14th Sep 2005 07:00
Provident Financial PLC14 September 2005 Provident Financial plc Interim results for the half-year to 30 June 2005 H I G H L I G H T S Provident Financial is a leading international provider of consumer credit, car finance and motor insurance with 3.7 million customers in the UK, Republic of Ireland, central Europe and Mexico. Key financial results - reported on an IFRS basis 30 June 2005 30 June 2004Pre-tax profit £82.9m £84.0mEarnings per share 23.07p 23.32pInterim dividend per share 14.06p 13.65p Key points • Good results from majority of group• Excellent international results with pre-tax profit up 79% to £19.2m• Solid UK home credit performance with pre-tax profit reduced by 1.0% to £60.5m• Vanquis Bank cardholders up to 113,000• Strong performance from motor insurance with pre-tax profit up by 39% to £23.1m• £6.2m pre-tax loss at Yes Car Credit offsets strong profit growth (+14%) in remainder of group• Group pre-tax profit down 1.3% to £82.9m• Earnings per share down 1.1% to 23.07 pence• Dividend per share up 3% to 14.06 pence Prospects for 2005 • Good performances from majority of group with growth offset by trading losses at Yes Car Credit Chairman's comment: "The majority of the group is delivering good results. The exception is Yes CarCredit, where a new management team is implementing a comprehensive improvementplan to return the business to profitability during 2006. We are closelymonitoring performance against this plan and will keep the business understrategic review." John van KuffelerChairman14 September 2005 Enquiries: Today Thereafter MediaDavid Stevenson 020 7404 5959 01274 731111 Investor RelationsHelen Waggott 020 7404 5959 01274 731111 BrunswickKevin Byram 020 7404 5959 020 7404 5959 Chairman's statement An otherwise strong group performance for the first six months of 2005 has beenoffset by trading losses at Yes Car Credit. Group profit before tax has fallenby 1.3% to £82.9 million (June 2004 £84.0 million) and earnings per sharedecreased by 1.1% from 23.32p to 23.07p. An interim dividend of 14.06p pershare (June 2004 13.65p) has been declared, an increase of 3.0%. Adoption of International Financial Reporting Standards Up to 31 December 2004 the group prepared its financial statements in accordancewith UK Generally Accepted Accounting Principles (UK GAAP). On 1 January 2005the group implemented International Financial Reporting Standards (IFRS). Inthis interim report the 2004 comparative financial information has been restatedon the basis of the IFRS accounting policies as described in note 4. The method prescribed by IFRS for the recognition of revenue on home creditloans results in revenue in excess of that to which we are contractuallyentitled being reported as revenue. There is an equal and compensating increasein the impairment charge. Whilst this "grossing up" does not change thereported profit, it does result in a material distortion of both revenue and theimpairment charge. To give a more meaningful view of the quantum of creditlosses we have also disclosed, for the home credit businesses, bad debt,calculated on the previous basis under UK GAAP. Operations UK consumer credit division Home credit Conditions in the market for small sum credit remain highly competitive with awide range of credit products available to many of our customers. Customernumbers at June 2005 were 4% lower than at June 2004 at 1.46 million. Half thereduction is due to action we took last year to eliminate certain uneconomiccustomer recruitment activities and half is attributable to market conditions. Despite the fall in customer numbers, credit issued increased by 4% in the firsthalf of 2005, benefiting from increased sales of larger loans, repaid overlonger terms of eighteen months or two years to selected, lower risk customers.This good performance has reversed, in the short-term, the reduction in creditissued experienced during 2004. Receivables at the half-year were £547 million,up by 5% on June 2004. Revenue increased by 0.3% to £282 million. The charge for impairment to customer receivables increased in line with creditissued, up by 4.5% to £101 million (on a UK GAAP basis, the bad debt chargeincreased by 5.4% to £55.2 million, representing a moving annual total of 9.8%of credit issued compared to 9.9% at June 2004). Costs were tightly controlled,falling by 1.1% to £114 million. Profit before tax reduced by 1.0% to £60.5million (June 2004 £61.1 million). Yes Car Credit The performance of Yes Car Credit during the first half of 2005 was worse thanexpected, primarily because of reduced sales volumes. A total of 15,289vehicles were sold and financed during the first half of 2005, 25% less than inthe corresponding period of 2004. While market conditions remain depressed withsales volumes in the used car credit market down by 7% in the first half, YesCar Credit's performance is considerably worse. Lower numbers of enquiries inresponse to national advertising and a reduced conversion of customer enquiriesto sales are key contributory factors. The reduction in sales volumes combined with rising vehicle preparation costsresulted in a decrease in gross profit of £10.9 million (16%) to £55.7 million.In addition, sales of optional insurance products reduced following theintroduction of new regulations in January 2005, which require a more complexand time-consuming sales process. As a result, the margins on business writtenin the first half of the year were lower than expected and this will flowthrough to the gross profit margins earned in subsequent periods. The charge for impairment of customer receivables increased by more thanexpected, up by 6.2% to £18.9 million. Costs were reduced by 4.3% to £36.0million, benefiting from the closure of two under-performing branches earlier inthe year. The loss before tax for the half-year to June 2005 was £6.2 million compared toa profit before tax of £5.7 million for the first half of 2004 and a loss of£8.4 million for the second half of 2004. During the past nine months a new senior management team has been recruited anda comprehensive improvement plan has been prepared and is being implemented.This aims to deliver improvements in all areas of the business and return it toprofitability. The improvement plan is beginning to deliver benefits and wewill continue to monitor performance closely against this plan. We are alsoconducting a full review of the strategy and options for this business andintend to conclude this within the next six months. Vanquis Bank Vanquis Bank performed well in the half-year to June 2005. In the firstquarter, the operations infrastructure was expanded to support the full scalelaunch of a differentiated credit card for the non-standard UK market. Thisexpansion enabled a successful acceleration of customer recruitment in thesecond quarter. At 30 June 2005, 113,000 cards were in issue, up from 76,000 atDecember 2004. Receivables at the half-year were £42.0 million, up from £12.1million at June 2004. Revenue was £7.2 million (June 2004 £2.0 million). Many of the costs associated with building a credit card business, includingcustomer acquisition and impairment charges, arise in the early stages of thecustomer relationship, leading to a substantial early investment in start-uplosses. This is reflected in the result for the first half of 2005 which, asexpected, was a loss of £7.2 million (June 2004 £4.8 million loss). Motor insurance division Provident Insurance continues to deliver excellent results. During the firsthalf of this year prices in our segments of the private car insurance markethave remained broadly stable. We have increased our prices by approximately 1%in the first half, and our policyholder numbers have remained steady at around498,000. Claims cost trends were favourable resulting in underwriting profitincreasing to £12.3 million for the first half of 2005 (June 2004 £4.7 million).The investment fund, held to meet future claims costs, reduced by 3.3% to £435million and yielded income of £10.8 million (June 2004 £11.9 million). Profitbefore tax increased by 39% to £23.1 million (June 2004 £16.6 million). International division In this section, percentage changes in credit issued, collections, customerreceivables, revenue and costs are stated on a like-for-like basis thattranslates foreign currency figures for the first half of 2004 into sterlingusing the rate of exchange prevailing in the first half of 2005. Percentagechanges in profit or loss figures are not currency adjusted and simply comparethe sterling figures for each half-year using the rate of exchange prevailing atthe time. The