3rd May 2005 12:00
Old Mutual PLC03 May 2005 Old Mutual plc ISIN: GB0007389926 JSE Share code: OML NSX share code: OLM Issuer code: OLOML Presentation to investors and analysts on International Financial ReportingStandards Old Mutual plc ("the Group") is today briefing analysts and investors on the key impacts resulting from the adoption of International Financial Reporting Standards ("IFRS"). The transition to IFRS results in a small increase in both operating profits and earnings per share. Shareholders' equity will remain broadly unchanged as a result of the transition to IFRS. As expected, the most significant impact will be on basic EPS which is primarily due to the reversal of goodwill amortisation on the first-time adoption of IFRS. The briefing will commence in Johannesburg at 4pm SA time (3pm UK time, 10am Eastern US time) and will also be available via a live webcast on the website: http://www.oldmutual.com. An archived version of the webcast and slides will be available on the website later this afternoon and will be available for the next month. A telephone dial- in will also be available in order to participate in the Q&A at the end of the briefing: SA: Toll-free 0800 200 648 UK: Toll-free 0800 917 7042 US: Toll-free 1800 860 2442 The briefing will show that, while some reported figures may alter as a result of adopting IFRS, the business fundamentals and mechanics will not change. The briefing will also cover the impact of IFRS on the recent BEE deal. The full presentation will be available to download on the website approximately 30 minutes before the start of the briefing. A copy of the restatement of financial information for the year ended 31 December 2004 and six months ended 30 June 2004 is attached. 3 May 2005 ENQUIRIES: Old Mutual plc UK Investor Relations: Malcolm Bell (UK) + 44 (0) 20 7002 7166 Media Relations: Miranda Bellord (UK) + 44 (0) 20 7002 7133 Old Mutual plc SA Investor Relations: Deward Serfontein (SA) +27 11 523 9616 Media Relations: Nad Pillay (SA) +27 11 523 9612 For further information about Old Mutual plc visit www.oldmutual.com OLD MUTUAL PLC RESTATEMENT OF FINANCIAL INFORMATION FOR THE YEAR ENDED 31 DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004 UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS") 3 MAY 2005 INTRODUCTION From 2005 onwards the Group will be required to prepare its consolidated financial statements in accordance with IFRS* as adopted by the European Union ("EU"). Previously these were prepared in accordance with UK Generally Accepted Accounting Practice ("UK GAAP"). This change applies to all financial reporting for accounting periods beginning on or after 1 January 2005 and, consequently, the Group's first IFRS financial statements will be for the year ending 31 December 2005. The date for transition to IFRS is 1 January 2004, this representing the start of the earliest period of comparative information. To explain how the Group's reported performance and financial position are affected by the change to IFRS, the Group has restated information previously published under UK GAAP to the equivalent basis under IFRS. This restatement follows the guidelines** set out by the Committee of European Securities Regulators ("CESR") applicable under IFRS 1, First-time Adoption of International Financial Reporting Standards ("IFRS 1"). This document includes the following: • Summary Consolidated Income Statements restated under IFRS for the six months ended 30 June 2004 and the year ended 31 December 2004 and under UK GAAP for the year ended 31 December 2004; • Consolidated Income Statements for the six months ended 30 June 2004 and the year ended 31 December 2004; • Consolidated Balance Sheets at 1 January 2004, 30 June 2004 and 31 December 2004; • Reconciliation of Income Statement for the six months ended 30 June 2004 and the year ended 31 December 2004; • Reconciliation of Equity at 1 January 2004, 30 June 2004 and 31 December 2004; • Basis of preparation and explanation of transitional arrangements and material adjustments; • Segmental analysis of operating performance for the six months ended 30 June 2004 and the year ended 31 December 2004; • Reconciliation of movements in consolidated equity shareholders' funds for the six months ended 30 June 2004 and the year ended 31 December 2004; • Description of the accounting policies adopted by the Group for the period from 1 January 2004. The basis of preparation of this financial information is explained on page 11. It is important to note that this financial information has been prepared on the basis of IFRSs expected to be applicable at 31 December 2005. These are subject to ongoing review and endorsement by the EU or possible amendment by interpretative guidance from the IASB and therefore may be subject to change. The special purpose auditors report from KPMG Audit Plc in connection with the work they have performed on the preliminary financial information for the year ended 31 December 2004 can be found on page 39. * IFRS refers to the application of International Accounting Standards and International Financial Reporting Standards. ** European Regulation on the application of IFRS in 2005: "Recommendation for additional guidance regarding the transition to IFRS" - December 2003 (CESR/03-323e) INDEX SUMMARY CONSOLIDATED INCOME STATEMENT .......................................5 CONSOLIDATED INCOME STATEMENT................................................7 CONSOLIDATED BALANCE SHEET ..................................................8 NOTES TO THE RESTATEMENT