Notes to the financial statements

1. Basis of preparation

(a) Basis of preparation – Group and Company

The financial statements have been prepared in accordance with IFRS adopted by the EU, IFRIC interpretations and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS and therefore comply with Article 4 of the EU IAS Regulation. The financial statements have also been prepared under the historical cost convention, as modified to include the fair value of certain financial instruments in accordance with IFRS. The financial statements are prepared in sterling, which is the functional currency of the parent company, ICAP plc, and presented in millions.

The Group maintains a columnar format for the presentation of its consolidated income statement. This enables the Group to continue its practice of improving the understanding of its results by presenting profit for the year before amortisation and impairment of intangibles arising on consolidation and exceptional items. This is the profit measure used to calculate adjusted EPS and is considered to be the most appropriate as it better reflects the Group’s underlying cash earnings. Profit before amortisation and impairment of intangibles arising on consolidation and exceptional items is reconciled to profit before tax on the face of the income statement.

Items which are of a non-recurring nature and material, when considering both size and nature, are disclosed separately to give a clearer presentation of the Group’s results. These are shown as “exceptional items” on the face of the income statement.

The Company has taken advantage of section 230 of the Companies Act 1985 not to present its own income statement.

Group

Intangible assets arising on consolidation represent goodwill and other separately identifiable intangible assets on business combinations since 1 April 2004. The amortisation of separately identifiable intangible assets and any impairment of goodwill together with the unwind of related deferred tax liabilities are included in the income statement within the column “amortisation and impairment of intangibles arising on consolidation”.

Prior-year adjustment – Group

Following a review of the accounting for recent acquisitions, the Group has determined that additional deferred tax liabilities should have been recognised in respect of temporary differences arising on certain intangible assets. The consequence of recognising such deferred tax liabilities is to recognise goodwill of an equivalent amount. Comparative amounts for the prior year have been restated.

The impact of the change on the consolidated income statement for the year ended 31 March 2008 is to reduce the taxation expense and hence increase profit for the year by £12m: both basic and diluted EPS increased by 1.9p as a result. The impact on the consolidated balance sheet as at 31 March 2008 is to increase goodwill by £116m, increase investment in associates by £2m, increase deferred tax liabilities by £95m and increase retained earnings by £23m. The impact on the opening balances as at 1 April 2007 is to increase net assets and retained earnings by £11m. The changes have no impact on the Group’s cash flow or on profit before tax before amortisation and impairments on intangible assets arising on consolidation and exceptional items.

Prior-year adjustment – Company

The net assets of the employee share trusts, which hold shares to satisfy employee share options, have been deconsolidated from the results of the Company to better reflect the relationship between the Company and the trusts. Previously the company reported the shares and cash owned by the trust as if they belonged to the Company. This has been amended to show the loan that exists between the entities, rather than the assets themselves. The effect on the net assets of the company as at 31 March 2008 is to increase retained earnings by £27m and to increase other receivables by £27m and at 1 April 2007 to increase retained earnings by £15m. There is no effect on the income statement of the Company. There is no overall effect on the results or net assets of the Group, as the results of the trusts are fully consolidated in the Group’s financial statements.

(b) Basis of consolidation – Group

The Group’s consolidated financial statements include the results and net assets of the Company, its subsidiaries and the Group’s share of joint ventures and associates.

An entity is regarded as a subsidiary if the Group has control over its strategic, operating and financial policies and intends to hold the investment on a long-term basis for the purpose of securing a contribution to the Group’s activities.

The results of companies acquired during the year are included in the Group’s results from the effective date of acquisition. The results of companies disposed of during the year are included up to the effective date of disposal.

The Group adopts the parent company model of accounting for minority interests. Purchases from minority interests result in goodwill being recognised, represented by the difference between any consideration paid and the relevant share of the carrying value of net assets acquired.

Where the Group has written a put option over shares held by a minority, the Group derecognises the minority interest and instead recognises a contingent deferred consideration liability for the estimated amount likely to be paid to the minority on exercise of those options. The residual amount, representing the difference between any consideration paid/payable and the minority’s share of net assets, is recognised as goodwill. Movements in the estimated liability after initial recognition are recognised as either goodwill or within the income statement, depending on whether the contract was written as part of a business combination.

