Explanatory note

This Order specifies that various resources of a building society which appear in its annual accounts or accounting records are to be treated as capital resources to be aggregated with reserves for the purpose of the first criterion of prudent management (maintenance of adequate reserves and other designated capital resources) under section 45(3) of the Building Societies Act 1986. The resources designated by this Order are verified interim profit, internally audited interim profit, revaluation reserves and general provisions for bad debt.

Aggregation of a society’s internally audited interim profit, revaluation reserve, general provisions for bad debt, and supplementary capital (as defined in the Building Societies (Supplementary Capital) Order 1988) is to be made only to the extent that the aggregate of those resources does not exceed the sum of the society’s primary capital. Primary capital is defined as a society’s reserves and verified interim profit plus any deferred shares falling to be aggregated under other Orders made under section 45(5), less any intangible assets and any interim loss.

Where a society has subsidiary undertakings, the calculation of the extent of aggregation of capital resources is to be made on the basis of the consolidated figures in its group accounts. Subsidiary undertakings are defined, by reference to the Building Societies Act 1986 (Modifications) Order 1991, in the same terms as for company accounts.

The Order gives effect, in relation to the capital resources of building societies, to the provisions of the European Communities Council Directive on the own funds of credit institutions (89/299/EEC) (OJ No L124, 5.5.89, p. 16) specifying the forms of capital which may be taken into account when calculating the own funds of a credit institution and imposing a limit on the extent to which capital other than primary capital may be counted as own funds for solvency and prudential purposes.