26th Jul 2005 07:00
St. James's Place Capital PLC26 July 2005 PRESS RELEASE 26 July 2005 RESTATEMENT OF 2004 FULL YEAR RESULTS UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS St. James's Place Capital plc, the wealth management group, today publishes therestatement of its 2004 full year results under International FinancialReporting Standards (IFRS). Andrew Croft, Group Finance Director, commented "As previously indicated, thetransition from UK GAAP to IFRS has a limited impact on the financial positionof the Group. Net assets at 31 December 2004 have increased by £7.2 million andthe 2004 retained profit after tax is £2.9 million higher. The underlyingeconomics of the Group remain unaffected by the transition and the adoption ofIFRS has no impact on dividend policy or solvency." The text of the transition restatement is attached. Enquiries: Andrew Croft, Group Finance Director Tel: 020 7514 1985 ST. JAMES'S PLACE CAPITAL PLC RESTATEMENT TO INTERNATIONAL FINANCIAL REPORTING STANDARDS CONTENTS Consolidated Income Statement for the Year Ended 31 December 2004 (under IFRS and UK GAAP (MSSB)) Consolidated Balance Sheet at 31 December 2004 (under IFRS and UK GAAP (MSSB)) Consolidated Statement in Changes in Equity for the Year Ended 31 December 2004 (under IFRS and UK GAAP (MSSB)) Reconciliation of Income Statement for the Year Ended 31 December 2004 Reconciliation of Balance Sheet at 31 December 2004 Consolidated Balance Sheet at 1 January 2004 (under IFRS and UK GAAP (MSSB)) Reconciliation of Balance Sheet at 1 January 2004 Notes to IFRS Financial Information - Basis of Preparation Notes to the IFRS Financial Information - Adjustments from UK GAAP (MSSB) to IFRS Notes to the IFRS Financial Information - Accounting Policies Special Purpose Audit Report CONSOLIDATED INCOME STATEMENT YEAR ENDED 31 DECEMBER 2004 IFRS UK GAAP (MSSB)* -------- --------- £' Million £' Million Insurance premium revenue 255.1 1,134.8Less premiums ceded to reinsurers (27.2) (27.2) -------- ---------Net insurance premium revenue 227.9 1,107.6 Fee & commission income 62.7 14.5Profit on sale of investment in Life AssuranceHolding Corporation Limited 28.0 28.0Other investment income 821.9 817.2 ------ ------Total investment income 849.9 845.2 -------- ---------Total revenue (net of reinsurance payable) 1,140.5 1,967.3 Other operating income 1.5 1.5 -------- ---------Net income 1,142.0 1,968.8 Policyholder claims & benefits incurred (105.4) (498.4)Less reinsurance recoveries 21.7 21.7 -------- ---------Net policyholder claims & benefits incurred (83.7) (476.7) Change in insurance contract liabilities 54.6 (1,258.7)Change in investment contract liabilities (840.7) - Fees, commission and other acquisition costs (179.2) (159.8)Administration expenses (49.8) (38.0)Other operating expenses (3.0) (2.2) Operating profit 40.2 33.4Financing costs (1.2) (1.2) -------- ---------Profit before tax 39.0 32.2 Tax on policyholders' return (14.5) 8.0Tax on shareholders' return 15.2 (3.4) -------- ---------Total tax expense 0.7 4.6 Profit for the period attributable toshareholders 39.7 36.8 ======== ========= Dividends 11.8 12.3 Earnings per share Pence PenceBasic earnings per share 9.1 8.5Diluted earnings per share 8.8 8.2 * Reanalysed under IFRS format CONSOLIDATED BALANCE SHEET 31 DECEMBER 2004 IFRS UK GAAP (MSSB)* £' Million £' MillionAssets Intangible assets Deferred acquisition costs 294.4 44.5 Acquired value of in-force business 70.5 49.5 -------- -------- 364.9 94.0 Property and equipment 6.9 7.1Deferred tax assets 54.9 -Investment property 129.8 -Investments Equities 5,637.9 - Fixed income securities 656.3 57.6 Investment in Collective Investment Schemes 381.4 - Currency forwards 0.2 -Assets held to cover unit linked liabilities - 7,456.2Reinsurers' share of insurance provisions 70.3 70.3Insurance contract receivables 8.5 8.5Income tax assets 7.8 7.8Other receivables 89.9 52.3Cash and cash equivalents 897.2 159.8 -------- --------Total assets 8,306.0 7,913.6 -------- -------- LiabilitiesInsurance contract liability provisions 307.3 124.2Unit linked liabilities - 7,456.2Other provisions 17.7 17.7Financial liabilities Investment contracts 7,236.2 - Borrowings 22.4 22.4 Currency forwards 6.6 -Deferred tax liabilities 124.8 4.7Reinsurance payables 11.3 11.3Payables related to direct insurance contracts 11.2 11.2Deferred income 231.8 -Income tax liabilities 5.1 5.1Other payables 51.2 45.8Net asset value attributable to unit holders 58.2 - -------- --------Total liabilities 8,083.8 7,698.6 -------- -------- Net assets 222.2 215.0 ======== ========Shareholders' equityShare capital 65.9 65.9Share premium 15.9 15.9Other reserves (8.4) (8.4)Retained earnings 148.8 141.6 -------- --------Total shareholders'equity 222.2 215.0 ======== ======== * Reanalysed under IFRS format CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 DECEMBER 2004 IFRS UK GAAP (MSSB)* £' Million £' Million Opening equity shareholders' funds 181.6 179.6 -------- -------- Profit for the financial period 39.7 36.8 -------- --------Total recognised income for the financialperiod 39.7 36.8 Dividends (11.8) (12.3)Issue of share capital Scrip