Notes to the Financial Statements

for the year ended 31 December 2004

3 Earnings And Earnings Per Share

Basic earnings per share is calculated based upon the profit after tax attributable to equity shareholders.

The directors’ view is that adjusted operating earnings per share, derived from adjusted operating profit or loss after tax and minority interests, provides a better indication of the underlying performance of the Group. For life assurance and general insurance businesses, adjusted operating profit is based on a long term investment return and includes investment return on own shares held in policyholders’ funds. For banking business, adjusted operating profit excludes the loss on disposal of investment in Dimension Data Holdings plc, restructuring and integration costs and the transitional impact of the change in credit provisioning methodology. For all businesses, adjusted operating profit excludes goodwill amortisation and impairment, and fines and penalties.

Adjusted operating earnings per share is similarly based, but is stated after tax and minority interests, with the calculation of the weighted average number of shares including own shares held in policyholders’ funds.

A table reconciling operating profit on ordinary activities after tax and minority interests to adjusted operating profit after tax and minority interests is set out below:

			£m
	Notes	Year to 31 December 2004	Year to 31 December 2003
Profit on ordinary activities after tax and minority interests		484	273
Goodwill amortisation and impairment net of minority interests		83	128
Loss on disposal of investment in Dimension Data Holdings plc net of tax and minority interests		-	3
Restructuring and integration costs net of tax and minority interests	5(d)(ii )	8	13
Change in credit provisioning methodology net of tax and minority interests	5(d)(iii )	-	31
Fines and penalties net of tax	11	41	-
Short term fluctuations in investment returns net of tax and minority interests		(162)	(95)
Investment return adjustment for own shares held in policyholders' funds	5(b)(iv)	94	(12)
Non-operating items net of tax and minority interests	17(b)	26	32
Adjusted operating profit after tax and minority interests		574	373

		p
	Year to 31 December 2004	Year to 31 December 2003
Basic earnings per share after tax and minority interests	14.1	8.0
Impact of inclusion of own shares held in policyholders' funds in weighted average number of shares	(1.2)	(0.7)
	12.9	7.3
Goodwill amortisation and impairment net of minority interests	2.2	3.4
Loss on disposal of investment in Dimension Data Holdings plc net of tax and minority interests	-	0.1
Restructuring and integration costs net of tax and minority interests	0.2	0.3
Change in credit provisioning methodology net of tax and minority interests	-	0.8
Fines and penalties net of tax	1.1	-
Short term fluctuations in investment return net of tax and minority interests	(4.3)	(2.5)
Investment return adjustment for own shares held in policyholders' funds	2.5	(0.3)
Non-operating items net of tax and minority interests	0.7	0.9
Adjusted operating earnings per share after tax and minority interests	15.3	10.0

Basic earnings per share is calculated by reference to the profit on ordinary activities after tax and minority interests of £484 million (R5,704 million) for the year ended 31 December 2004 (2003: £273 million (R3,381 million)) and a weighted average number of shares in issue of 3,432 million (2003: 3,411 million). The weighted average number of shares is calculated as follows:

		millions
	At 31 December 2004	At 31 December 2003
Total weighted average number of shares in issue	3,844	3,824
Shares held in ESOP Trusts	(96)	(97)
Adjusted weighted average number of shares	3,748	3,727
Shares held in policyholders' funds	(316)	(316)
Weighted average number of shares	3,432	3,411

In accordance with UITF Abstract 37 “Purchases and Sales of Own Shares”, shares in the Company held in policyholders’ funds are not included in the weighted average number of shares used in basic earnings per share calculations. No adjustment is required in respect of UITF Abstract 38 “Accounting for ESOP Trusts” as the shares in the Company held in ESOP Trusts have already been excluded from the calculation as, in the majority of cases, the ESOP Trusts have waived their rights to dividends on these shares.

The diluted earnings per share calculation reflects the issue of shares in respect of the ESOP Trusts and the US Dollar Guaranteed Convertible Bond.