international division continues to grow rapidly and to produce excellentresults. Customer numbers at the end of June were 1.6 million, 246,000 (18%)higher than at June 2004. Credit issued for the division also increasedstrongly, up by 15% to £247 million. Customer receivables at June 2005increased by 24% to £276 million compared to June 2004 and this generatedincreased revenue, up by 23% to £172 million. The charge for impairment ofcustomer receivables was £72 million, up by 36% on the same period of 2004 (on aUK GAAP basis the bad debt charge increased by 32% to £33 million, representinga moving annual total of 10.3% of credit issued compared to 10.3% at June 2004).Costs continue to grow by less than revenue, rising by 12% to £71 million,reflecting improving efficiency as the business matures. Lower rates ofinterest on borrowings also benefited the division with interest costs rising byonly 4% to £10 million. Profit before tax increased by 79% to £19.2 million(June 2004 £10.7 million). Central Europe Central Europe is the largest business in the international division. Since itslaunch in 1997 it has grown rapidly and established strong market positions inthe four central European markets of Poland, Czech Republic, Hungary andSlovakia. At the end of June 2005 customer numbers were up by 197,000 (14%), to1.56 million compared to June 2004, with particularly strong growth in Hungaryand Slovakia. In the first half of 2005, credit issued also increased rapidly,up by 13% to £241 million. Customer receivables at June 2005 increased by 22%to £271 million compared to June 2004 and revenue by 22% to £169 million.Charges for impairment to customer receivables increased by more than we hadexpected, up by 34% to £71 million (on a UK GAAP basis the bad debt chargeincreased by 31% to £32.8 million, representing a moving annual total of 10.4%of credit issued compared to 10.2% at June 2004). This reflects a reduction inthe collections performance in Poland primarily attributable to the stronggrowth in lending in the second half of 2004. This has been addressed duringthe first half of this year with a measured slowing in the growth in creditissued in Poland together with an increased emphasis on collections. CentralEuropean overhead expenses increased by 10% to £63 million, well below volumegrowth and substantial efficiency gains continue to be made as the businessgrows. Interest costs on borrowings benefited from lower interest rates andincreased by just 1% to £9 million. Profit before tax increased by 53% from£16.3 million to £25.0 million. Mexico Following our decision to move from pilot scale in Mexico to a regional roll-outin the Puebla-Veracruz region, we have made good progress. In the first half of2005, nine new branches were opened, agent numbers rose by 568 to 1,192 andcustomer numbers increased from 35,000 to 63,000. In the six months to June2005, £6.2 million of credit was issued and collections and credit qualitydeveloped to plan. Mexico is performing as we anticipated and pre-tax start-uplosses for the half-year were, as expected, £1.5 million (June 2004 £1.1 millionloss). Regulatory The UK Government's Consumer Credit Bill is progressing through theparliamentary process and is expected to become law towards the end of thisyear. The aim of the bill is to modernise the regulation of consumer credit andto enhance consumer protection through tighter licensing requirements and bymaking it easier for consumers to challenge unfair practices and terms. Wewelcome these proposals. In Poland, a new law establishing a maximum interest rate of four times theLombard rate (equivalent to LIBOR in the UK) is being introduced. The Lombardrate is currently 6% which would result in a maximum interest rate of 24%. Thenew law becomes effective for loans issued from February 2006. We have madepreparations for this eventuality and are confident that we can continue toserve our customers without any material impact on the performance of our Polishbusiness. The Competition Commission inquiry into the supply of home credit in the UKcontinues and we have made several submissions of evidence in public and privatehearings, and in writing. We have made clear that Provident Financial is aresponsible lender operating in a highly competitive market with transparentproducts and a home service which is valued by our customers. The Commission isexpected to publish its 'emerging thinking' document later this month or inearly October and its 'provisional findings' report at the end of the year. Prospects for 2005 UK consumer credit division We expect that market conditions for UK home credit will remain competitive andthat the business will continue to see reductions in customer numbers for 2005.Growth in credit issued is expected for the year as a whole, although at aslightly lower level than for the half-year. This is because those customersalready served with larger, longer term loans are unlikely to require furtherloans during the second half of 2005. In common with other consumer lenders wehave recently seen early signs that the pressure on consumers' disposableincomes from rising fuel and utility prices is leading to an increase in arrearsand impairment charges. We continue to expect a modest reduction in profit thisyear with a further reduction in 2006 if current market conditions persist. At Yes Car Credit, the comprehensive improvement plan which is being implementedby the new management team is aimed at improving all areas of the business withparticular focus on increasing sales, profit margins and reducing impairmentcharges. Our target is for the business to return to profitable trading during2006, breaking-even for 2006 as a whole. We are closely monitoring performanceagainst this plan and will conclude a strategic review of this business withinthe next six months. 2005 will be a year of re-building and, as previouslyindicated, we expect pre-tax trading losses in the range of £15-20 million. Vanquis Bank is expected to grow its cardholder numbers and customer receivablesstrongly during the second half. Vanquis has also seen the results of increasedpressure on consumers' disposable incomes from rising fuel and utility pricesand has tightened its underwriting standards in response to an increase inarrears and impairment charges. Overall, Vanquis is developing in line withplan. We expect start-up losses of around £15 million in 2005, with a muchreduced loss in 2006 as the card portfolio matures and benefits from scaleeconomies, and profits in 2007. Motor insurance division We expect our underwriting results to continue to benefit from the favourabledevelopment of claims costs and the business is expected to deliver excellentresults for the year. International division International division is set to continue to deliver strong growth and goodresults for the year. In Mexico, we will further expand our operations in thePuebla-Veracruz region and we continue to expect start-up losses of about £5million for this year. In central Europe, we expect strong growth and a goodperformance for the year. Group outlook We expect good performances from the majority of the group in 2005 with growthoffset by the trading losses at Yes Car Credit. John van KuffelerChairman14 September 2005 Consolidated interim income statement Notes Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 as restated as restated £m £m £mRevenue 5 663.3 632.2 1,272.4 Finance income 13.9 13.6 27.4Total income 677.2 645.8 1,299.8Finance costs (27.6) (26.3) (57.1)Operating costs (423.9) (408.5) (767.7)Administrative expenses (142.8) (127.0) (269.5)Total costs (594.3) (561.8) (1,094.3) Profit before taxation 5 82.9 84.0 205.5 Tax expense 6 (24.3) (24.9) (61.1)Profit after taxation 58.6 59.1 144.4 Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 as restated as restated pence pence penceEarnings per share Basic 7 23.07 23.32 57.00Diluted 7 22.93 23.21 56.74 Dividend per shareProposed 8 14.06 13.65 20.75Paid 8 20.75 19.90 33.55 Statement of recognised income and expense Notes Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 as restated as restated £m £m £mProfit after taxation for the financial period 58.6 59.1 144.4 Exchange differences on foreign currencytranslations (2.3) (0.8) 3.9Net fair value losses - cash flow hedges (2.9) (0.4) (4.9)Actuarial losses on retirement benefit obligations 11 (18.5) (17.7) (34.3)Tax on items taken directly to equity 6.1 5.4 11.9Net expense recognised directly in equity (17.6) (13.5) (23.4) Total recognised income for the period 41.0 45.6 121.0 Consolidated interim balance sheet Notes Unaudited Unaudited Unaudited