DOCUMENT ...........................................9 RECONCILIATION OF INCOME STATEMENT .........................................9 RECONCILIATION OF EQUITY...................................................10 BASIS OF PREPARATION ......................................................11 MATERIAL ADJUSTMENTS ......................................................13 FOREIGN CURRENCIES ........................................................16 SEGMENT INFORMATION........................................................16 RECONCILIATION OF MOVEMENTS IN CONSOLIDATED EQUITY SHAREHOLDERS' FUNDS ....21 ACCOUNTING POLICIES .......................................................25 AUDITORS' REPORT............................................................39 SUMMARY CONSOLIDATED INCOME STATEMENT The following table summarises the Group's results in the Consolidated Income Statement. Adjusted operating profit represents the Directors' views of the underlying performance of the Group. This summary will not form part of the audited IFRS financial statements for 31 December 2005. UK GAAP** IFRS IFRS GBPm Year to Year to Six months to 31 Dec 2004 31 Dec 2004 30 June 2004 Africa Long term business 490 509 251 Asset management 53 54 22 Banking 177 241 54 General insurance 89 101 52 809 905 379 North America Long term business 96 97 40 Asset management 89 87 47 185 184 87 United Kingdom and Rest of World Long term business 8 6 - Asset management 10 (12) 7 Banking 14 - 11 32 (6) 18 Other shareholders' net expenses (70) (72) (33) Adjusted operating profit* 956 1,011 451 Goodwill amortisation and impairments (110) (33) (33) Restructuring and integration costs (21) - - (Loss) / profit on disposal of subsidiaries (35) (27) 12 Short term fluctuations in investment return 226 197 (48) Income from hedging activities that do not qualify for hedge accounting - 31 5 Investment return adjustment for own shares held in policyholders' funds (94) (94) (22) Fines and penalties (49) (49) (49) Operating profit before tax and minority interests 873 1,036 316 Income tax expense (286) (344) (120) Profit on ordinary activities after tax 587 692 196 Minority interests - ordinary shares (44) (74) (24) - preferred securities (59) (59) (27) Profit for the financial period attributable to equity holders 484 559 145 * For life assurance and general insurance business, IFRS adjusted operating profit is based on a long-term investment return and includes investment returns on own shares held within policyholders' funds and adjustments for unrealised gains on certain insurance contracts. For all businesses, adjusted operating profit excludes goodwill amortisation and impairments, fines and penalties, income from hedging activities that do not qualify for hedge accounting, and (loss) / profit on disposal of subsidiaries. ** UK GAAP information is extracted from the Summary Consolidated Profit and Loss Account contained within the Group's Annual Report and Accounts for the year ended 31 December 2004; segmental reallocations have been made to this information to make it consistent with the segmental analysis presented under IFRS. All segmental analysis within this Summary Consolidated Income Statement has been prepared on a gross of inter-segment transactions basis. SUMMARY CONSOLIDATED INCOME STATEMENT continued The adjusted operating profit on an after-tax and minority interests basis isdetermined as follows: UK GAAP IFRS IFRS GBPm Year to Year to Six months to 31 Dec 31 Dec 30 June 2004 2004 2004 Adjusted operating profit 956 1,011 451 Tax on adjusted operating profit (240) (306) (132) 716 705 319 Minority interests - ordinary shares (83) (94) (36) - preferred securities (59) (59) (27) Adjusted operating profit after tax and minority interests 574 552 256 The reconciliation of adjusted operating profit after tax and minority interests to profit for the financial period is as follows: Adjusted operating profit after tax and minority interests 574 552 256 Goodwill amortisation and impairment (83) (17) (17) Restructuring and integration costs (8) - - (Loss) / profit on disposal of subsidiaries (26) (21) 6 Short term fluctuations in investment return 162 149 (42) Income from hedging activities that do not qualify for hedge accounting - 31 5 Investment return adjustment for own shares held in policyholders' funds (94) (94) (22) Fines and penalties (41) (41) (41) Profit for the financial period 484 559 145 Earnings attributable to equity UK GAAP IFRS IFRS shareholders p Year to Year to Six months to 31 Dec 31 Dec 30 June 2004 2004 2004 Earnings per share Adjusted operating earnings per share* 15.3 14.8 6.9 Basic earnings per share 14.1 16.3 4.2 Diluted earnings per share 14.1 16.3 4.2 Adjusted weighted average number of shares - millions 3,748 3,738 3,735 Weighted average number of shares - millions 3,432 3,422 3,419 * Adjusted operating earnings per share is calculated on the same basis as adjusted operating profit, 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. CONSOLIDATED INCOME STATEMENT IFRS IFRS GBPm Year to 31 Six months to December 30 June 2004 2004 Revenue Gross earned premiums 4,114 2,023 Outward reinsurance (140) (74) Net earned premiums 3,974 1,949 Investment return (net of investment losses) 4,257 379 Interest and similar income (banking) 2,017 979 Fee and commission income, and income from service activities 1,190 559 Other income 147 67 Total revenue 11,585 3,933 Expenses Claims and benefits (including change in insurance contract provisions) (5,901) (1,737) Reinsurance recoveries 143 55 Change