dividend 8.0 8.0 Exercise of share options 3.8 3.8Consideration paid for own shares (1.4) (1.4)P & L reserve credit in respect of shareoption charges 2.3 0.5 -------- --------Net increase to shareholders' funds 40.6 35.4 -------- -------- Closing equity shareholders' funds 222.2 215.0 ======== ======== * Reanalysed under IFRS format RECONCILIATION OF INCOME STATEMENT YEAR ENDED 31 DECEMBER 2004 UK GAAP ADJUSTMENTS IFRS (MSSB)* Investment DAC / Unit Linked Unit Trusts Other - Other - No Contracts DIR Assets Equity Impact Equity Impact Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 £' m £' m £' m £' m £' m £' m £' m £' m Net insurancepremium revenue 1,107.6 (879.7) 227.9Fee & commissionincome 14.5 (8.2) 56.4 62.7Investment income 845.2 4.9 (0.2) 849.9Other operatingincome 1.5 1.5 ---------------------------------------------------------------------------------------------------Net income 1,968.8 (879.7) (8.2) - 4.9 (0.2) 56.4 1,142.0 Net policyholderclaims &benefits incurred (476.7) 393.0 (83.7)Change in insurancecontractliabilities (1,258.7) 1,313.3 54.6Change in investmentcontract liabilities - (835.8) (4.9) (840.7)Expenses (200.0) 27.3 (2.1) (57.2) (232.0)Financing costs (1.2) (1.2) ---------------------------------------------------------------------------------------------------Profit before tax 32.2 (9.2) 19.1 - - (2.3) (0.8) 39.0 Tax on policyholders'return 8.0 (0.5) (22.0) (14.5)Tax on shareholders'return (3.4) 1.5 (6.7) 1.0 22.8 15.2 --------------------------------------------------------------------------------------------------Profit for theperiod attributableto shareholders 36.8 (7.7) 12.4 (0.5) - (1.3) - 39.7 ================================================================================================== Dividends 12.3 (0.5) 11.8 * Reanalysed under IFRS format RECONCILIATION OF BALANCE SHEET 31 DECEMBER 2004 UK GAAP ADJUSTMENTS IFRS (MSSB)* Investment DAC / Unit Linked Unit Other - Other - No Contracts DIR Assets Trusts Equity Impact Equity Impact Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 £' m £' m £' m £' m £' m £' m £' m £' mAssetsIntangible assets Deferred acquisition costs 44.5 249.9 294.4 Acquired value of in-force business 49.5 21.0 70.5 ---------------------------------------------------------------------------------------------------- 94.0 249.9 21.0 364.9Property & equipment 7.1 (0.2) 6.9Deferred tax assets 0.5 45.4 1.7 7.3 54.9Investment property - 129.8 129.8Investments Equities - 5,582.1 55.8 5,637.9 Fixed income securities 57.6 598.7 656.3 Investment in Collective Investment Schemes - 305.3 76.1 381.4 Currency forwards - 0.2 0.2Assets held tocover linkedliabilities 7,456.2 (7,456.2) -Reinsurers'share ofinsurance provisions 70.3 70.3Insurance contractreceivables 8.5 8.5Income tax assets 7.8 7.8Other receivables 52.3 37.3 0.3 89.9Cash & cashequivalents 159.8 811.3 2.2 (76.1) 897.2 -------------------------------------------------------------------------------------------------Total assets 7,913.6 0.5 295.3 8.5 58.3 1.5 28.3 8,306.0 LiabilitiesInsurance contractliability provisions 124.2 183.1 307.3Unit linkedliabilities 7,456.2 (7,456.2) -Other provisions 17.7 17.7Financial liabilities Investment contracts - 7,267.8 (31.6) 7,236.2 Borrowings 22.4 22.4 Currency forwards - 6.6 6.6Deferred taxliabilities 4.7 3.2 66.9 21.7 28.3 124.8Reinsurance payables 11.3 11.3Payables related todirect insurancecontracts 11.2 11.2Deferred income - 231.8 231.8Income tax liabilities 5.1 5.1Other payables 45.8 12.3 0.1 (7.0) 51.2Net asset valueattributable tounit holders - 58.2 58.2 ------------------------------------------------------------------------------------------------Total liabilities 7,698.6 (2.1) 298.7 9.0 58.3 (7.0) 28.3 8,083.8 Net assets 215.0 2.6 (3.4) (0.5) - 8.5 - 222.2 Shareholders'equityShare capital 65.9 65.9Share premium 15.9 15.9premiumOther reserves (8.4) (8.4)Retained earnings 141.6 2.6 (3.4) (0.5) 8.5 148.8 ------------------------------------------------------------------------------------------------Total shareholders'equity 215.0 2.6 (3.4) (0.5) - 8.5 - 222.2 * Reanalysed under IFRS format CONSOLIDATED BALANCE SHEET 1 JANUARY 2004 IFRS UK GAAP (MSSB)* £' Million £' MillionAssets Intangible assets Deferred acquisition costs 276.1 53.5 Acquired value of in-force business 73.4 51.6 -------- -------- 349.5 105.1Property and equipment 7.1 7.1Deferred tax assets 45.1 -Investment property - -Investments Equities 4,653.0 31.6 Fixed income securities 542.1 52.8 Investment in Collective Investment Schemes 261.2 - Currency forwards 8.6 -Assets held tocover unit linked liabilities - 6,195.8Reinsurers' shareisions 79.1 79.1Insurance contract receivables 4.5 4.5Income tax assets 5.9 5.9Other receivables 73.4 51.7Cash and cash equivalents 956.2 118.1 -------- --------Total assets 6,985.7 6,651.7 -------- -------- LiabilitiesInsurance contract liability provisions 369.3 133.3Unit linked liabilities - 6,195.8Other provisions 1.3 1.3Financial liabilities Investment contracts 5,934.0 - Borrowings 53.6 53.6 Currency forwards 0.7 -Deferred tax liabilities 103.5 14.8Reinsurance payables 11.6 11.6Payables related to direct insurance contracts 