As at As at As at 30 June 2005 30 June 2004 31 Dec 2004 as restated as restated £m £m £mASSETS Non-current assetsGoodwill 9 94.1 87.8 87.8Property, plant and equipment 41.1 36.2 39.7Intangible assets 26.7 17.1 21.1Deferred income tax assets 73.8 57.8 67.0 235.7 198.9 215.6Current assetsInventories 11.3 13.7 16.6Financial assets:- Amounts receivable from customers: - due within one year 10 913.5 788.6 990.1 - due in more than one year 10 220.3 217.0 210.1- Derivative financial instruments 10.6 10.4 5.4Trade and other receivables 119.0 132.8 119.5Current income tax assets 4.0 1.0 4.0Cash and cash equivalents 505.7 521.1 500.1 1,784.4 1,684.6 1,845.8Total assets 2,020.1 1,883.5 2,061.4 LIABILITIES Current liabilities Financial liabilities:- Bank and other borrowings (17.0) (17.9) (35.3)- Derivative financial instruments (33.6) (29.6) (39.3)Trade and other payables (126.2) (131.6) (134.9)Current income tax liabilities (53.4) (50.2) (60.1) Insurance accruals and deferred income (395.4) (447.3) (424.9) (625.6) (676.6) (694.5)Non-current liabilitiesFinancial liabilities- Bank and other borrowings (855.2) (717.6) (822.4)Retirement benefit obligations 11 (133.2) (118.5) (129.8) (988.4) (836.1) (952.2)Total liabilities (1,614.0) (1,512.7) (1,646.7) NET ASSETS 406.1 370.8 414.7 SHAREHOLDERS' EQUITY Called-up share capital 12 26.5 26.4 26.4Share premium account 12 107.4 105.1 105.5Other reserves 12 (1.2) (1.8) 2.4Retained earnings 12 273.4 241.1 280.4TOTAL EQUITY 12 406.1 370.8 414.7 Consolidated interim cash flow statement Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 as restated as restated £m £m £mCash flows from operating activities Cash generated from operations 101.4 114.8 79.7Interest paid (30.7) (27.6) (53.3)Interest received 14.1 13.8 27.9Income tax paid (31.4) (23.1) (54.5)Net cash generated from/(used in) operating activities 53.4 77.9 (0.2) Cash flows from investing activitiesPurchases of property, plant and equipment (10.1) (8.7) (19.0)Proceeds from sale of property, plant and equipment 1.5 0.9 3.3Purchase of intangible assets (6.0) (2.9) (7.1)Net cash used in investing activities (14.6) (10.7) (22.8) Cash flows from financing activities Proceeds from borrowings 105.0 44.3 181.9Repayment of borrowings (85.4) (97.9) (139.6)Dividends paid to company shareholders (52.7) (50.3) (84.9) Proceeds from issue of share capital 2.0 3.7 4.1(Purchase of)/proceeds from the sale of treasury shares (0.4) (0.1) 1.9Net cash used in financing activities (31.5) (100.3) (36.6) Net increase/(decrease) in cash and bank overdrafts 7.3 (33.1) (59.6)Cash and bank overdrafts at beginning of period 493.5 546.0 546.0Exchange (losses)/gains on cash and bank overdrafts (2.0) (1.8) 7.1Cash and bank overdrafts at end of period 498.8 511.1 493.5 Cash and bank overdrafts at end of period comprise: Cash at bank and in hand 50.2 53.7 38.4Short term deposits 455.5 467.4 461.7 Cash and cash equivalents 505.7 521.1 500.1 Overdrafts (held in borrowings) (6.9) (10.0) (6.6) 498.8 511.1 493.5 The cash and investments held by those businesses that are regulated arerequired to be strictly segregated from those of the rest of the group and arenot available to repay group borrowings. At 30 June 2005 the cash and shortterm deposits held by the group's regulated businesses amounted to £462.7m (30June 2004: £478.0m, 31 December 2004: £469.6m). Cash generated from operations Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 as restated as restated £m £m £m Profit for the period 58.6 59.1 144.4Adjusted for: Tax expense 24.3 24.9 61.1 Finance costs 27.6 26.3 57.1 Finance income (13.9) (13.6) (27.4) Share-based payment charge 1.5 0.7 1.4 Depreciation 6.3 5.2 10.8 Amortisation 0.4 - 0.2Loss on sale of property, plant and equipment 0.1 - 0.1Changes in operating assets and liabilities: Inventories 5.3 0.9 (2.0) Amounts receivable from customers 51.0 39.9 (120.6) Trade and other receivables (1.5) (5.0) 14.7 Trade and other payables (13.6) (2.8) (11.4) Insurance accruals and deferred income (29.5) (15.6) (38.0) Retirement benefit obligations (15.1) (5.3) (10.6) Derivative financial instruments (0.1) 0.1 (0.1)Cash generated from operations 101.4 114.8 79.7 Changes in the cash flow statement on transition to IFRS The insurance division holds deposits with financial institutions to meet thecost of settling future claims. These deposits have maturities of three monthsor less from the date of acquisition. UK GAAP requires the movement in cash to be reported in the cash flow statement.Cash is defined as 'cash in hand and deposits repayable on demand lessoverdrafts'. Under UK GAAP, the insurance division deposits did not meet thedefinition of cash and were therefore classified as a 'management of liquidresources' in the cash flow statement. The cash flows reported under IAS 7 'Cash Flow Statements' relate to movementsin cash and cash equivalents. Under IAS 7, cash equivalents are defined as 'short term highly liquid investments that are readily convertible into knownamounts of cash and subject to insignificant risk of changes in value'.Generally, an investment qualifies as a cash equivalent when it has a maturityof three months or less from the date of acquisition. Accordingly, under IAS 7,the insurance division deposits form part of cash and cash equivalents. Notes to the interim financial information 1. General information Following the adoption of IAS Regulation EC 1606/2002 on 19 July 2002 by theEuropean Parliament, Provident Financial plc ('the group'), along with all otherEuropean listed entities, will be required to prepare consolidated accounts inaccordance with International Financial Reporting Standards (IFRS) as endorsedby the European Union (EU) for years beginning 1 January 2005. The group will apply IFRS for the year ended 31 December 2005, and will prepareone year of comparative figures under IFRS. Accordingly the group's date oftransition to IFRS is 1 January 2004 and its first reporting period under IFRSis for the half-year ended 30 June 2005. This report therefore contains theconsolidated financial results for the half-year ended 30 June 2005 on the basisof the IFRS accounting policies as described in note 4, and comparatives for thehalf-year ended 30 June 2004 and for the year ended 31 December 2004 restated tocomply with these accounting policies. Reconciliations between previously reported UK GAAP results and IFRS as adoptedare presented in note 13. This financial information does not constitute a set of statutory accounts andis unaudited. This document (the 2005 interim report) will be published on thecompany's website in addition to the normal paper version. The maintenance andintegrity of the Provident Financial website is the responsibility of thedirectors and the work carried out by the auditors does not involveconsideration of these matters. Legislation in the UK governing the preparationand dissemination of accounts may differ from legislation in otherjurisdictions. 2. Basis of preparation The financial information in this interim report has been prepared on the basisof all EU endorsed IFRSs that had been published by 31 December 2004 and applyto accounting periods beginning on or after 1 January 2005. The group has also,as permitted, early adopted the amendment to IAS 19 'Employee Benefits -Actuarial Gains and Losses' that was published by the International AccountingStandards Board (IASB) in December 2004 but has not yet been endorsed by the EU.The directors expect that the amendments to IAS 19 will be fully adopted bythe EU and will therefore be available for use in the annual IFRS Report andAccounts for the year ended 31 December 2005. During 2005 further standards andinterpretations may be issued that will be applicable for financial yearsbeginning on or after 1 January 2005 or that are applicable to later accountingperiods but may be adopted early. The group's first IFRS accounts may,therefore, be prepared in accordance with some different accounting policiesfrom those used to prepare the financial information presented here. The accounting policies that have been applied to this interim financialinformation are set out in note 4. The comparative figures for the financial year ended 31 December 2004 are notthe group's statutory accounts for that financial year. Those accounts, whichwere prepared under UK GAAP in accordance with the UK Companies Act 1985, havebeen reported on by the company's auditors and delivered to the registrar ofcompanies. The report of the auditors was unqualified and did not containstatements under section 237(2) or (3) of the UK Companies Act 1985. 