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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Debt cap: financial services groups: income statement of a financial services group: example

Part of an income statement of a fictitious financial services group

The following is an extract from an income statement from the consolidated financial statements of a fictitious financial services group and shows the make up of the worldwide trading income and which amounts are in respect of qualifying activities.

The example is very straightforward, in that the income from qualifying activities can be identified just from the figures reported in the income statement.

Intra-group transactions should not be included in these figures because the accounts show the consolidated position for the group.

In practice groups will very likely have to breakdown the headline figures reported in the income statement to establish whether particular amounts of income arise from qualifying activities.

Consolidated income statement    
     
For the year ended 31 December (in million of £) 2012 2011
Continuing operations    
Interest income 90,000 70,000
Interest expense (75,000) (56,000)
Net interest income 15,000 14,000
Fee and commission income 10,000 8,000
Fee and commission expenses (2,000) (1,000)
Net fee and commission income 8,000 7,000
Gross insurance premiums written 20,000 15,000
Insurance premiums ceded to reinsurers (1,000) (1,000)
Premiums written net of re-insurance 19,000 14,000
Net change in provision of unearned premiums 500 (500)
Net written insurance premiums 19,500 13,500
Net trading income 4,000 1,500
Net investment income 3,000 2,500
Other income 2,000 1,000
Total income 51,500 39,500
Insurance claims (16,000) (12,000)
Total income net of insurance claims 35,500 27,500
Impairment charges (10,000) (8,000)
Net income 25,500 19,500
Staff costs (5,000) (4,000)
General and administrative expenses (4,000) (3,000)
Depreciation of property, plant and equipment (1,000) (1,000)
Amortisation of intangible assets (1,000) (1,000)
Operating expenses (11,000) (9,000)
Share of profits in associates and joint ventures 2,000 1,000
Profit on disposal of subsidiaries, associates and JVs   500
Gains on acquisition 500  
Profit before tax 17,000 12,000

The bold entries show the amounts that are included in the calculation of the worldwide trading income.

For 2011 the group had worldwide trading income of £98m, of which, assuming that the net trading income is from qualifying activities, at least £94.5m is likely to be derived from qualifying activities. The £94.5m is the total of the gross interest income, gross fee and commission income, gross insurance premiums written and net trading income.

For 2012 the group had worldwide trading income of £129m, of which, again assuming that the net trading income is from qualifying activities, at least £124m is likely to be derived from qualifying activities. The £124m is the total of the gross interest income, gross fee and commission income, gross insurance premiums written and net trading income.

In both years it is likely that the group will be a qualifying financial services group.