in provision for investment contract liabilities (including amortisation) (760) (33) Losses on loans and advances (104) (33) Finance costs (including interest and similar expenses) (61) (21) Interest expense and similar charges (banking) (1,382) (681) Fees, commissions and other acquisition costs (399) (167) Third party interest in consolidated funds (55) (7) Other operating and administrative expenses (1,988) (981) Total expenses (10,507) (3,605) Share of associated undertakings' operating profit after tax 18 9 Goodwill impairments (33) (33) (Loss) / profit on disposal of subsidiaries (27) 12 Operating profit before tax and minority interests 1,036 316 Income tax expense (344) (120) Profit on ordinary activities after tax 692 196 Minority interests - ordinary shares (74) (24) - preferred securities (59) (27) Profit for the financial period attributable to equity holders 559 145 Earnings attributable to equity shareholders UK GAAP IFRS IFRS p Year to Year to Six months to 31 Dec 31 Dec 30 June 2004 2004 2004 Earnings per share Basic earnings per share 14.1 16.3 4.2 Diluted earnings per share 14.1 16.3 4.2 Weighted average number of shares - millions 3,432 3,422 3,419 CONSOLIDATED BALANCE SHEET IFRS IFRS IFRS GBPm At 31 Dec At 30 June At 1 Jan 2004 2004 2004 Assets Goodwill and other intangible assets 1,296 1,397 1,409 Investments in associated undertakings 149 186 182 Investment property 690 649 593 Property, plant and equipment 512 480 471 Deferred tax assets 440 360 559 Reinsurers' share of insurance contract provisions 317 338 330 Deferred acquisition costs 655 626 420 Current tax receivable 20 16 23 Loans, receivables and advances 17,183 15,706 15,276 Derivative financial instruments - assets 2,689 2,003 2,502 Other financial assets 9,763 8,705 7,396 Financial assets fair valued through profit and loss 27,935 23,183 22,967 Short term securities 3,063 2,978 2,643 Other assets 2,074 2,157 1,896 Cash and balances with the central bank 1,038 1,543 1,454 Placements with banks 392 42 266 Total assets 68,216 60,369 58,387 Liabilities Insurance contract provisions 18,883 16,643 15,743 Investment contract liabilities 13,293 11,768 11,198 Third party interests in consolidation of funds 556 395 395 Borrowed funds 1,492 1,319 1,020 Provisions 510 434 221 Deferred revenue 139 129 123 Deferred tax liabilities 400 257 470 Current tax payable 171 97 130 Deposits from banks 2,831 1,699 4,759 Amounts owed to depositors 18,334 17,047 14,673 Money market deposits 1,563 984 174 Derivative financial instruments - liabilities 2,599 1,774 2,445 Other liabilities 2,711 3,678 3,137 Total liabilities 63,482 56,224 54,488 Net assets 4,734 4,145 3,899 Equity attributable to equity holders of the parent 3,264 2,796 2,670 Minority interests - ordinary shares 788 691 583 - preferred securities 682 658 646 Total minority interests 1,470 1,349 1,229 Total equity 4,734 4,145 3,899 NOTES TO THE RESTATEMENT DOCUMENT RECONCILIATION OF INCOME STATEMENT Revenue 1 Year to Year to 31 December Six months to 31 December Note 2004 30 June 2004 2004 As reported under UK GAAP 12,875 4,370 11,815 Inclusion of amounts previously netted 1 - - - Reclassifications - available-for-sale investments moved to equity 2 (63) 207 - Adjustments for: Goodwill 3 - - - Consolidation of funds 4 84 22 84 Recognition and valuation of financial instruments 5 65 (3) 5 Revenue recognition 6 7 (1) - Elimination of equalisation provisions 7 - - (12) Investment contracts 8 (1,312) (643) (1,294) Insurance accounting 9 - - 5 Post-employment benefits 10 1 - (10) Dividend recognition 11 - - - Share-based payments 12 - - 17 Consolidation of other entities 13 (46) (19) (33) Elimination of policyholder investments in Nedcor 14 (27) (4) (15) Reclassification of policyholder loans 15 - - - Valuation of embedded derivatives 16 - - (40) Other items 17 1 4 (15) Minority interest impacts - - - As reported under IFRS 11,585 3,933 10,507 GBPm Profit after tax and Expenses 2 minority interests Year to Six months to 31 December Six months to Note 30 June 2004 2004 30 June 2004 As reported under UK GAAP 4,298 484 (62) Inclusion of amounts previously netted 1 - - - Reclassifications - available-for-sale investments moved to equity 2 - (36) 146 Adjustments for: Goodwill 3 - 83 31 Consolidation of funds 4 22 - - Recognition and valuation of financial instruments 5 (22) 48 14 Revenue recognition 6 (3) 5 - Elimination of equalisation provisions 7 (6) 12 6 Investment contracts 8 (643) (14) - Insurance accounting 9 6 (3) (4) Post-employment benefits 10 2 9 (1) Dividend recognition 11 - - - Share-based payments 12 5 (16) (4) Consolidation of other entities 13 (19) (2) - Elimination of policyholder investments in Nedcor 14 - (12) (4) Reclassification of policyholder loans 15 - - - Valuation of embedded derivatives 16 (26) 26 17 Other items 17 (9) 5 15 Minority interest impacts - (30) (9) As reported under IFRS 3,605 559 145 1. Revenue - represents the pre-tax operating inflows of the Group's ordinary activities, excluding profits from associated undertakings and profit / (losses) on disposal of subsidiaries. 