(a) Basis of preparation
The accounts have been prepared in accordance with applicable accounting standards and decisions of the Urgent Issues Task Force under the historical cost accounting convention. In addition the accounts have been prepared in accordance with the special provisions of the Companies Act 1985 applicable to banking companies and banking groups and in accordance with the Statements of Recommended Practice (SORP's) issued by the British Bankers' Association.

(b) Basis of consolidation
The Group accounts consolidate the accounts of the Company and its subsidiary undertakings, and other companies which are considered by the Directors to be quasi-subsidiaries as defined in Financial Reporting Standard No. 5 'Reporting the Substance of Transactions', all of which have co-terminous accounting periods. In addition the accounts comprise the appropriate share of profits and losses of its associates and joint ventures.Where subsidiaries have been acquired during a period, their results have been consolidated in the Financial Statements from the date of acquisition.

(c) Goodwill
Goodwill arising on the acquisition of subsidiary undertakings and joint ventures represents the difference between the fair value of the consideration and the aggregate of the fair values of the separate net assets acquired. Goodwill is included within intangible fixed assets or investments in joint ventures and is amortised over a period appropriate to each acquisition, not exceeding 20 years.

Any unamortised goodwill on disposal of a subsidiary undertaking or joint venture is charged against the sale proceeds.

Impairment reviews are conducted at the end of the first full year after the year of acquisition in accordance with accounting standards or when events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable or the amortisation period may have reduced.Any shortfalls are added to the amortisation of goodwill in the year of the impairment review.

(d) Taxation
The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Full provision is made for deferred taxation in accordance with Financial Reporting Standard No.19 'Deferred Tax'.

(e) Fixed assets and depreciation
The cost of additions and major alterations to land and buildings, equipment, fixtures and motor vehicles is capitalised.

Depreciation is provided so as to write off the cost, less the estimated residual value, of tangible fixed assets over their useful economic lives.

Depreciation is provided as follows:

• freehold and long leasehold buildings at 2% per annum on a straight-line basis;
• short leasehold properties are amortised over the remainder of the lease up to 50 years;
• fixtures and fittings at 20% per annum on a straight-line basis;
• motor vehicles at 25% per annum on a reducing balance basis;
• computer equipment at rates ranging from 20% to 33% per annum on a straight-line basis;
• software licences of an enduring nature at 33% per annum on a straight-line basis;
• internet development costs for transactional based websites at 50% per annum on a straight-line basis; and
• other equipment and major alterations to buildings at 10% per annum on a straight-line basis.

Any impairment in the value of freehold and long leasehold land and buildings is dealt with through the Profit and Loss Account as it arises.

(f) Leasing
Rentals under operating leases are charged to administrative expenses in the year in which the expenditure is incurred. Assets acquired under finance leases are capitalised at fair value at the start of the lease, with the corresponding obligations being included in other liabilities.The finance lease costs charged to the Profit and Loss Account are based on a constant periodic rate as applied to the outstanding liabilities.

(g) Debt securities
Debt securities intended for use on a continuing basis in the Group's activities are classified as investment securities and are stated at cost as adjusted for the amortisation of any premiums or discounts arising on acquisition, which are amortised over the period to redemption on a level yield basis.Any such amortisation is included in interest receivable. Provision is made for any impairment in value. Debt securities are accounted for on a trade date basis. Each investment in a structured investment vehicle ('SIV') is individually reviewed to ensure the accounting treatment is appropriate.

Where the SIV is considered to have minimal management discretion, the Group recognises its share of the SIV's underlying assets and liabilities. In other cases they are treated as debt securities. Interest on these vehicles includes a margin above the coupon rate to reflect profits earned by the underlying investment.

(h) Pension and post retirement benefits
The Group charges pension and other post retirement costs against profits in accordance with Statement of Standard Accounting Practice 24 'Accounting for Pension Costs' using an actuarial method and assumptions designed to provide for the anticipated costs over the remaining service lives of the employees in the scheme.This method ensures that the regular costs represent a relatively equal proportion of the current and expected future pensionable payroll in the light of current actuarial assumptions.Any SSAP 24 prepayment or liability is included in prepayments and accrued income or other liabilities as appropriate, with all charges to the Profit and Loss Account, including interest, in administrative expenses.