9.4 9.4Deferred income 223.6 -Income tax liabilities 5.1 5.1Other payables 49.9 47.2Net asset value attributable to unit holders 42.1 - --------- --------Total liabilities 6,804.1 6,472.1 -------- -------- Net assets 181.6 179.6 ======== ========Shareholders' equityShare capital 64.8 64.8Share premium 5.1 5.1Other reserves (7.7) (7.7)Retained earnings 119.4 117.4 -------- -------Total shareholders'equity 181.6 179.6 ======== ======== * Reanalysed under IFRS format RECONCILIATION OF BALANCE SHEET 1 JANUARY 2004 UK GAAP ADJUSTMENTS IFRS (MSSB)* Investment DAC / Unit Linked Unit Trusts Other - Other - No Contracts DIR Assets Equity Impact Equity Impact Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 £' m £' m £' m £' m £' m £' m £' m £' mAssetsIntangible assets Deferred acquisition costs 53.5 222.6 276.1 Acquired value of in-force business 51.6 21.8 73.4 -------------------------------------------------------------------------------------------------- 105.1 222.6 21.8 349.5Property & equipment 7.1 7.1Deferred tax assets - 44.5 0.6 45.1Investment property - -Investments Equities 31.6 4,581.5 39.9 4,653.0 Fixed income securities 52.8 489.3 542.1 Investment in Collective Investment Schemes - 235.8 25.4 261.2 Currency forwards - 8.6 8.6Assets held to coverlinked liabilities 6,195.8 (6,195.8) -Reinsurers'share ofinsurance provisions 79.1 79.1Insurance contractreceivables 4.5 4.5Income tax assets 5.9 5.9Other receivables 51.7 21.5 0.2 73.4Cash & cash equivalents 118.1 861.4 2.1 (25.4) 956.2 ----------------------------------------------------------------------------------------------Total assets 6,651.7 - 267.1 2.3 42.2 0.6 21.8 6,985.7 LiabilitiesInsurance contractliability provisions 133.3 236.0 369.3Unit linkedliabilities 6,195.8 (6,195.8) -Other provisions 1.3 1.3Financial liabilities Investment contracts - 5,945.4 (11.4) 5,934.0 Borrowings 53.6 53.6 Currency forwards - 0.7 0.7Deferred tax liabilities 14.8 4.1 59.3 3.5 21.8 103.5Reinsurance payables 11.6 11.6Payables related todirect insurancecontracts 9.4 9.4Deferred income - 223.6 223.6Income tax liabilities 5.1 5.1Other payables 47.2 9.5 0.1 (6.9) 49.9Net asset valueattributable tounit holders - 42.1 42.1 -------------------------------------------------------------------------------------------------Total liabilities 6,472.1 (10.3) 282.9 2.3 42.2 (6.9) 21.8 6,804.1 Net assets 179.6 10.3 (15.8) - - 7.5 - 181.6 Shareholders'equityShare capital 64.8 64.8Share premium 5.1 5.1Other reserves (7.7) (7.7)Retained earnings 117.4 10.3 (15.8) 7.5 119.4 ------------------------------------------------------------------------------------------------Total shareholders'equity 179.6 10.3 (15.8) - - 7.5 - 181.6 * Reanalysed under IFRS format NOTES TO THE IFRS FINANCIAL INFORMATION Basis of Preparation EU law requires St. James's Place Capital plc to prepare its next annualconsolidated financial statements, for the year ending 31 December 2005, inaccordance with International Financial Reporting Standards (IFRSs) as adoptedfor use in the European Union ("EU adopted IFRSs"). The Group has restated theconsolidated balance sheet at 31 December 2004, the related consolidated incomestatement and the consolidated statement of changes in equity for the year ended31 December 2004 in accordance with EU adopted IFRSs (the "IFRS FinancialInformation") in order to establish the comparative financial informationexpected to be included in the Group's first set of IFRS financial statementsfor the year ended 31 December 2005. The IFRS Financial Information is based onthe statutory accounts previously prepared under UK Generally AcceptedAccounting Principles ("UK GAAP") adjusted for EU adopted IFRSs. As required byIFRS 1, the IFRS Financial Information does not take account of any changes inestimates since the sign-off of the UK GAAP accounts. In addition, the IFRSFinancial Information does not include comparative figures for the prior period. The IFRS Financial Information does not constitute the Group's statutoryaccounts for the year ended 31 December 2004. Those accounts, prepared under UKGAAP, have been reported on by the Company's auditors and delivered to theregistrar of companies. The report of the auditors was unqualified and did notcontain statements under section 237(2) or (3) of the Companies Act 1985. The Board acknowledges its responsibility for the preparation of the IFRSFinancial Information which has been prepared in accordance with EU adoptedIFRSs and policies expected to be adopted when the Board prepares the Group'sfirst set of IFRS financial statements for the year to 31 December 2005. The EUadopted IFRSs that will be effective in the annual financial statements for theyear ending 31 December 2005 are still subject to change and to additionalinterpretations and therefore cannot be determined with certainty. Accordinglythe accounting policies for that annual period will be determined finally onlywhen the annual financial statements are prepared for the year ending 31December 2005. The Board approved the IFRS Financial Information at its meeting on 25 July2005. The date of transition for IFRS for the Group is 1 January 2004, as