2. Expenses - represents the pre-tax operating expenses of the Group's ordinary activities, excluding goodwill impairments. NOTES TO THE RESTATEMENT DOCUMENT continued RECONCILIATION OF EQUITY GBPm Assets At 31 At At December 30 June 1 January Note 2004 2004 2004 As reported under UK GAAP 66,260 59,375 57,715 Inclusion for amounts previously netted 1 1,588 1,298 1,299 Reclassifications 2 - - - Adjustments for: Goodwill 3 (91) (128) (154) Consolidation of funds 4 1,159 899 688 Recognition and valuation of financial Instruments 5 629 190 157 Revenue recognition 6 124 121 112 Elimination of equalisation provisions 7 (5) (6) (5) Investment contracts 8 38 35 36 Insurance accounting 9 (216) (85) (201) Post-employment benefits 10 (23) (14) (13) Dividend recognition 11 - - - Share-based payments 12 1 1 1 Consolidation of other entities 13 (1,086) (830) (821) Elimination of policyholder investments in Nedcor 14 (195) (156) (169) Reclassification of policyholder loans 15 - (349) (314) Valuation of embedded derivatives 16 2 7 42 Other items 17 31 11 14 As reported under IFRS 68,216 60,369 58,387 Liabilities At 31 At At December 30 June 1 January Note 2004 2004 2004 As reported under UK GAAP 61,488 55,153 53,651 Inclusion for amounts previously netted 1 1,588 1,298 1,299 Reclassifications 2 - - - Adjustments for: Goodwill 3 - - - Consolidation of funds 4 1,159 899 688 Recognition and valuation of financial Instruments 5 502 103 127 Revenue recognition 6 132 129 124 Elimination of equalisation provisions 7 (65) (59) (49) Investment contracts 8 143 119 116 Insurance accounting 9 (75) (30) (70) Post-employment benefits 10 (44) (24) (24) Dividend recognition 11 (122) (60) (106) Share-based payments 12 17 4 - Consolidation of other entities 13 (1,108) (847) (876) Elimination of policyholder investments in Nedcor 14 (133) (131) (123) Reclassification of policyholder loans 15 - (349) (314) Valuation of embedded derivatives 16 3 18 70 Other items 17 (3) 1 (25) As reported under IFRS 63,482 56,224 54,488 Equity At 31 At At December 30 June 1 January Note 2004 2004 2004 As reported under UK GAAP 4,772 4,222 4,064 Inclusion for amounts previously netted 1 - - - Reclassifications 2 - - - Adjustments for: Goodwill 3 (91) (128) (154) Consolidation of funds 4 - - - Recognition and valuation of financial Instruments 5 127 87 30 Revenue recognition 6 (8) (8) (12) Elimination of equalisation provisions 7 60 53 44 Investment contracts 8 (105) (84) (80) Insurance accounting 9 (141) (55) (131) Post-employment benefits 10 21 10 11 Dividend recognition 11 122 60 106 Share-based payments 12 (16) (3) 1 Consolidation of other entities 13 22 17 55 Elimination of policyholder investments in Nedcor 14 (62) (25) (46) Reclassification of policyholder loans 15 - - - Valuation of embedded derivatives 16 (1) (11) (28) Other items 17 34 10 39 As reported under IFRS 4,734 4,145 3,899 GBPm Equity At At At 31 December 2004 30 June 2004 1 January 2004 UK GAAP Shareholders' equity 3,245 2,741 2,754 Minority interests 1,527 1,481 1,310 Total shareholders' equity 4,772 4,222 4,064 IFRS Shareholders' equity 3,264 2,796 2,670 Minority interest 1,470 1,349 1,229 Total shareholders' equity 4,734 4,145 3,899 NOTES TO THE RESTATEMENT DOCUMENT continued BASIS OF PREPARATION The Group has prepared the consolidated preliminary balance sheet at 31 December 2004, the related consolidated preliminary statements of income and changes in equity for the year then ended and the related notes, in accordance with IFRS adopted for use by the EU ('the preliminary financial information') as set out on pages 7 to 38 to establish the financial position and results of operations of the Group necessary to provide the comparative financial information expected to be included in the Group's first set of IFRS financial statements for the year to 31 December 2005. The preliminary financial information does not include comparative financial information for the prior period. The Board acknowledges its responsibility for the preparation of the preliminary financial information which has been prepared in accordance with IFRS adopted for use by the EU and policies expected to be adopted when the Board prepares the Group's first set of IFRS Financial Statements for the year to 31 December 2005. The Board approved the preliminary financial information at its meeting on 27 April 2005. The standards adopted by the Group are those adopted by the EU at the date the preliminary financial information was approved by the Board. In accordance with the guidance issued by the EU, the Group has accounted for unit linked contracts which fall within the scope of IAS 39, Financial Instruments: Recognition and Measurement ("IAS 39") at fair value, as permitted by the insurance accounts directive. The latest version of IAS 19, Employee Benefits ("IAS 19") which the Group has adopted, is expected to be adopted by the EU and be effective for the 31 December 2005 financial statements. The preliminary financial information does not reflect any changes in respect of any amendments to IAS 39 for the fair value option. Proposals to restrict the fair value option are being considered by the IASB and are the subject of continuing debate between the IASB, industry and regulators. The Group has applied the requirements of IAS 27, Consolidation ("IAS 27") in determining whether holdings in mutual funds, such as open-ended investment companies, should be consolidated. Old Mutual plc will continue to monitor industry developments in this area. Transitional arrangements The date of transition to IFRS for the Group is 1 January 2004, as required by IFRS. The Group's opening balance sheet at 1 January 2004 has been restated to reflect all existing IFRSs expected to be applicable at 31 December 2005. At transition IFRS 1 allows a number of exemptions to this retrospective application principle upon adoption of IFRS. The Group has taken advantage of the following transitional arrangements: Cumulative translation differences The Group has