3. Transitional arrangements On transition to IFRS, an entity is generally required to apply IFRSretrospectively, except where an exemption is available under IFRS 1 'First-timeAdoption of International Financial Reporting Standards'. The following is asummary of the key elections from IFRS 1 that have been made by the group. - The group has elected to adopt the IFRS 1 exemption in relation tobusiness combinations and will only apply IFRS 3 'Business Combinations'prospectively from 1 January 2004. As a result, the balance of goodwill underUK GAAP as at 31 December 2003 is the deemed IFRS cost of goodwill at 1 January2004. Goodwill is not amortised annually under IFRS but is instead subject to anannual impairment review. - The group has elected to adopt the IFRS 1 option to reset foreign currencycumulative translation differences to zero on transition to IFRS. Cumulativeforeign currency translation differences are shown separately as part of otherreserves under IFRS. - The group has elected to recognise all actuarial gains and losses onpensions directly in shareholders' equity at 1 January 2004. The full definedbenefit pension deficit as at 1 January 2004 is therefore recognised in thebalance sheet. - The group has elected to apply the share-based payment exemption and hasapplied IFRS 2 from 1 January 2004 to those options that were issued after 7November 2002 but that had not vested by 1 January 2005. - The group has elected to retain UK GAAP carrying values of property, plantand equipment (including any historic revaluations) as deemed cost on the dateof transition to IFRS. IFRS 1 allows IAS 32 'Financial Instruments: Disclosure and Presentation', IAS39 'Financial Instruments: Recognition and Measurement' and IFRS 4 'InsuranceContracts' to be applied from 1 January 2005 with no restatement of comparativeinformation. Given that IAS 39 impacts the group's revenue recognition,impairment and recognition of derivatives at fair value, the group has not takenadvantage of this exemption and has therefore fully adopted IAS 32, IAS 39 andIFRS 4 in its 2004 comparatives to ensure that they are comparable with the 2005results. 4. Significant accounting policies The interim financial information for the half-year ended 30 June 2005 has beenprepared on a going concern basis under the historical cost convention, asmodified by the revaluation of derivative financial instruments to fair value. The group's principal accounting policies under IFRS are as follows: Basis of consolidation The consolidated income statement and balance sheet include the accounts of thecompany and its subsidiary undertakings drawn up from the date control passes tothe group until the date control ceases. Control is assumed to exist where more than 50% of the voting share capital isowned or where it is clear that the group controls another entity either throughthe power to: - govern the operating and financial policies of that entity; - appoint or remove the majority of the members of the board of that entity; or - cast the majority of the votes at a board meeting of that entity. All intra-group transactions, balances and unrealised gains on transactionsbetween group companies are eliminated on consolidation. Revenue Revenue, which excludes value added tax and intra-group transactions, comprisesrevenue earned for the home credit businesses; premiums written for the motorinsurance underwriting business; revenue earned by Yes Car Credit on the sale ofmotor vehicles and associated finance and insurance contracts; and interest andfee income earned by Vanquis Bank. Revenue recognition In the home credit business, the service charge on a home credit loan is fixed.The charge does not increase if customers take longer than the contracted periodto repay the loan and there are no penalty or default interest charges. Inaccordance with IAS 39 the service charge is accounted for as interest income.Revenue on loan receivables is recognised using an effective interest rate(EIR). The EIR is calculated using estimated cash flows, being contractualpayments adjusted for the impact of customers repaying early, but excluding theanticipated impact of customers paying late or not paying at all. Directlyattributable incremental issue costs are also taken into account in calculatingthe EIR. Interest income continues to be accrued on impaired loans using theoriginal EIR applied to the loans' carrying value stated after the deduction forimpairment. In the car finance business of Yes Car Credit revenue from the sale of the motorvehicle is recognised in the income statement when the vehicle is sold. Financeincome and insurance commission, which are treated as part of the yield on thefinancing arrangement, are recognised using the EIR method. In respect of the motor insurance underwriting business, credit is taken to theincome statement for premium income, net of commissions paid to intermediaries,over the life of the policy on a straight line time apportioned method. In respect of the credit card business of Vanquis Bank, interest is calculatedon credit card advances to customers using the EIR on the daily balanceoutstanding. Annual fees charged to customers' credit card accounts arerecognised as part of the EIR. Penalty charges and other fees which are not anintegral part of the EIR are recognised at the time the charges are made tocustomers. Amounts receivable from customers All customer receivables are initially recognised at the amount loaned to thecustomer plus directly attributable incremental issue costs. After initialrecognition, customer receivables are subsequently measured at amortised cost.Amortised cost is the amount of the customer receivable at initial recognitionless customer repayments, plus revenue earned, less any deduction forimpairment. Customer receivables are assessed for impairment at each balance sheet date.All customer accounts that are in arrears are deemed to have demonstratedevidence of impairment and are subject to a detailed impairment review.Impairment is calculated by estimating the future cash flows from each portfolioof similar loans, discounting these to a present value using the original EIRand comparing this figure with the balance sheet value. All such impairmentsare charged to the income statement. Provision for unpaid insurance claims Provision is made at the period end for the estimated gross cost of claimsincurred but not settled at the balance sheet date, including the gross cost ofclaims expected to be incurred but not yet reported to the group. The estimatedcost of claims comprises expenses to be incurred in settling claims and adeduction for the expected value of salvage and other recoveries. Provisionsare calculated gross of any reinsurance recoveries. The group takes allreasonable steps to ensure that it has appropriate information regarding itsclaims exposures. However, given the uncertainty in establishing claimsprovisions, it is likely that the outcome will prove to be different from theoriginal liability established. The estimated cost of claims is calculated by reference to the projected numberof claims based on statistics showing how the number of notified claims hasdeveloped over time, and the anticipated average cost per claim based onhistorical levels adjusted to allow for changes in variables such aslegislation, inflation rates, the mix of business and industry benchmarks. Theprovision for estimated insurance claims is reviewed annually by an externalactuary. Amounts recoverable from reinsurers An asset is recognised in respect of amounts recoverable from reinsurers toreflect expected recoveries from reinsurers relating to insurance claims madeand estimated claims incurred but not reported at the balance sheet date.Amounts recoverable from reinsurers are assessed for impairment annually andwhenever events or changes in circumstances indicate that the carrying valueamount may not be recoverable. Goodwill All acquisitions are accounted for using the purchase method of accounting. Goodwill is measured as the excess of the fair value of the consideration overthe fair value of the acquired identifiable assets, liabilities and contingentliabilities. Goodwill is not subject to annual amortisation but is instead tested annuallyfor impairment and carried at cost less accumulated impairment losses. Gainsand losses on the disposal of a subsidiary include the carrying amount ofgoodwill relating to the subsidiary sold. Goodwill arising on acquisitions prior to 1 January 1998 was eliminated againstshareholders' funds under UK GAAP and has not been reinstated on transition toIFRS. On disposal of a business, any such goodwill relating