required byIFRS. The Group's opening balance sheet at 1 January 2004 has been restated toreflect all existing IFRSs expected to be applicable at 31 December 2005. IFRS 1(First-time Adoption of International Financial Reporting Standards) does allowa number of exemptions or elections on adoption of IFRS for the first time. TheGroup has not taken advantage of the exemption from the requirement to restatecomparative information in the first year of adoption of IFRS for IAS 32(Financial Instruments: Disclosure and Presentation), IAS 39 (FinancialInstruments: Recognition and Measurement) and IFRS 4 (Insurance Contracts)Advantage has, however, been taken of the following provisions under IFRS 1: • The Group has elected not to apply the provisions of IFRS 2 (Share-based Payment) to options and equity instruments granted on or before 7 November 2002 or to equity instruments that were granted after 7 November 2002 that had vested before 1 January 2005. • The Group has also elected not to apply the provisions of IFRS 3 (Business Combinations) prior to the date of transition, and no adjustments have therefore been made for business combinations prior to 1 January 2004. • The Group has elected to restate owner occupied property at fair value at 1 January 2004 and to treat this fair value as the deemed cost at that date. The accounting policies adopted in the preparation of the IFRS FinancialInformation are set out later in these notes. Adjustments from UK GAAP (MSSB) to IFRS 1. MSSB Mapping to IFRS Format The UK GAAP (MSSB) balance sheet has been presented in a format consistent withInternational Financial Reporting Standards (IFRS). No changes, other than thereanalysis under IFRS format, have been made to the numbers previously reportedfor UK GAAP. 2. Accounting for Investment Contracts Under UK GAAP all long term contracts written by an insurance company areaccounted for on a similar basis. Under IFRS 4 products are classified foraccounting purposes between insurance and investment contracts, depending on thelevel of insurance risk assumed, and the liabilities for insurance andinvestment contracts are disclosed separately within the balance sheet. Amountsreceivable under investment contracts are no longer shown as premiums in theincome statement but are treated as deposits and added to investment contractliabilities. Similarly amounts payable under investment contracts are notrecorded as claims in the income statement but as deductions from investmentcontract liabilities. None of these reclassification adjustments has any impacton profit after tax or shareholders' equity. In addition, however, under UK GAAP the Group held certain reserves on productsthat are now classified as investment contracts. These reserves are releasedunder IFRS. The impact is to decrease profit after tax by £7.7 million for theyear ended 31 December 2004, with a £2.6 million increase in shareholders'equity (£10.3 million at 1 January 2004). 3. Deferred Acquisition Costs and Deferred Income (DAC/DIR) Revenue and expense for investment contracts are recognised in accordance withIAS 18 (Revenue). Under IAS 18, revenue arising from investment contracts mustbe recognised over the life of the contract and an explicit deferred incomeliability is recognised for any front end fees which relate to services to beprovided in future periods. Under UK GAAP no such liability is recognised andfront end fees are recognised when received. The recognition of deferred income(net of the associated deferred tax asset) decreases shareholders' equity by£186.4m at 31 December 2004 (£179.1 million at 1 January 2004) and decreasesprofit after tax by £7.3 million for the year ended 31 December 2004. In addition under IAS18 only directly attributable incremental acquisition costsare deferred. However the introduction of IFRS significantly extends the rangeof investment contracts where costs may be deferred. This deferral of additionalacquisition costs (net of the associated deferred tax liability) has increasedshareholders' equity by £183.0 million at 31 December 2004 (£163.3 million at 1January 2004) and increased profit after tax by £19.7 million for the year ended31 December 2004. Consequently the aggregate deferred income and deferred acquisition costadjustments have decreased shareholders' equity by £3.4 million as at 31December 2004 (£15.8 million at 1 January 2004), and increased profit after taxby £12.4 million for the year ended 31 December 2004. 