Variations from regular cost are spread over the remaining service lives of current employees in the scheme.

(i) Provisions for bad and doubtful debts
Provisions for losses on residential loans and advances to customers are made throughout the year and at the year-end.The basis for determining the level of provisions is to provide for all reasonably foreseeable losses that exist in the portfolio at the date of calculation.

Specific provisions for residential lending are created for cases with arrears to debt ratios of 2.5% or greater.The potential shortfall is calculated from the outstanding mortgage debt plus costs of re-possession less the estimated property value with a discount valuation factor for forced sale.The potential shortfall for each case is adjusted to reflect the probability of loss.This adjustment reflects historical performance except for specialist lending where, because this area of lending is not yet mature, probabilities of loss are predicted by reference to the credit scoring system.

The specific provision for properties in possession is based on the contracted/agreed sale price or sale valuation with adjustment for expenses of sale and income from insurance policies. Specific provisions for the commercial portfolio are calculated on all cases three or more months in arrears. A probability of loss, dependent on the severity of the arrears, is applied on a case-by-case basis.

General provisions are raised to cover losses which are judged to be present in loans and advances at the balance sheet date, but which have not been specifically identified as such.The general provision also takes into account the economic climate in the market and the level of security held. Loans and advances are written off where there is no realistic prospect of recovery.

Interest charged to all residential and commercial loans which are in arrears or in possession, and where the interest is expected to be irrecoverable, is suspended from other interest receivable and similar income.

(j) Debt and capital instrument issue costs
These are amortised over the period to the instruments' maturity at a constant rate and included in interest payable.The unamortised amounts are deducted from the relevant liability. In the event of early repayment the unamortised issue cost is charged to interest payable.

(k) Interests in joint ventures
Joint ventures are undertakings in which the Group holds an interest on a long-term basis and are jointly controlled by the Group and one or more other venturers under a contractual agreement.

The Group's share of profits less losses from joint ventures is included in the Profit and Loss Account using the gross equity method.The holding value of joint ventures in the Consolidated Balance Sheet is calculated by reference to the Group's share of the gross assets, including Group loans to the joint venture and any related unamortised goodwill, less its share of the gross liabilities, as shown by the most recent accounts available.

(l) Foreign currencies
Assets and liabilities denominated in foreign currency that have been hedged by means of matching foreign currency contracts, are translated at the exchange rate inherent in those contracts. Where assets and liabilities denominated in foreign currency have not been hedged, they are translated at the rate of exchange at the balance sheet date. Any gains or losses are included in interest receivable or payable depending on the underlying instrument being an asset or liability.

(m) Mortgage indemnity insurance
Charges to borrowers in respect of high loanto- value advances are paid to a wholly owned captive insurance company. In the Group accounts these charges are treated as deferred income and deducted from loans and advances to customers.The income deferred is released to interest receivable on a level yield basis over the life of the mortgage.

(n) Incentives to customers
Cashbacks, interest discounts and other incentives to customers are amortised against interest receivable and similar income or interest payable over the early redemption clawback period of these products commencing from the date of completion. Unamortised incentives are held within prepayments and accrued income and other liabilities.

(o) Acquisition of mortgage portfolios
Premiums paid on the acquisition of mortgage portfolios are held within other assets and amortised over the estimated economic life of the underlying asset.Where such mortgage portfolios are acquired as part of a company purchase, the resulting charge is included within administrative expenses.Where such mortgage portfolios are acquired as a result of a specific asset purchase, the resulting charge is deducted from interest receivable.

(p) Loans and advances to customers subject to non-recourse funding
Loans and advances to customers subject to non-recourse funding are included in the Consolidated Balance Sheet using the linked presentation method. Such balances are stated at book value.The profit on ordinary activities before taxation is included within other operating income in the Consolidated Profit and Loss Account.The same provisioning policies as stated in note (i) above apply to these loans.

