried at fair value under the contract. As a practical expedient, the Group may measure impairment on the basis of an The Group assesses at each balance sheet date whether instrument's fair value using an observable market there is objective evidence that a financial price. asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant The calculation of the present value of the estimated or prolonged decline in the fair value of the future cash flows of a collateralised security below its cost is considered in determining financial asset reflects the cash whether the assets are impaired. If any such evidence flows that may result from foreclosure less exists for available-for- sale financial costs for obtaining and selling the collateral, assets, the cumulative loss - measured as the whether or not foreclosure is probable. For the difference between the acquisition cost and the purposes of a collective evaluation of impairment, current fair value, less any impairment loss on that financial assets are grouped on the basis of financial asset previously recognised in profit similar credit risk characteristics (i.e. on the basis or loss - is removed from equity and of the Group's grading process that considers asset recognised in the income statement. Impairment losses type, industry, geographical location, collateral recognised in the income statement on equity type, past-due status and other relevant factors). instruments are not reversed through the income Those characteristics are relevant to the estimation statement. If, in a subsequent period, the fair value of future cash flows for groups of such assets of a debt instrument classified as available by being indicative of the debtors' ability to pay all for sale increases and the increase can be objectively amounts due related to an event occurring after the impairment loss was recognised in profit or loss, the according to the contractual terms of the assets being impairment loss is reversed through the income evaluated. statement. 7 Impairment of financial assets Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the The fair value of the liability portion of a contractual cash flows of the assets in the convertible bond is determined using a market interest Group and historical loss experience for assets with rate for an equivalent non-convertible bond. This credit risk characteristics similar to those in the amount is recorded as a liability on an amortised cost Group. Historical loss experience is adjusted on the basis until extinguished on conversion or maturity of basis of current observable data to reflect the bonds. The remainder of the proceeds is allocated the effects of current conditions that did not affect to the conversion option. the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. This information is provided by RNS The company news service from the London Stock Exchange

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