4. Unit Linked Asset Analysis and Valuation Under UK GAAP assets held to cover unit-linked liabilities were disclosed as asingle line item, but under IFRS they are disclosed under the relevantinvestment and other balance sheet categories. This reclassification has noimpact on profit after tax or shareholders' equity. Under IFRS the Group's investments are classified as fair value through profitor loss and IAS 39 requires that the fair value for listed investment bedetermined at a bid value, rather than at mid value as under UK GAAP. Thisrevaluation from mid to bid for the assets held within the unit-linked funds isoffset by a change in investment contract liability provisions and thus has noimpact on profit after tax or shareholders' equity. The Group discounts the deferred tax on unrealised capital gains within theunit-linked funds to reflect the expected time period over which the gains areexpected to be realised. While this discounting is required in determining theunit-linked liability, IFRS does not permit the discounting of deferred tax inthe computation of unit linked assets (resulting in an asset liabilitymismatch). Adjustments have therefore been made to account for the unprovidedtax liability within the unit linked assets. This has reduced profit after taxby £0.5 million for the year ended 31 December 2004 and shareholders' equity by£0.5 million at 31 December 2004 (£ nil at 1 January 2004). Any tax liabilitywill be settled by the unit linked funds rather than the Group. 5. Consolidation of Unit Trusts IFRS requires the consolidation of certain St. James's Place Unit Trusts inwhich the Group, via its unit linked funds, owns more than 50% of the units.These did not previously require consolidation under UK GAAP, but a differentdefinition of the circumstances in which an entity is deemed to be under thecontrol of an investor applies under IFRS. The consolidation of these unittrusts has no impact on profit after tax or shareholders' equity. 6. Other Adjustments - Impact on Shareholders' Equity There are a number of other adjustments which affect profit after tax andshareholders' equity, as set out below: (i) Dividend Recognition Under UK GAAP dividends were recognised in the period to which they relatedregardless of whether they had been declared or approved. Under IAS 10 (EventsAfter the Balance Sheet Date) dividends may only be recognised when they havebeen declared and approved. The IFRS dividend for the year ended 31 December2004 therefore represents the final 2003 dividend and the interim 2004 dividend.The reversal of the final 2004 dividend has resulted in an increase inshareholders' equity of £7.0 million at 31 December 2004 (1 January 2004 £6.5million). (ii) Share Based Payment Under UK GAAP the costs of awards to employees and members of the St. James'sPlace Partnership under share based payment plans, other than Save as You EarnPlans, were recognised immediately if no performance criteria applied. Where performance criteria applied, the cost was recognised over the period towhich the performance criteria related. In both circumstances the cost of awardswas based on the underlying share price at the date of grant of the awards, lessany expected contribution. The cost was based on a reasonable expectation of theextent to which performance criteria would be met and any subsequent changes inthat expectation were reflected in the income statement. Under IFRS 2 equity instruments granted after 7 November 2002 which remainunvested at 1 January 2005 are measured at fair value. The fair value of theequity instrument is determined at grant date and recognised over the vestingperiod, with a corresponding adjustment in equity. In addition, a deferred taxasset, representing the expected future tax deduction in respect of instrumentsgranted and based on intrinsic value, is also recognised. The effect of this change in accounting treatment is to decrease profit aftertax by £1.1 million in the year ended 31 December 2004, offset by an increase inequity of £1.8 million (as illustrated by the Consolidated Statement of Changesin Equity). In addition, shareholders' equity increased by £1.7 million at 31December 2004 (£1.0 million at 1 January 2004). (iii) Revaluation of Owner Occupied Property The Group has elected to value owner occupied property at the date of transitionto IFRS (1 January 2004) and apply this fair value as the deemed cost at thatdate. Revaluation adjustments made in the year ended 31 December 2004 havetherefore been reversed, decreasing profit after tax for the year by £0.2million. Similarly, shareholders' equity has decreased by £0.2 million at 31December 2004 (£ nil at 1 January 2004). 7. Other Adjustments - Nil Impact on Shareholders' Equity IFRS also require a number of gross up adjustments and balance sheetreclassifications, none of which affect profit after tax or shareholders'equity. Further details are shown below: (i) Policyholder and Shareholder Tax The Group discloses policyholders' and shareholders' tax separately within theincome statement. For the purposes of mapping the UK GAAP accounts under theIFRS format the tax on the long-term business fund was treated as policyholdertax. Under IFRS, however, the Group is treating the tax borne by the unit-linkedfunds as policyholder tax with all other tax being treated as shareholder tax.This has resulted in the reclassification of certain non unit-linked tax itemsout of policyholder tax into shareholder tax, together with the gross up oftaxes borne by the UK unit linked funds which are offset against tax payable bythe UK life company. The overall impact of the adjustment is to increasepolicyholder tax by £22.0 million and decrease shareholder tax by £22.0 millionin the year ended 31 December 2004. There is no impact on the balance sheet as aresult of these adjustments. (ii) Acquired