elected that the cumulative translation differences for foreign operations were deemed to be zero at the date of transition. Business combinations The Group has elected not to apply the retrospective application requirements of IFRS 3, Business Combinations ("IFRS 3") for combinations that occurred prior to 1 January 2004 and consequently no adjustment has been made. Property, plant and equipment The Group has elected to measure individual items of property, plant and equipment at fair value at the date of transition to IFRS, hence fair value is deemed to be cost at that date. Employee benefits The Group has elected to recognise all cumulative actuarial gains and losses on defined benefit post retirement schemes in equity at the date of transition. Equity compensation plans The Group has elected not to apply the provisions of IFRS 2, Share-based Payments ("IFRS 2") to equity-settled awards granted on or before 7 November 2002, or to awards granted after that date but which had vested prior to 1 January 2005. Compound financial instruments The Group has elected not to separate compound financial instruments into debt and equity portions provided that the debt component is no longer outstanding at the date of transition. Derecognition of financial assets and liabilities The Group has applied the derecognition requirements in IAS 39. Hedge accounting The Group has applied the requirements of IAS 39 relating to hedge accounting and the measurement of derivatives at fair value to its opening IFRS balance sheet. NOTES TO THE RESTATEMENT DOCUMENT continued BASIS OF PREPARATION continued Comparatives The Group has not taken advantage of the exemption within IFRS 1 that allows comparative information presented in the first year of adoption of IFRS not to comply with IAS 32, Financial Instruments: Disclosure and Presentation ("IAS 32"), IAS 39, and IFRS 4, Insurance Contracts ("IFRS 4"). Estimates The preliminary financial information is based on the UK GAAP financial statements approved by the Board on 28 February 2005, and adjusted to comply with IFRS. In accordance with IFRS 1 there have been no adjustments to the estimates made at the time of the preparation of the UK GAAP financial statements. Cash flow statement As a change from UK GAAP, cash flows from transactions with policyholders and third party interests in consolidated funds are now included in the cash flow statement under IFRS. However, there are no overall changes to Group cash and cash equivalents, as cash balances in policyholder funds are treated as financial assets in the balance sheet. Further changes The possibility exists that the preliminary financial information may require adjustment before its inclusion in the Group's first IFRS financial statements for the year ending 31 December 2005 because of revisions or changes to standards issued by the IASB or endorsed by the EU, and interpretations or guidance on the application of IFRS in a particular industry. Accounting policies The IFRS accounting policies adopted by the Group in preparing the preliminary financial information have been included on pages 25 to 38. NOTES TO THE RESTATEMENT DOCUMENT continued MATERIAL ADJUSTMENTS The basis for material adjustments between UK GAAP and IFRS, as shown in the Reconciliation of Equity and Reconciliation of Income Statement tables, is noted below. Note that the adjustments are net of the associated tax impact. Note 1: Inclusion of amounts previously netted Under IFRS, the Group has elected to move to trade date accounting for certain financial instruments held within the banking segment. The Group has also made adjustments for amounts previously netted under UK GAAP. This has resulted in an increase in assets and liabilities of GBP1,588m at 31 December 2004. There is no impact on net equity or profit and loss for the year. Note 2: Reclassifications The Group has reclassified certain financial assets as available-for-sale ("AFS") which had been classified under UK GAAP as fair value through profit and loss. This has resulted in a reclassification of profit after tax to the revaluation reserve in equity of GBP36m and a loss of GBP146m at 31 December2004 and 30 June 2004 respectively. There is no impact on net equity. Note 3: Goodwill Under UK GAAP, the Group recognised acquired goodwill at cost and amortised it on a straight-line basis over its expected useful life. Under IFRS, goodwill is not amortised and is subject to impairment reviews both annually and when there are indications that the carrying value may not be recoverable. Under IFRS 1, the UK GAAP goodwill balance at 1 January 2004 has been carried forward and the amortisation of GBP83m charged in the year ended 31 December2004 has been reversed. Included in the goodwill balance sheet adjustment is an adjustment to the treatment of goodwill of GBP154m at 1 January 2004 with an offsetting adjustment to minority interests within equity of GBP135m. Note 4: Consolidation of funds IFRS requires the consolidation of certain mutual funds and other investment vehicles, which did not previously require consolidation under UK GAAP. This arises from a more stringent definition of when an entity is considered to be under the control of an investor. As a result the Group has now consolidated a number of mutual funds and other investment vehicles on a line-by-line basis. The Group has applied IFRS and consolidated those vehicles that meet the definition of a subsidiary under IFRS. Old Mutual plc will continue to monitor industry developments in this area. This has resulted