IPRU-INV 9.3 CALCULATING INITIAL CAPITAL

A firm's initial capital consists of the sum of the following items:

1. (1)

   ordinary share capital which is fully paid;

2. (2)

   perpetual non-cumulative preference share capital which is fully paid;

3. (3)

   share premium account;

4. (4)

   reserves excluding revaluation reserves;

5. (5)

   audited retained earnings;

6. (6)

   externally verified interim net profits;

7. (7)

   partners' capital;

8. (8)

   eligible LLP members' capital (in accordance with the provisions of IPRU-INV Annex A); and

9. (9)

   sole trader capital.

A firm may include preference share capital in initial capital only where any coupon on it is not cumulative, and the firm is under no obligation to pay a coupon in any circumstances.

When calculating initial capital, a firm may include its audited retained earnings only after making the following adjustments:

1. (1)

   a firm must not recognise the fair value reserves related to gains or losses on cash flow hedges of financial instruments measured at amortised cost;

2. (2)

   in respect of a defined benefit occupational pension scheme, a firm must derecognise any defined benefit asset;

3. (3)

   a firm must not include any unrealised gains from investment property (these should be reported as part of revaluation reserves);

4. (4)

   where applicable, a firm must deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but excluding from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

A firm may include interim net profits or current account when calculating initial capital to the extent that they have been verified by the firm's external auditor and are net of any foreseeable tax, dividend and other appropriations.

When calculating initial capital, a firm may includes its partners' capital only after making the following adjustments:

1. (1)

   a firm must not recognise the fair value reserves related to gains or losses on cash flow hedges of financial instruments measured at amortised cost;

2. (2)

   in respect of a defined benefit occupational pension scheme, a firm must derecognise any defined benefit asset;

3. (3)

   where applicable, a firm must deduct any asset in respect of deferred acquisition costs and add back in any liability in respect of deferred income (but excluding from the deduction or addition any asset or liability which will give rise to future cash flows), together with any associated deferred tax.

For the calculation of initial capital, a firm may substitute for a defined benefit liability the firm's deficit reduction amount. The election must be applied consistently in respect of any one financial year.