value of in force business Under UK GAAP the acquired value of in-force business was disclosed net of tax.The asset has been grossed up for deferred tax under IFRS, both increasing theacquired value of in-force business and the deferred tax liability by £21.0million at 31 December 2004 (£21.8 million at 1 January 2004). This adjustment has also given rise to an increase of £0.8 million in the costof amortisation and a similar decrease in the tax expense in the incomestatement for the year ended 31 December 2004. (iii) Income Expense Gross Up Within the primary statements of the UK GAAP accounts the expenses of the unittrust business and other operations were netted off again their respectiveincome streams. These expenses, which totalled £56.4 million in the year ended31 December 2004, have been grossed up under IFRS. There is no balance sheetimpact as a result of this adjustment. (iv) Deferred Tax Gross Up The £7.3 million deferred tax asset (£ nil at 1 January 2004) in respect ofunrelieved expenses, which had previously been netted off against deferred taxliability under UK GAAP, has been grossed up under IFRS for presentationalpurposes. There is no impact on the income statement. (v) Reclassification Adjustment Monies held for the longer term in unitised money market funds (£76.1 million at31 December 2004, £25.4 million at 1 January 2004) have been reclassified asinvestment in collective investment schemes. This adjustment has no impact onthe income statement. 8. Cash Flow Statement Under IFRS the Group's consolidated cash flow statement includes all cash flowsof the Group, including those relating to the long-term fund. Under UK GAAP thecash flows of the long term fund are explicitly excluded, except to the extentthat funds are transferred to or from the shareholder. Accounting Policies (a) Basis of consolidation The consolidated financial information incorporates the assets, liabilities andthe results of the Company and of its subsidiary undertakings. Subsidiaries arethose entities in which the Group directly or indirectly has the power to governthe financial and operating policies in order to gain benefits from itsactivities (including unit trusts in which the Group holds more than 50% of theunits). The financial statements of subsidiaries are included in theconsolidated financial statements from the date that control commences until thedate that control ceases. Intragroup balances, and any income and expenses or unrealised gains and lossesarising from intragroup transactions, are eliminated in preparing theconsolidated financial statements. (b) Product classification The Group's products are classified for accounting purposes as either insurancecontracts or investment contracts. Insurance contracts are contracts whichtransfer significant insurance risk. Contracts that do not transfer significantinsurance risk are treated as investment contracts. Where contracts contain bothinsurance and investment components and the investment components can bemeasured reliably, the contracts are unbundled and the components are separatelyaccounted for as insurance contracts and investment contracts respectively. (c) Long term business (i) Premium income For unit-linked insurance contracts, premiums are recognised as revenue when theliabilities arising from them are created. All other premiums are accounted forwhen due for payment. Investment contract premiums are not included in the income statement but arereported as deposits to investment contract liabilities in the balance sheet. (ii) Revenue from investment contracts Fees charged for services related to the management of investment contracts arerecognised as revenue as the services are provided. Initial fees which exceedthe level of recurring fees and relate to the future provision of services, aredeferred and amortised over the anticipated period in which services will beprovided. (iii) Claims For insurance contracts, death claims are accounted for on notification ofdeath. Surrenders for non-linked policies are accounted for when payment ismade. Critical illness claims are accounted for when admitted. All other claimsand surrenders are accounted for when payment is due. For investment contracts, benefits paid are not included in the income statementbut are instead deducted from investment contract liabilities. The movement ininvestment contract liabilities consists of benefits paid in the period less thecorresponding elimination of the policyholder liability originally recognised inthe balance sheet and the investment return credited to policyholders. (iv) Acquisition costs For insurance contracts, acquisition costs comprise direct costs such as initialcommission and the indirect costs of obtaining and processing new business.Acquisition costs which are incurred during a financial year are deferred by useof an explicit asset which is amortised over the period during which the costsare expected to be recoverable and in accordance with the incidence of futurerelated margins. For investment contracts only directly related acquisition costs, which varywith and are related to securing new contracts and renewing