to the businesswill not be taken into account in determining the profit or loss on disposal. Property, plant and equipment Property, plant and equipment is shown at cost less subsequent depreciation andimpairment, except for land, which is shown at cost less impairment. Cost represents invoiced cost plus any other costs that are directlyattributable to the acquisition of the item. Repairs and maintenance costs areexpensed as incurred. Under the transitional rules of IFRS 1, the group has elected to use previous UKGAAP carrying values, including revaluations, as deemed cost on transition toIFRS. Depreciation is calculated to write down assets to their estimated realisablevalue over their useful economic lives. The following are the principal basesused: % MethodLand Nil -Freehold and long leasehold buildings 2 1/2 Straight lineShort leasehold buildings Over the lease period Straight lineFixtures and fittings 10 Straight lineEquipment (including computer hardware) 20 to 33 1/3 Straight lineMotor vehicles 25 Reducing balance The residual value and useful economic life of all assets are reviewed, andadjusted if appropriate, at each balance sheet date. All items of property, plant and equipment, other than land, are tested forimpairment whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. Land is subject to an annual impairmenttest. An impairment loss is recognised for the amount by which the asset'scarrying value exceeds the higher of the asset's value in use or its fair valueless costs to sell. Computer software Acquired computer software licences are capitalised as an intangible asset onthe basis of the costs incurred to acquire and bring into use the specificsoftware. Directly attributable costs associated with the development of software thatwill generate future economic benefits are capitalised as part of the softwareintangible asset. Direct costs include the cost of software developmentemployees and an appropriate portion of relevant directly attributableoverheads. Computer software is amortised over its estimated useful economic life which isgenerally five years. Investment in own shares Shares purchased through the Qualifying Employees Share Ownership Trust ('theQUEST') are treated as treasury shares and are deducted at cost from otherreserves within shareholders' equity. Inventories Inventories comprise motor vehicles held for resale and are stated at the lowerof cost and net realisable value. Cost includes all costs of purchase, preparation and costs incurred in bringingthe vehicle to its present location and condition. Net realisable value is the estimated selling price in the normal course ofbusiness less the estimated costs of completion and the estimated costsnecessary to make the sale. Foreign currency translation Items included in the accounts of each of the group's subsidiaries are measuredusing the currency of the primary economic environment in which the subsidiaryoperates ('the functional currency'). The consolidated accounts are presentedin sterling which is the company's functional and presentational currency. Transactions that are not denominated in a subsidiary's functional currency arerecorded at the rate of exchange ruling at the date of the transaction.Monetary assets and liabilities denominated in foreign currencies are translatedinto the relevant functional currency at the rates of exchange ruling at thebalance sheet date. Differences arising on translation are charged or creditedto the income statement except when deferred in equity as qualifying cash flowhedges or qualifying net investment hedges. The income statements of group subsidiaries (none of which has the currency of ahyperinflationary economy) that have a functional currency different fromsterling are translated into sterling at the average exchange rate and thebalance sheets are translated at the exchange rates ruling at the balance sheetdate. On consolidation, exchange differences arising from the translation ofthe net investment in foreign subsidiaries, and of borrowings and other currencyinstruments designated as hedges of such investments, are taken to shareholders'equity. From 1 January 2004 these exchange differences are recognised as aseparate component of shareholders' equity within other reserves. When aforeign operation is sold such exchange differences are recognised in the incomestatement as part of the gain or loss on sale. Segment reporting The group's primary reporting format is business segments and its secondaryformat is geographical segments. A business segment is a component of the groupthat is engaged in providing a group of related products and is subject to risksand returns that are different from those of other business segments. Ageographical segment is a component of the group that operates within aparticular economic environment and that is subject to risks and returns thatare different from those of components operating in other economic environments. Leases The leases entered into by the group are solely operating leases. Costs inrespect of operating leases are charged to the income statement on a straightline basis over the lease term. Deferred income tax Deferred income tax is provided in full, using the liability method, ontemporary differences between the tax bases of assets and liabilities and theircarrying amounts in the consolidated accounts. Deferred income tax isdetermined using tax rates (and laws) that have been enacted or substantiallyenacted by the balance sheet date and are expected to apply when the relateddeferred income tax asset is realised or the deferred income tax liability issettled. Deferred income tax assets are recognised to the extent that it is probable thatfuture taxable profit will be available against which the temporary differencescan be utilised. Deferred income tax is provided on temporary differences arising on investmentsin subsidiaries except where the timing of the reversal of the temporarydifference is controlled by the group and it is probable that the temporarydifference will not reverse in the future. Employee benefits • Defined benefit pension plans The charge in the income statement in respect of defined benefit pension planscomprises the actuarially assessed current service cost of working employeestogether with the interest charge on pension liabilities offset by the expectedreturn on pension scheme assets. All charges are allocated to administrativeexpenses. The liability recognised in the balance sheet in respect of defined benefitpension plans is the present value of the defined benefit obligation at thebalance sheet date less the fair value of the plan assets. The defined benefit obligation is calculated annually by independent actuariesusing the projected unit credit method. The present value of the definedbenefit obligation is determined by discounting the estimated future cashoutflows using interest rates of high quality corporate bonds that have terms tomaturity approximating to the terms of the related pension liability. Cumulative actuarial gains and losses arising from experience adjustments andchanges in actuarial assumptions are recognised immediately in the statement ofrecognised income and expense. • Defined contribution plans Contributions to defined contribution pension schemes are charged to the incomestatement on an accruals basis. Dividends Dividend distributions to the company's shareholders are recognised as aliability in the group accounts as follows: - Final dividend: when approved by the company's shareholders at the annual general meeting. - Interim dividend: when declared by the directors and paid by the company. Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand, short-term depositsand other short-term highly liquid investments with original maturities of threemonths or less held for the purpose of meeting short-term cash commitments andbank overdrafts. Bank overdrafts are presented in current liabilities to theextent that there is no right of offset with cash balances. Derivative financial instruments The group uses derivative financial instruments, principally interest rateswaps, currency swaps and forward currency contracts, to manage the interestrate and currency risk arising from the group's underlying business operations.No transactions of a purely speculative nature are undertaken. All derivative financial instruments are assessed against the hedge accountingcriteria set out in IAS 39. The majority of the group's derivatives meet thehedge accounting requirements of IAS 39 and are accordingly designated aseither: hedges of the fair value of recognised assets or liabilities or a firmcommitment (fair value hedge) or hedges of highly probable forecast transactions(cash flow hedge). Derivatives are initially recognised at the fair value on the date a derivativecontract is entered into and are subsequently remeasured at each reporting dateat their fair value. Where derivatives do not qualify for hedge accounting,movements in their fair value are recognised immediately within the incomestatement. Where the hedge accounting criteria have been met, the resultantgain or loss on the derivative instrument is recognised as follows: • Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fairvalue hedges are recorded in the income statement together with any changes inthe fair value of the hedged asset or liability that are attributable to thehedged risk. • Cash flow hedges The effective portion of changes in the fair value of derivatives that aredesignated and qualify as cash flow hedges are recognised in equity. The gainor loss relating to the ineffective portion is recognised immediately in theincome statement. Amounts accumulated in equity are recognised in the incomestatement when the income or expense arising on the hedged item is recognised inthe income statement. Share-based payments The group issues equity settled share-based payments to certain employeesthrough executive share option schemes, a performance share plan scheme and SaveAs You Earn (SAYE) schemes. The cost of providing share-based payments to employees is charged to the incomestatement over the vesting period of the related share options or shareallocations. The corresponding credit is made to a share-based payment reservewithin other reserves. The cost is based on the fair value of the options and shares allocateddetermined using a binomial option pricing model. The value of the charge isadjusted at each balance sheet date to reflect expected and actual levels ofvesting. In accordance with the transitional provisions of IFRS 2 'Share-based Payment'the group has elected to apply IFRS 2 to grants, options and other equityinstruments granted after 7 November 2002 and not vested at 1 January 2005. Borrowings Borrowings are recognised initially at fair value, being their issue proceedsnet of any transaction costs incurred. Borrowings are subsequently stated atamortised cost; any difference between proceeds net of transaction costs and theredemption value is recognised in the income statement over the expected life ofthe borrowings using the effective interest rate. All borrowings denominated in currencies other than sterling are translated atthe rate ruling at the balance sheet date. Where borrowings are the subject of a fair value hedge, changes in the fairvalue of the borrowing that are attributable to the hedged risk are recognisedin the income statement and a corresponding adjustment made to the carryingvalue of borrowings. 5. Segment information Primary reporting format - business segments Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 as restated as restated £m £m £mRevenue UK home credit 281.6 280.7 558.4Yes Car Credit 121.0 143.8 272.1Vanquis Bank 7.2 2.0 5.9UK consumer credit 409.8 426.5 836.4 International 171.5 122.1 271.2 Motor insurance 82.0 83.6 164.8 663.3 632.2 1,272.4 Profit before taxation UK home credit 60.5 61.1 154.0Yes Car Credit (6.2) 5.7 (2.7)Vanquis Bank (7.2) (4.8) (9.0)UK consumer credit 47.1 62.0 142.3 International 19.2 10.7 39.8 Motor insurance 23.1 16.6 34.6 Central (6.5) (5.3) (11.2) 82.9 84.0 205.5 Secondary reporting format - geographical segments Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 as restated as restated £m £m £mRevenue UK and Republic of Ireland 491.8 510.1 1,001.2Central Europe 168.5 121.6 269.4Mexico 3.0 0.5 1.8 663.3 632.2 1,272.4 Profit before taxation UK and Republic of Ireland 59.4 68.8 155.1Central Europe 25.0 16.3 52.6Mexico (1.5) (1.1) (2.2) 82.9 84.0 205.5 6. Tax expense The tax expense for the period has been calculated by applying the directors'best estimate of the effective tax rate for the year, which is 29.3% (30 June2004: 29.7%), to the profit for the period. 7. Earnings per share The basic and diluted earnings per share figures have been calculated using theprofit for the period attributable to ordinary shareholders of £58.6m (30 June2004: £59.1m, 31 December 2004: £144.4m) and the weighted average number ofshares in issue during the period. The weighted average number of shares in issue during the period can bereconciled to the number used in the basic and diluted earnings per sharecalculations as follows: Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 Number Number NumberWeighted average number of shares m m m In issue during the period 255.2 254.7 254.9Held by the QUEST (1.1) (1.5) (1.5) Used in basic earnings per share calculation 254.1 253.2 253.4 Issuable on conversion of outstanding options 1.4 1.3 1.2 Used in diluted earnings per share calculation 255.5 254.5 254.6 The movement in the number of shares in issue during the period is as follows: Number mAt 1 January 2005 255.1 Shares issued pursuant to the exercise of options 0.3 At 30 June 2005 255.4 8. Dividends paid and proposed Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 £m £m £m 2003 final - 19.90p - 50.3 50.32004 interim - 13.65p - - 34.6 2004 final - 20.75p 52.7 - - Dividends paid 52.7 50.3 84.9 An interim dividend in respect of 2005 of 14.06p per share, amounting to a totaldividend of £35.9m, has been declared by the directors. The interim financialinformation does not reflect this dividend payable as it was declared after thebalance sheet date. 9. Goodwill Goodwill of £94.1m (30 June 2004: £87.8m, 31 December 2004: £87.8m) comprises£91.0m (30 June 2004: £84.7m, 31 December 2004: £84.7m) in respect of theacquisition of Yes Car Credit in 2002 and £3.1m (30 June 2004: £3.1m, 31December 2004: £3.1m) in respect of the acquisition of N&N Cheque EncashmentLimited in 2001. The increase of £6.3m in the Yes Car Credit goodwill during the period reflectsthe final settlement of the contingent consideration in respect of thatacquisition. 10. Amounts receivable from customers Unaudited Unaudited Unaudited As at As at As at 30 June 2005 30 June 2004 31 Dec 2004 as restated as restated £m £m £m UK home credit 546.6 521.2 613.5International 275.6 201.0 285.1Yes Car Credit 269.6 271.3 275.6Vanquis Bank 42.0 12.1 26.0 1,133.8 1,005.6 1,200.2 Analysed as:- due within one year 913.5 788.6 990.1- due in more than one year 220.3 217.0 210.1 1,133.8 1,005.6 1,200.2 The impairment charge in respect of amounts receivable from customers reflectedwithin operating costs can be analysed as follows: Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 as restated as restated £m £m £m UK home credit 100.9 96.6 154.0International 71.7 46.3 87.0Yes Car Credit 18.9 17.8 40.1Vanquis Bank 4.4 1.9 4.0 195.9 162.6 285.1 11. Retirement benefit obligations The group operates two funded defined benefit schemes in the UK. A fullactuarial valuation was carried out by a qualified independent actuary on bothschemes at 1 June 2004. The valuation used for IAS 19 purposes has been basedon these valuations which have been updated by the actuary to take account ofthe requirements of IAS 19 in order to assess the liabilities of the scheme at30 June 2005. Scheme assets are stated at fair value at 30 June 2005. Theassumptions used by the actuary were: Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 % % % Rate of increase in salaries 4.18 4.34 4.34Rate of increase in pensions 2.60 2.75 2.75Discount rate 5.00 5.80 5.40Inflation assumption 2.60 2.75 2.75 The amounts recognised in the balance sheet are determined as follows: Unaudited Unaudited Unaudited As at As at As at 30 June 2005 30 June 2004 31 Dec 2004 £m £m £m Present value of funded obligations (398.2) (323.9) (361.2)Fair value of scheme assets 265.0 205.4 231.4Liability in the balance sheet (133.2) (118.5) (129.8) The movement in the liability recognised in the balance sheet is as follows: Unaudited Unaudited Unaudited Half-year to Half-year to Full year to 30 June 2005 30 June 2004 31 Dec 2004 £m £m £m Liability at beginning of period (129.8) (106.1) (106.1)Total expense in the income statement (5.3) (4.6) (9.2)Actuarial loss (18.5) (17.7) (34.3)Contributions paid 20.4 9.9 19.8Liability at end of period (133.2) (118.5) (129.8) 12. Consolidated interim statement of changes in shareholders' equity Unaudited Attributable to equity shareholders of the company Called-up Share share premium Other Retained capital account reserves earnings Total £m £m £m £m £mBalance at 1 January 2004 as previously reportedunder UK GAAP 26.3 101.5 7.1 314.1 449.0Changes