(q) Off-balance sheet financial instruments
Off-balance sheet financial instruments are entered into by the Group for hedging purposes to reduce the risks arising on transactions entered into in the normal course of business.The effectiveness of this hedging is reviewed on a regular basis.

The income or expense arising from offbalance sheet financial instruments entered into for hedging purposes is recognised in the accounts in accordance with the accounting treatment of the underlying transaction or transactions being hedged.

Where off-balance sheet instruments are terminated prior to the underlying hedged transaction terminating, any profits or losses realised upon early termination are deferred and matched against the income or expenditure arising from the underlying hedged transaction over the remaining period of the hedging instrument. If the underlying hedged transaction is extinguished or terminated, the remaining unamortised gains or losses on the hedge are recognised in the Profit and Loss Account immediately.

The Group does not undertake transactions for trading or speculative purposes and consequently all off-balance sheet financial instruments are classified as hedging contracts.

(r) Income recognition

• Interest income is recognised in the Profit and Loss Account as it accrues except where interest is suspended as set out in accounting policy note (i) above.
• Commercial lending fees charged in lieu of interest are recognised in the Profit and Loss Account as interest receivable on a level yield basis over the discount period of the interest foregone.
• Residential lending fees and commissions receivable are recognised in the Profit and Loss Account on receipt within Fees and Commissions Receivable.
• Commission receivable from Regulated Financial Services products is recognised as income within Fees and Commissions Receivable when the policy goes 'On Risk', net of any provision for repayment in the event of termination by the customer.
• Procurement Fees from sale of mortgages are recognised when the house sale completes and the mortgage becomes active.
• Client Fees are recognised on the exchange of contract for the relevant property.
• Estate Agency fees on sales of new and second hand homes are recognised on exchange of contracts.

2. On-going administrative expenses

Statutory audit fees paid by the Company were £0.5m (2002: £0.4m).

3. Exceptional administrative expenses


The exceptional costs in 2002 in respect of the joint venture related principally to software write-off and redundancy costs relating to disengagement from the ALLTEL Mortgage Solutions joint venture.The exceptional re-organisation costs in 2002 comprised principally staff redundancy costs resulting from a rationalisation of administrative support functions, including further outsourcing of the IT function to IBM.

4. Staff costs and number
The full time equivalent is based on the average hours worked by employees in the year.

5. Directors' remuneration
Full details of the Directors' remuneration are set out in the Directors' Remuneration Report, including details of the long-term incentive schemes and pension entitlements. Details of Directors' share interests in Bradford & Bingley plc are set out in the Directors' Report.

6. Tax on profit on ordinary activities
There are no adjustments in respect of previous periods included within foreign tax.

During the year, the Inland Revenue agreed that certain costs of conversion to listed company status were a deductible expense for tax purposes. As a result of this agreement, an exceptional tax credit of £22.9m has been recognised in these accounts.

The 2003 current tax charge of £40.7m (2002: £68.3m) equates to an effective rate of 15.4% (2002: 28.4%).This is reconciled to the standard UK rate as follows:

7. Profit on ordinary activities after tax
The profit after tax of the Company attributable to the shareholders is £151.4m (2002: £162.3m). As permitted by section 230 of the Companies Act 1985, the Company's Profit and Loss Account has not been presented in these Financial Statements.

8. Dividends

9. Earnings per share

Shares acquired by employee share trusts which are held on the Consolidated Balance Sheet have been excluded from the calculation of earnings per share, as under Financial Reporting Standard No. 14 they are treated as if they are cancelled until such time as they vest unconditionally to the employee.

The earnings, net of corporation tax, used in calculating the basic, diluted and excluding exceptionals earnings per share figures were as follows:
The earnings per share figure excluding exceptionals is reported in order to provide shareholders with a performance measure excluding the effect of exceptionals.