existing contracts,are deferred to the extent that they are recoverable out of future revenue.Deferred acquisition costs are amortised on a straight line basis over theaverage lifetime of the Group's investment contracts. All other costs arerecognised as expenses when incurred. (v) Insurance contract liabilities Under current IFRS requirements, insurance contract liabilities are measuredusing accounting policies consistent with those adopted previously underexisting accounting practices. In the UK, the insurance contract provision is determined following an annualactuarial investigation of the long-term fund in accordance with regulatoryrequirements. The provisions are calculated on the basis of current informationand using the gross premium valuation method. The Group's accounting policiesfor insurance contracts meet the minimum specified requirements for liabilityadequacy testing under IFRS 4, as they consider current estimates of allcontractual cash flows, and of related cash flow such as claims handling costs. Long-term business provisions can never be definitive as to their timing nor theamount of claims and are therefore subject to subsequent reassessment on aregular basis. (vi) Investment contracts Investment contracts consist of unit linked contracts. Unit linked liabilitiesare measured by reference to the value of the underlying net asset value of theGroup's unitised investment funds, determined on a bid value, at the balancesheet date. Deferred tax on unrealised capital gains, discounted to reflect thetime period over which such gains are expected to be realised, is also reflectedin the measurement of unit linked liabilities. (d) Reinsurance The Group's insurance subsidiaries cede insurance premiums and risk in thenormal course of business. Outwards reinsurance premiums are accounted for inthe same accounting period as the related premiums for the direct reinsurancebusiness being reinsured. Reinsurance assets include balances due fromreinsurance companies for paid and unpaid losses, ceded unearned premiums andceded future life policy benefits. Amounts recoverable from reinsurers areestimated in a manner consistent with the claim liability associated with thereinsured policy. (e) Fee & commission income Fee and commission income primarily consists of management fees on investmentcontracts (see accounting policy note c (ii)) and commission due in respect ofproducts sold on behalf of third parties. Commission is accounted for whenearned. (f) Investment return Investment return comprises investment income and investment gains and losses.Investment income includes dividends, interest and rent. Dividends are accruedon an ex-dividend basis. Interest and rent are accounted for on an accrualsbasis. (g) Expenses (i) Operating lease payments Leases where a significant proportion of the risks and rewards of ownership isretained by the lessor are classified as operating leases. Payments made underoperating leases are recognised in the income statement on a straight-line basisover the term of the lease. Lease incentives received are recognised in theincome statement as an integral part of the total lease expense. (ii) Financing costs Financing costs comprise interest payable on borrowings calculated using theeffective interest rate method. (h) Income taxes Income tax on the profit or loss for the year comprises current and deferredtax. Income tax is recognised in the income statement except to the extent thatit relates to items recognised directly in equity, in which case it isrecognised in equity. (i) Current tax Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantially enacted at the balance sheet date, andany adjustment to tax payable in respect of previous years. The total income tax expense for a period includes tax which is not related toprofits earned by shareholders for the period, being the income tax paid by theGroup in respect of UK life policy holder returns. The tax charge in the incomestatement is therefore analysed between tax that is payable in respect ofpolicyholders' returns and tax that is payable on shareholders' returns, withthe policyholder tax reflecting tax charged within the unit linked funds. (ii) Deferred tax Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes, exceptwhere otherwise required by IAS12 (Income Taxes). The amount of deferred taxprovided is based on the expected manner of realisation or settlement of thecarrying amount of assets and liabilities, using tax rates enacted orsubstantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised. (i) Dividends Dividend distributions to the Company's shareholders are recognised asliabilities in the period in which the dividends are declared, and, for thefinal dividend, when approved by the Company's shareholders at the annualgeneral meeting. (j) Intangible assets (i) Deferred acquisition costs See accounting policy note c (iv). (ii) Acquired value of in-force business Investment and insurance contracts acquired in business combinations aremeasured at fair value at the time of acquisition. The acquired value of in-force contracts is amortised over the estimated life of the contracts. (iii) Goodwill