upon transition to IFRS - - (8.4) (69.4) (77.8)Restated balance under IFRS 26.3 101.5 (1.3) 244.7 371.2 Exchange differences on foreign currencytranslations - - (0.8) - (0.8)Net fair value losses - cash flow hedges - - (0.4) - (0.4)Actuarial losses on retirement benefit - - - (17.7) (17.7)obligationsTax on items taken directly to equity - - 0.1 5.3 5.4Net expense recognised directly in equity - - (1.1) (12.4) (13.5)Profit for the period - - - 59.1 59.1Total recognised income for the period - - (1.1) 46.7 45.6Increase in share capital 0.1 - - - 0.1Increase in share premium - 3.6 - - 3.6Movement in treasury shares - - (0.1) - (0.1)Share-based payment adjustment to reserves - - 0.7 - 0.7Dividend - - - (50.3) (50.3)Balance at 30 June 2004 26.4 105.1 (1.8) 241.1 370.8 Balance at 1 July 2004 26.4 105.1 (1.8) 241.1 370.8 Exchange differences on foreign currencytranslations - - 4.7 - 4.7Net fair value losses - cash flow hedges - - (4.5) - (4.5) Actuarial losses on retirement benefit - - - (16.6) (16.6)obligations Tax on items taken directly to equity - - 1.3 5.2 6.5Net income/(expense) recognised directly inequity - - 1.5 (11.4) (9.9)Profit for the period - - - 85.3 85.3 Total recognised income for the period - - 1.5 73.9 75.4Increase in share premium - 0.4 - - 0.4 Share-based payment adjustment to reserves - - 0.7 - 0.7 Movement in treasury shares - - 2.0 - 2.0 Dividend - - - (34.6) (34.6) Balance at 31 December 2004 26.4 105.5 2.4 280.4 414.7 Balance at 1 January 2005 26.4 105.5 2.4 280.4 414.7Exchange differences on foreign currencytranslations - - (2.3) - (2.3) Net fair value losses - cash flow hedges - - (2.9) - (2.9) Actuarial losses on retirement benefit - - - (18.5) (18.5)obligations Tax on items taken directly to equity - - 0.5 5.6 6.1Net expense recognised directly in equity - - (4.7) (12.9) (17.6) Profit for the period - - - 58.6 58.6 Total recognised income for the period - - (4.7) 45.7 41.0 Increase in share capital 0.1 - - - 0.1 Increase in share premium - 1.9 - - 1.9 Share-based payment adjustment to reserves - - 1.5 - 1.5 Movement in treasury shares - - (0.4) - (0.4) Dividend - - - (52.7) (52.7) Balance at 30 June 2005 26.5 107.4 (1.2) 273.4 406.1 13. Reconciliations between IFRS and UK GAAP Reconciliation of the income statement for the half-year ended 30 June 2004 Unaudited Revenue & Share-based Unaudited UK GAAP Reclassify impairment Goodwill Pensions payments Derivatives IFRS note 13(a) note 13(b) note 13(c) note 13(d) note 13(e) note 13(f) £m £m £m £m £m £m £m £mRevenue 566.1 9.3 56.8 - - - - 632.2 Finance income - 13.6 - - - - - 13.6Total income 566.1 22.9 56.8 - - - - 645.8Finance costs - (26.4) - - - - 0.1 (26.3)Operating costs (303.2) (45.1) (60.2) - - - - (408.5)Administrative (178.0) 48.6 - 2.3 0.8 (0.7) - (127.0)expensesTotal costs (481.2) (22.9) (60.2) 2.3 0.8 (0.7) 0.1 (561.8)Profit before 84.9 - (3.4) 2.3 0.8 (0.7) 0.1 84.0taxationTax expense (25.7) - 0.8 - (0.2) 0.2 - (24.9)Profit after 59.2 - (2.6) 2.3 0.6 (0.5) 0.1 59.1taxation Reconciliation of the income statement for the year ended 31 December 2004 Audited Revenue & Share-based Unaudited UK GAAP Reclassify impairment Goodwill Pensions payments Derivatives IFRS note 13(a) note 13(b) note 13(c) note 13(d) note 13(e) note 13(f) £m £m £m £m £m £m £m £mRevenue 1,166.7 12.1 93.6 - - - - 1,272.4 Finance income - 27.4 - - - - - 27.4Total income 1,166.7 39.5 93.6 - - - - 1,299.8Finance costs - (55.5) - - - - (1.6) (57.1)Operating costs (571.8) (88.5) (107.4) - - - - (767.7)Administrative (378.8) 104.5 - 4.6 1.5 (1.3) - (269.5)expensesTotal costs (950.6) (39.5) (107.4) 4.6 1.5 (1.3) (1.6) (1,094.3)Profit before 216.1 - (13.8) 4.6 1.5 (1.3) (1.6) 205.5taxationTax expense (64.7) - 3.3 - (0.5) 0.4 0.4 (61.1)Profit after 151.4 - (10.5) 4.6 1.0 (0.9) (1.2) 144.4taxation Reconciliation of the balance sheet as at 1 January 2004 Audited Revenue & Share-based Unaudited UK GAAP Reclassify impairment Goodwill Pensions payments Derivatives Dividends IFRS note 13(a) note 13(b) note 13 note 13 note 13(e) note 13(f) note 13 (c) (d) (g) £m £m £m £m £m £m £m £m £mASSETSNon-current assetsGoodwill 87.8 - - - - - - - 87.8Property, plant and 48.1 (14.2) - - - - - - 33.9equipmentIntangible assets - 14.2 - - - - - - 14.2Deferred income tax assets - (2.6) 15.1 - 39.7 0.2 (1.0) - 51.4 135.9 (2.6) 15.1 - 39.7 0.2 (1.0) - 187.3Current assetsInventories 14.6 - - - - - - - 14.6Financial assets:- Amounts receivable fromcustomers: - due within one year 905.3 - (46.5) - - - - - 858.8 - due in more than one 204.1 - (9.7) - - - - - 194.4year- Derivative financial - - - - - - 11.4 - 11.4instrumentsTrade and other receivables 152.1 - 2.5 - (26.6) - - - 128.0Current income tax assets 1.0 - - - - - - - 1.0Cash and cash equivalents 553.3 - - - - - - - 553.3 1,830.4 - (53.7) - (26.6) - 11.4 - 1,761.5 Total assets 1,966.3 (2.6) (38.6) - 13.1 0.2 10.4 - 1,948.8 LIABILITIESCurrent liabilitiesFinancial liabilities:- Bank and other borrowings (19.6) - - - - - - - (19.6)- Derivative financial - - - - - - (27.9) - (27.9)instrumentsTrade and other payables (185.1) - (0.4) - - - - 50.3 (135.2)Current income tax (47.3) - - - - - (0.5) - (47.8)liabilitiesInsurance accruals anddeferred income (462.9) - - - - - - - (462.9) (714.9) - (0.4) - - - (28.4) 50.3 (693.4) Non-current liabilitiesFinancial liabilities:- Bank and other borrowings (799.8) - - - - - 21.7 - (778.1)Retirement benefit - - - - (106.1) - - - (106.1)obligationsDeferred income tax (2.6) 2.6 - - - - - - -liabilities (802.4) 2.6 - - (106.1) - 21.7 - (884.2) Total liabilities (1,517.3) 2.6 (0.4) - (106.1) - (6.7) 50.3 (1,577.6) NET ASSETS 449.0 - (39.0) - (93.0) 0.2 3.7 50.3 371.2 SHAREHOLDERS' EQUITY Called-up share capital 26.3 - - - - - - - 26.3Share premium account 101.5 - - - - - - - 101.5Other reserves 7.1 (13.1) - - - 0.6 4.1 - (1.3)Retained earnings 314.1 13.1 (39.0) - (93.0) (0.4) (0.4) 50.3 244.7TOTAL EQUITY 449.0 - (39.0) - (93.0) 0.2 3.7 50.3 371.2 Reconciliation of the balance sheet as at 30 June 2004 Unaudited Revenue & Share-based Unaudited UK GAAP Reclassify impairment Goodwill Pensions payments Derivatives Dividends IFRS note 13(a) note 13(b) note 13 note 13 note 13(e) note 13(f) note 13 (c) (d) (g) £m £m £m £m £m £m £m £m £mASSETSNon-current assetsGoodwill 85.5 - - 2.3 - - - - 87.8Property, plant and 53.3 (17.1) - - - - - - 36.2equipmentIntangible assets - 17.1 - - - - - - 17.1Deferred income tax assets - (2.6) 15.9 - 44.8 0.4 (0.7) - 57.8 138.8 (2.6) 15.9 2.3 44.8 0.4 (0.7) - 198.9Current assetsInventories 13.7 - - - - - - - 13.7Financial assets:- Amounts receivable fromcustomers: - due within one year 846.8 - (58.2) - - - - - 788.6 - due in more than one 217.4 - (0.4) - - - - - 217.0year- Derivative financial - - - - - - 10.4 - 10.4instrumentsTrade and other receivables 161.8 - 2.1 - (31.1) - - - 132.8Current income tax assets 1.0 - - - - - - - 1.0Cash and cash equivalents 521.1 - - - - - - - 521.1 1,761.8 - (56.5) - (31.1) - 10.4 - 1,684.6 Total assets 1,900.6 (2.6) (40.6) 2.3 13.7 0.4 9.7 - 1,883.5 LIABILITIESCurrent liabilitiesFinancial liabilities:- Bank and other borrowings (17.9) - - - - - - - (17.9)- Derivative financial - - - - - - (29.6) - (29.6)instrumentsTrade and other payables (165.7) - (0.5) - - - - 34.6 (131.6)Current income tax (49.7) - - - - - (0.5) - (50.2)liabilitiesInsurance accruals anddeferred income (447.3) - - - - - - - (447.3) (680.6) - (0.5) - - - (30.1) 34.6 (676.6) Non-current liabilities Financial liabilities:- Bank and other borrowings (741.5) - - - - - 23.9 - (717.6)Retirement benefit - - - - (118.5) - - - (118.5)obligationsDeferred income tax (2.6) 2.6 - - - - - - -liabilities (744.1) 2.6 - - (118.5) - 23.9 - (836.1) Total liabilities (1,424.7) 2.6 (0.5) - (118.5) - (6.2) 34.6 (1,512.7) NET ASSETS 475.9 - (41.1) 2.3 (104.8) 0.4 3.5 34.6 370.8 SHAREHOLDERS' EQUITYCalled-up share capital 26.4 - - - - - - - 26.4Share premium account 105.1 - - - - - - - 105.1Other reserves 7.1 (14.5) 0.5 - - 1.3 3.8 - (1.8)Retained earnings 337.3 14.5 (41.6) 2.3 (104.8) (0.9) (0.3) 34.6 241.1TOTAL EQUITY 475.9 - (41.1) 2.3 (104.8) 0.4 3.5 34.6 370.8 Reconciliation of the balance sheet as at 31 December 2004 Audited Revenue & Share-based Unaudited UK GAAP Reclassify impairment Goodwill Pensions payments Derivatives Dividends IFRS note 13(a) note 13(b) note 13 note 13 note 13(e) note 13(f) note 13 (c) (d) (g) £m £m £m £m £m £m £m £m £mASSETSNon-current assetsGoodwill 83.2 - - 4.6 - - - - 87.8Property, plant and 60.8 (21.1) - - - - - - 39.7equipmentIntangible assets - 21.1 - - - - - - 21.1Deferred income tax assets - (2.8) 18.8 - 49.7 0.6 0.7 - 67.0 144.0 (2.8) 18.8 4.6 