A joint venture is an entity in which the Group has an interest and, in the opinion of the directors, exercises joint control over its operating and financial policies. An interest exists where an investment is held on a long-term basis for the purpose of securing a contribution to the Group’s activities. Joint ventures are proportionately consolidated, whereby the Group’s income statement and balance sheet include the Group’s share of the income and assets on a line-by-line basis.

An associate is an entity in which the Group has an interest and, in the opinion of the directors, can exercise significant influence, but not control, over its operating and financial policies. An interest exists where an investment is held on a long-term basis for the purpose of securing a contribution to the Group’s activities. Significant influence generally exists where the Group holds more than 20% and less than 50% of the shareholders’ voting rights. Associates are accounted for under the equity method whereby the Group’s income statement includes its share of their profits and losses and the Group’s balance sheet includes its share of their net assets.

(c) Segmental analysis

Primary segment – geographic

The Group regards its primary reporting segment as geographic as this is substantially the basis on which it manages its operations. The three geographic business segments are the Americas, EMEA and Asia Pacific.

Secondary segment – business

The Group’s secondary segmentation is by business type – voice, electronic and information divisions.

The voice division represents trades concluded directly by the Group’s staff for interest rates, credit, FX, commodities, equities and emerging market products. The electronic division represents trades concluded via electronic trading platforms and post-trade services. The information division represents the sale of market data and research services.

(d) Recent accounting developments

IFRIC14 IAS19 “The Limit on Defined Benefit Asset, Minimum Funding Requirements and their Interaction” was adopted by the Group during the year. There has been no impact on the results or net assets of the Group or Company as a result of this adoption.

Amendments to IAS39 “Financial Instruments: Recognition and Measurement” and IFRS7 “Financial Instruments: Disclosures” permit the reclassification of certain non-derivative financial assets out of fair value through the income statement category in periods beginning after July 2008. These amendments will have no effect on the results and net assets of the Group or Company.

As at the date of approval of these financial statements, the following Standards and Interpretations were in issue but not yet effective. The Group has not applied these Standards and Interpretations in the preparation of these financial statements:

IFRS8 “Operating Segments” applies to accounting periods beginning after 1 January 2009. This standard replaces IAS14 “Segment Reporting” and will not affect the results of the Group but will require a change in the disclosure of segmental information. The Group will adopt this standard from 1 April 2009.

Amendments to IFRS2 “Share Based Payment” clarify the vesting and service conditions of certain employee share option schemes and applies to periods beginning after 1 January 2009. The Group will adopt this amendment from 1 April 2009, and cancellations of share options by employees will be treated in the same way as a cancellation by the Group after that date. This amendment is not expected to have a material effect on the results and net assets of the Group or Company.

Amendments to IAS1 “Presentation of Financial Statements” apply to accounting periods beginning after 1 January 2009 and the Group will adopt these changes from the 1 April 2009. These amendments will not have any effect on the results and net assets of the Group or Company, but may change the presentation of the results.

Amendments to IFRIC9 IAS39 “Financial Instruments: Recognition and Measurement”, IFRS7 “Financial Instruments: Disclosures”, IFRS3 “Business Combinations”, and IAS27 “Consolidated and Separate Financial Statements” have not yet been endorsed by the EU. The impact on the Group’s financial statements of the future adoption of the Standards is still under review.

It is expected that the adoption of IFRS3 revised will alter the manner in which future acquisitions are recognised. For example all movements to contingent deferred consideration subsequent to initial recognition are required to be re-measured through the income statement, and costs incurred as part of the transaction are required to be expensed through the income statement. Previously both these amounts have been recognised on the balance sheet. IAS27 revised requires that all transactions with minorities are recognised in equity instead of movements in goodwill or within the income statement. The Group expects that this will not have an effect on the current results and net assets of the Group, but that prospectively it will depend on the nature of transactions undertaken by the Group.

A number of other interpretations and amendments to existing standards have been made by the International Accounting Standards Board and IFRIC but are not considered relevant to the Group’s or Company’s operations.