in an increase in total assets and total liabilities ofGBP556m at 31 December 2004 representing that part of the funds owned by thirdparties. This third party interest is recorded within liabilities. Theconsolidation of mutual funds has no effect on equity or profit after tax. Note 5: Recognition and valuation of financial instruments Under IFRS, financial instruments have been classified as "fair value through profit or loss", "available-for-sale", "held-to- maturity" and "loans and receivables" and fair valued as required. The fair value movements for these financial instruments have been recognised in the income statement or equity as appropriate. Available-for-sale fair value adjustments are transferred out of equity to the income statement on sale or impairment. Derivatives, as required under IFRS, are included in the "fair value through profit or loss" classification and recognised on the balance sheet at fair value. Under UK GAAP, the majority of investments within the Group's US Life segment were recorded at fair value with changes in fair value recorded in the income statement, while off balance sheet financial instruments were measured on a basis consistent with on balance sheet instruments. The effect of classifying these assets as available-for-sale under IFRS therefore has no material net impact on equity. Additionally, under IFRS, the Group has moved to an "incurred loss" provisioning model within its banking segment. Under UK GAAP, the Group utilised an "expected loss" provisioning model. The implementation of hedge accounting has resulted in a GBP27m increase in profit after tax and an GBP9m increase in equity at 31 December 2004. As a result of the stricter designation and documentation requirements and effectiveness testing required to qualify for hedge accounting under IAS 39, certain transactions undertaken as hedges under UK GAAP have not qualified for hedge accounting under IFRS and the fair value movements for these derivatives have been accounted for through the income statement. Unrealised profits and losses on UK GAAP hedges at transition have been included in reserves in accordance with IFRS 1 transitional arrangements. The impact of the above adjustments is an increase of GBP127m to equity at 31 December 2004 and an increase of GBP48m to profit after tax for the year ended 31 December 2004, mainly representing the cumulative fair value changes on financial instruments, the implementation of the amended loan provisioning model and hedging adjustments. Assets and liabilities have increased by GBP439m and GBP399m from 30 June 2004 to 31 December 2004 respectively. This increase represents fair value movements on increased holdings of financial instruments during this period as well as reclassifications of assets and liabilities previously shown net. NOTES TO THE RESTATEMENT DOCUMENT continued MATERIAL ADJUSTMENTS continued Note 6: Revenue recognition Under IAS 18, Revenue ("IAS 18"), fees that are directly attributable to securing an investment management service contract are deferred as a liability. This liability represents the deferred revenue from providing investment management services and is amortised as the related services are provided. Costs that are directly attributable to securing an investment management service contract are deferred as an asset and expensed in line with the related revenue as the services are provided. Both the long term business and asset management segments contain investment management service contracts. Additionally, the Group's banking segment has recognised fees and costs relating to securing loans in line with IAS 18, resulting in deferred acquisition costs and deferred revenue liability balances on the balance sheet. Past policy was to expense acquisition costs as incurred and recognise initial fees and recurring fees as received. The effect on the balance sheet at 31 December 2004 is an increase in assets and liabilities of GBP124m and GBP132m respectively resulting in a net decrease in equity of GBP8m. Profit after tax has increased by GBP5m for the year ended 31 December 2004. Note 7: Elimination of equalisation provisions Under UK GAAP an equalisation provision is recorded in the financial statements of individual general insurance companies within the Group to eliminate, or reduce, the volatility in incurred claims arising from exceptional levels of claims in certain classes of business. The provision is required by law even though no actual liability exists at the balance sheet date, with the annual change in the equalisation provision being recorded in the profit and loss account. Under IFRS 4, the recognition of equalisation provisions is not permitted. The removal of the equalisation provision results in an increase in equity of GBP60m at 31 December 2004 and a related increase of GBP12m to profit after taxfor the year ended 31 December 2004. Note 8: Investment contracts Under IFRS 4, certain contracts previously accounted for as insurance are classified as investment contracts as they do not contain significant insurance risk. Those that have a discretionary participating feature continue to be accounted for using local GAAP. Under IAS 39, investment contracts without a discretionary participating feature are carried at either fair value (in the case of linked liabilities) or amortised cost. Fair value for these investment contracts is equal to the fair value of the related assets, or the policyholder's account balance. Adjustments to the account balance under the previous basis of accounting