CMCOB 7.3 Calculation of prudential resources

1

Share capital

This must be fully paid and may include:

(1)

ordinary share capital; or

(2)

preference share capital (excluding preference shares redeemable by shareholders within two years).

2

Capital other than share capital (for example, the capital of a sole trader, partnership or limited liability partnership)

The capital of a sole trader is the net balance on the firm’s capital account and current account. The capital of a partnership is the capital made up of the partners’:

(1)

capital account, that is the account:

(a)

into which capital contributed by the partners is paid; and

(b)

from which, under the terms of the partnership agreement, an amount representing capital may be withdrawn by a partner only if:

(i)

the person ceases to be a partner and an equal amount is transferred to another such account by the person’s former partners or any person replacing that person as their partner; or

(ii)

the person ceases to be a partner and an equal amount is transferred to another such account by the person’s former partners or any person replacing that person as their partner; or

(iii)

the partnership is otherwise dissolved or wound up; and

(2)

current accounts according to the most recent financial statement.

For the purpose of the calculation of capital resources in respect of a defined benefit occupational pension scheme:

(3)

a firm must derecognise any defined benefit asset;

(4)

a firm may substitute for a defined benefit liability the firm’s deficit reduction amount, provided that the election is applied consistently in respect of any one financial year.

3

Reserves (Note 1)

These are, subject to Note 1, the audited accumulated profits retained by the firm (after deduction of tax, dividends and proprietors’ or partners’ drawings) and other reserves created by appropriations of share premiums and similar realised appropriations. Reserves also include gifts of capital, for example, from a parent undertaking.

For the purposes of calculating capital resources, a firm must make the following adjustments to its reserves, where appropriate:

(1)

a firm must deduct any realised gains or, where applicable, add back in any unrealised losses on debt instruments held, or formerly held, in the available-for-sale financial assets category;

(2)

a firm must deduct any unrealised gains or, where applicable, add back in any unrealised losses on cash flow hedges of financial instruments measured at cost or amortised cost;

(3)

in respect of a defined benefit occupational scheme:

(a)

a firm must derecognise any defined benefit asset;

(b)

a firm may substitute for a defined benefit liability the firm’s reduction amount, provided that the election is applied consistently in respect of any one financial year.

4

Interim net profits (Note 1)

If a firm seeks to include interim net profits in the calculation of its capital resources, the profits have, subject to Note 1, to be verified by the firm’s external auditor, net of tax, anticipated dividends or proprietors’ drawings and other appropriations.

5

Revaluation reserves

Revaluation reserves such as reserves arising from the revaluation of land and buildings, including any net unrealised gains for the fair valuation of equities held in the available-for-sale financial assets category.

6

Subordinated loans/debt

Subordinated loans/debt must be included in capital on the basis of the provisions in this chapter that apply to subordinated loans/debts.

Note:

1

Reserves must be audited and interim net profits, general and collective provisions must be verified by the firm’s external auditor unless the firm is exempt from the provisions of Part VII of the Companies Act 1985 (section 249A (Exemption from audit) or, where applicable, Part 16 of the Companies Act 2006 (section 477 (Small companies; Conditions for exemption from audit)) relating to the audit of accounts.

1

Investments in own shares

2

Investments in subsidiaries (Note 1)

3

Intangible assets (Note 2)

4

Interim net losses (Note 3)

5

Excess of drawings over profits for a sole trader or a partnership (Note 3)

Notes:

1

Investments in subsidiaries are valued at the full balance sheet value.

2

Intangible assets are the full balance sheet value of goodwill, capitalised development costs, brand names, trademarks and similar rights and licences.

3

The interim net losses in row 4, and the excess of drawings in row 5, are in relation to the period following the date as at which the prudential resources are being computed.