Goodwill on the acquisition of subsidiaries prior to 1998 has been chargeddirectly to reserves. Prospectively the Group's policy is to recognise goodwillon the balance sheet as an intangible asset, measured at cost less anyaccumulated impairment losses. (k) Property & equipment Items of property and equipment are stated at cost less accumulated depreciationand impairment losses (see accounting policy note p). The deemed cost of owneroccupied property is the fair value as at 1 January 2004, the date of transitionto IFRS.Depreciation is charged to the income statement on a straight-line basis overthe estimated useful lives of the property and equipment as follows: • Computers: 3 years• Fixtures and fittings: 5 years• Office equipment: 5 years• Motor vehicles: 4 years• Buildings 50 years (l) Investment property Investment properties, which are all held within the unit linked funds, areproperties which are held to earn rental income and / or for capitalappreciation. They are stated at fair value. An external, independent valuationcompany, having an appropriate recognised professional qualification and recentexperience in the location and category of property being valued, values theportfolio every month. The fair values are based on market values, being theestimated amount for which a property could be exchanged on the date ofvaluation between a willing buyer and a willing seller in an arm's lengthtransaction after proper marketing wherein the parties had each actedknowledgeably, prudently and without compulsion. Any gain or loss arising from a change in fair value is recognised in the incomestatement. Rental income from investment property is accounted for as describedin accounting policy note f. (m) Investments The Group's investments are all classified as fair value through profit andloss, with all gains and losses recognised through the income statement. Thefair values of quoted financial investments are based on current bid prices. If the market for a financial investment is not active, the Group establishesfair value by using valuation techniques such as recent arm's lengthtransactions, reference to similar listed investments, discounted cash flowmodels or option pricing models. (n) Currency forwards The Group uses currency forwards within its unit-linked funds to hedge itsexposure to foreign currency. Each contract is recognised initially at cost andis subsequently stated at fair value, with all changes in value recognised inthe income statement. (o) Other receivables Other receivables are stated at cost less impairment losses. (p) Impairment policy The carrying amounts of the Group's assets which are not carried at fair valueare reviewed at each balance sheet date to determine whether there is anyindication of impairment. If any such indication exists, the asset's recoverableamount is estimated. An impairment loss is recognised whenever the carryingamount of an asset exceeds its recoverable amount. Impairment losses arerecognised in the income statement. Impairment losses are reversed - through the income statement - if there is achange in the estimates used to determine the recoverable amount. Such lossesare reversed only to the extent that the assets' carrying amount do not exceedthe carrying amount that would have been determined, net of depreciation oramortisation where applicable, if no impairment loss have been recognised. (q) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call withbanks, other short-term highly liquid investments and bank overdrafts. (q) Provisions Provisions are recognised when the Group has a present legal or constructiveobligation as a result of past events such that it is probable that an outflowof economic benefits will be required to settle the obligation and a reliableestimate of the amount of the obligation can be made. The Group recognisesprovisions for onerous contracts when the expected benefits to be derived from acontract are less than the unavoidable costs of meeting the obligations underthe contract. (r) Borrowings Borrowings are recognised initially at fair value, net of transaction costs, andsubsequently stated at amortised cost. The difference between the proceeds andthe redemption value is recognised in the income statement over the borrowingperiod on an effective interest rate basis. (s) Other payables Other payables are stated at cost. (t) Employee benefits (i) Pension obligations The Group operates a defined contribution personal pension plan for itsemployees. Contributions to this plan are recognised as an expense in the incomestatement as incurred. The Group also has an occupational pension scheme with both a definedcontribution and a defined benefit section, both of which are closed to newmembers. Contributions to the defined contribution section, in respect of existingmembers, are recognised as an expense in the income statement as incurred. The defined benefit section has no active members and there are thus no employercontributions. The residual liabilities to the current and deferred pensionershave been matched by purchased annuities (both immediate and deferred) fromRelated Shares:
St James's Place