for Rand or Sterling reserves and actuarial funding have been reversed. The effect is to increase investment contract liabilities by GBP143m at 31 December 2004 and by GBP116m at 1 January 2004,with an impact on profit after tax of GBP14m. Amounts received under investment contracts (other than those with a discretionary participating feature) are no longer shown as premiums but are treated as deposits and added to investment contract liabilities. Similarly, amounts paid under investment contracts (other than those with a discretionary participating feature) are recorded not as claims but as deductions from investment contract liabilities. This is reflected as a reduction to both revenue and expenses of GBP1,312m for the year ended 31 December 2004. Note 9: Insurance accounting Under IFRS 4, the Group continues to account for insurance contracts using local GAAP for each Group entity, but has the option to make improvements to its policies if the changes make the financial statements more relevant to the decision-making needs of users. Insurance business in the United States ("US") continues to be accounted for under US Generally Accepted Accounting Practice ("US GAAP"), and the Group has elected to make certain improvements to its accounting for Deferred Acquisition Costs ("DAC") and Present Value of Future Profits ("PVFP") on insurance contracts. Under the revised policy, unrealised and actual realised gains are reflected in the amortisation of DAC / PVFP. The net impact of these improvements is to decrease equity by GBP141m and GBP131m at31 December 2004 and 1 January 2004 respectively. Profit after tax is decreasedby GBP3m for the year ended 31 December 2004. Note 10: Post-employment benefits Under UK GAAP, post-employment costs were charged to the income statement account so as to spread the related charges over the service lives of employees and were determined by independent qualified actuaries undertaking formal actuarial valuations at least every three years. In accordance with IAS 19, the projected benefit obligation is matched against the fair value of the underlying assets and other unrecognised actuarial gains and losses in determining the expense for the year. Any asset or obligation must be recorded in the balance sheet, and separate recognition of the operating and financing costs of defined benefits (and similarly funded employee benefits) is required in the income statement. IAS 19 permits a number of options for the recognition of actuarial gains and losses. The Group has elected to recognise actuarial gains and losses using the 'corridor' method and take advantage of the IFRS 1 exemption allowing any previously unrecognised actuarial gains or losses to be recognised in full on the balance sheet, at the date of transition (1 January 2004). The effect of these changes is to increase equity by GBP21m and GBP11m at 31December 2004 and 1 January 2004 respectively. Profit after tax has increased by GBP9m for the year ended 31 December 2004. NOTES TO THE RESTATEMENT DOCUMENT continued MATERIAL ADJUSTMENTS continued Note 11: Dividend recognition Under UK GAAP, dividends were accrued in the period to which they related regardless of when they were declared and approved. Under IAS 10, Events after the Balance Sheet Date ("IAS 10"), dividends are only accrued when declared and appropriately approved. The reversal of accrued dividends has increased equity by GBP122m at 31 December 2004. There is no profit or loss impact. Note 12: Share-based payments Under UK GAAP, the costs of awards to employees under equity compensation plans, other than Save As You Earn plans, were recognised immediately if they were not conditional on performance criteria. If the award was conditional, the cost was recognised over the period to which the performance criteria related. The minimum cost for the award was the difference between the share price of the underlying equity instruments at the date of grant less any contribution required from the employee. The cost was based on a reasonable expectation of the extent to which the performance criteria would be met. Any subsequent changes in that expectation were reflected in the income statement. Under IFRS 2, equity instruments granted under equity-settled awards after 7 November 2002, which remain unvested at 1 January 2005, are measured at the fair value of the equity instruments granted. The fair value of those equity instruments is measured at grant date and is recognised over the vesting period, adjusted at the end of each reporting period to reflect actual and expected levels of vesting. Equity instruments granted under cash-settled awards are measured at fair value at each reporting date. The fair value is recognised over the vesting period and is re-measured until the underlying liability is settled. Any changes in the fair value are reflected in profit andloss. The effect of this change in treatment is a decrease in profit after tax of GBP16m and a corresponding decrease to equity at 31 December 2004. There is minimal impact on 1 January 2004 equity primarily due to the IFRS charge being offset by the reversal of related UK GAAP accruals. Note 13: Consolidation of other entities IFRS does not differentiate between shareholders' and policyholders' funds. Assets and liabilities, and income and expenditure items between group companies and policyholders' funds have now been eliminated on consolidation. Additionally, under IFRS, a charitable foundation has now been consolidated in the Group's preliminary financial information. The effect is to decrease assets and liabilities by GBP1,086m and GBP1,108m respectively at 31 December 2004. Profit after tax decreased by GBP2m for the year ended 31 December 2004. Note 14: Elimination of policyholder investments in Nedcor IFRS does not recognise the distinction between shareholder and policyholder investments and as a result the Group has eliminated certain policyholder investments in its Nedcor subsidiary, not previously eliminated under UK GAAP. This has resulted in a decrease of GBP195m and GBP133m to assets and liabilitiesat 31 December 2004 respectively. Profit after tax decreased by GBP12m in theyear ended 31 December 2004. Note 15: Reclassification of policyholder loans Certain policyholder loans have been offset against investment contract liabilities in accordance with IAS 32 as the Group has both the contractual ability and right to offset and intends to settle on a net basis. The effect is to decrease assets by GBP349m at 30 June 2004 and by GBP314m at 1 January 2004. There is no equity or profit after tax impact. This adjustment was made within the UK GAAP balance sheet at 31 December 2004 and therefore does not feature in the IFRS reconciliation at 31 December 2004. Note 16: Valuation of embedded derivatives IFRS 4 requires that embedded derivatives within insurance contracts be separated and fair valued if the derivatives do not qualify as insurance contracts. The overall effect of the embedded derivatives adjustment is to decrease net equity by GBP1m at 31 December 2004 and GBP28m at 1 January 2004. Profit after tax increased by GBP26m for the year ended 31 December 2004. Note 17: Other items The other changes that arise as a result of the transition to IFRS are principally reclassifications and presentational changes, which individually and collectively have an immaterial effect on the Group's equity and profit after tax. Other items principally comprise of: • Properties previously held at cost which have been reclassified under IFRS as owner occupied properties and restated to depreciated fair value accordingly. This has resulted in a net increase to equity of GBP22m at 31 December 2004 and an associated decrease to profit after tax of GBP4m; • An adjustment under IAS 21 to reflect the transfer directly to equity of foreign exchange gains or losses incurred by entities with a non-Rand functional currency. Profit after tax has increased by GBP10m. There is no impact on equity. In aggregate these adjustments resulted in a GBP34m and GBP5m increase to equityand profit after tax respectively at 31 December 2004. NOTES TO THE RESTATEMENT DOCUMENT continued FOREIGN CURRENCIES Principal exchange rates used to translate the operating results; assets and liabilities of key foreign business segments to Sterling are presented below: Rand 31 December 30 June 1 January 2004 2004 2004 Income statement 11.7986 12.1544 12.3487 Balance sheet (closing rate) 10.8482 11.3037 11.9367 USD 31 December 30 June 1 January 2004 2004 2004 Income statement 1.8327 1.8222 1.6354 Balance sheet (closing rate) 1.9158 1.8144 1.7833 Foreign currency revenue transactions are translated at average exchange rates for the year. Foreign currency assets and liabilities are translated at year-end exchange rates. The assets and liabilities of foreign operations are translated from their respective functional currencies into the Group's presentation currency using the year-end exchange rates, and their income and expenses using the average exchange rates. Unrealised gains or losses resulting from translation of functional currencies to the presentation currency are included as a separate component of shareholders' equity, net of applicable deferred income taxes. SEGMENT INFORMATION (i) Basis of segmentation Geographical segments For management purposes the Group is organised on a geographical basis in the following segments: Africa, North America, UK and Rest of World. This is the basis on which the Group reports its primary segment information. Business segments Although the Group is managed primarily on a geographical basis, it operates in four principal areas of business: long term business, general insurance, banking and asset management. These business segments operate independently within each geographic area. Financial information about the Group's geographic and business segments is presented below. Where financial information is provided for both primary and secondary segments, this information is shown in the format of a matrix. Transactions between segments are determined on an arms length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. NOTES TO THE RESTATEMENT DOCUMENT continued SEGMENT INFORMATION continued (ii) Long-term business Year to 31 December 2004 GBPm UK and Africa North Rest Conso America of World lidated Gross premiums and investment contract deposits written Individual business Single 643 2,169 125 2,937 Recurring 973 205 13 1,191 1,616 2,374 138 4,128 Group business Single 452 - - 452 Recurring 321 - - 321 773 - - 773 Total gross premiums and investment contracts written 2,389 2,374 138 4,901 Insurance contracts 1,052 2,023 2 3,077 Investment contracts with discretionary participation features 402 - - 402 Other investment contracts 935 351 136 1,422 2,389 2,374 138 4,901 Less: Other investment contracts (935) (351) (136) (1,422) Total gross written premiums 1,454 2,023 2 3,479 Gross new business premiums and investment contract deposits written Individual business Single 643 2,169 125 2,937 Recurring 164 58 1 223Related Shares:
Old Mutual PLC