49.7 0.6 0.7 - 215.6Current assetsInventories 16.6 - - - - - - - 16.6Financial assets:- Amounts receivable fromcustomers: - due within one year 1,048.3 - (58.2) - - - - - 990.1 - due in more than one 224.0 - (13.9) - - - - - 210.1year- Derivative financial - - - - - - 5.4 - 5.4instrumentsTrade and other receivables 153.3 - 1.9 - (35.7) - - - 119.5Current income tax assets 4.0 - - - - - - - 4.0Cash and cash equivalents 500.1 - - - - - - - 500.1 1,946.3 - (70.2) - (35.7) - 5.4 - 1,845.8 Total assets 2,090.3 (2.8) (51.4) 4.6 14.0 0.6 6.1 - 2,061.4 LIABILITIESCurrent liabilitiesFinancial liabilities:- Bank and other borrowings (35.3) - - - - - - - (35.3)- Derivative financial - - - - - - (39.3) - (39.3)instrumentsTrade and other payables (187.1) - (0.6) - - 0.1 - 52.7 (134.9)Current income tax (59.6) - - - - - (0.5) - (60.1)liabilitiesInsurance accruals anddeferredincome (424.9) - - - - - - - (424.9) (706.9) - (0.6) - - 0.1 (39.8) 52.7 (694.5) Non-current liabilitiesFinancial liabilities:- Bank and other borrowings (855.1) - - - - - 32.7 - (822.4)Retirement benefit - - - - (129.8) - - - (129.8)obligationsDeferred income tax (2.8) 2.8 - - - - - - -liabilities (857.9) 2.8 - - (129.8) - 32.7 - (952.2) Total liabilities (1,564.8) 2.8 (0.6) - (129.8) 0.1 (7.1) 52.7 (1,646.7) NET ASSETS 525.5 - (52.0) 4.6 (115.8) 0.7 (1.0) 52.7 414.7 SHAREHOLDERS' EQUITYCalled-up share capital 26.4 - - - - - - - 26.4Share premium account 105.5 - - - - - - - 105.5Other reserves 7.1 (4.8) (2.5) - - 2.0 0.6 - 2.4Retained earnings 386.5 4.8 (49.5) 4.6 (115.8) (1.3) (1.6) 52.7 280.4TOTAL EQUITY 525.5 - (52.0) 4.6 (115.8) 0.7 (1.0) 52.7 414.7 The principal differences for the group between reporting on the basis of UKGAAP and IFRS are as follows: 13(a) Reclassifications The following reclassifications have been made within the income statement andthe balance sheet on transition from UK GAAP to IFRS. • Commissions paid to reinsurers were deducted from the revenue of themotor insurance division under UK GAAP. In accordance with IFRS 4, these costsare now included within operating costs. • Under UK GAAP, interest payable by the group and investment incomereceivable by the motor insurance division was included in cost of sales and notseparately disclosed on the face of the profit and loss account. In accordancewith IAS 1, these amounts are now separately disclosed as finance costs(interest payable) and finance income (investment income receivable). • The group has reclassified certain costs between operating costs(formerly cost of sales under UK GAAP) and administrative expenses to betterreflect the current structure of the group. In the home credit businesses andVanquis Bank, operating costs comprise impairment charges, agents' commissionand advertising and marketing costs. Operating costs for Yes Car Credit includethe aforementioned costs plus the vehicle cost. For the motor insurancedivision, operating costs comprise claims costs, reinsurance costs and directlevies. All other costs are classed as administrative expenses. • The UK GAAP deferred tax provision has been reclassified to deferredincome tax assets as the group is now in a deferred income tax asset positionfollowing the transition to IFRS. • Software development costs were disclosed as part of property, plantand equipment under UK GAAP. Such costs meet the definition of intangibleassets under IFRS and are therefore disclosed as intangible assets. • Given that the group has elected to retain UK GAAP carrying values ofproperty, plant and equipment (including any historic revaluations) as deemedcost on the date of transition to IFRS there is no difference between cost andvaluation on an IFRS basis. Accordingly, the UK GAAP revaluation reserve hasbeen transferred from other reserves to retained earnings. • Treasury shares and foreign exchange movements taken to reserves formedpart of retained earnings under UK GAAP. Under IFRS, these amounts have beenrecategorised as part of other reserves. As permitted by the transitionalarrangements of IFRS 1, only foreign exchange differences taken to retainedearnings after 1 January 2004 have been recategorised. 13(b) Revenue recognition and impairment • Revenue recognition and impairment in home credit The service charge on a home credit loan is fixed. The charge does not increaseif customers take longer than the contracted period to repay the loan and thereare no penalty or default interest charges. Therefore, revenue is capped at theamount of the service charge. Under UK GAAP, revenue in home credit wasrecognised by a combination of (i) an initial release to cover issue costs, (ii)an amount recognised in proportion to cash collections and (iii) a small amountreleased on a sum of digits method reflecting the funding cost of the amountadvanced. Under IFRS, the group is required to treat the service charge as if it wereinterest. Revenue on loan receivables is recognised using an effective interestrate (EIR). This is calculated using contracted cash flows adjusted for theimpact of customers repaying early but excluding the anticipated impact ofcustomers paying late or not paying at all. Directly attributable incrementalissue costs are also taken into account. Under IFRS, the group recognisesrevenue more slowly as many of the costs covered by the initial release under UKGAAP do not qualify as directly attributable costs under IFRS. Under UK GAAP, bad debt provisions in home credit were based on a formulaicapproach which was based on historical performance. Under IFRS, impairment ofthe balance sheet value of customer receivables is calculated by estimating thefuture cash flows from a loan portfolio, discounting these to a present valueusing the EIR and comparing this figure with the balance sheet value. Animpairment provision is made for the shortfall between the present value and thebalance sheet value and an impairment charge or credit to the income statementresults. Under UK GAAP, during the life of the loan, revenue was not accrued ifcollections were not made. Under IFRS, revenue continues to be accrued even ifpayments are missed and an impairment charge is made. This approach can, anddoes, result in the recognition of revenue in excess of the amount to which thegroup is contractually entitled because revenue continues to be recognised onloans that are not fully repaid within the contracted term. The recognition of revenue above that which the group is contractually entitledto causes an immediate impairment charge since no cash collection is expected.This results in a 'grossing up' of the impairment charge which goes to offsetthe 'grossing up' of the revenue. Unfortunately the relevant standard here, IAS39, was not written with the home collected credit sector in mind. • Revenue recognition and impairment in Yes Car Credit Under UK GAAP, the proceeds from a vehicle sale were recognised immediately,together with a proportion of the insurance commission income. The remainder ofthe insurance commission was recognised over the life of the finance contract.Finance income was recognised over the life of the contract to give a constantreturn on the carrying amount. Under IFRS, the car sale continues to be recognised immediately and financeincome is recognised using the EIR. Insurance commissions are taken intoaccount in calculating the EIR and are therefore recognised over the life of thecontract albeit not on a straight line basis. Under UK GAAP, bad debt provisions in Yes Car Credit reflected the directors'best estimate of the number of contracts likely to default and the averageexpected loss for these contracts. Under IFRS, impairment is recognised whenthere is objective evidence that a loan is impaired (e.g. when a contractualpayment has been missed). Provisions are calculated using the expected cashflows of impaired loans and discounted at the EIR. • Revenue recognition and impairment in Vanquis Bank Under UK GAAP, annual fees were taken to the profit and loss accountimmediately. Under IFRS, annual fees are recognised over the expected life of the outstandingbalance using the EIR. There is no material change in the bad debt provisioning policy of Vanquis Bankon transition to IFRS. 13(c) Goodwill Under UK GAAP, goodwill was recorded at cost and amortised to the profit andloss account over its expected useful economic life. Goodwill amortisation is prohibited under IFRS. Instead, annual impairmentreviews of goodwill are conducted and any impairment is reflected in the incomestatement. The adjustment included in the reconciliations reflects the reversal of the UKGAAP goodwill amortisation charge since the date of transition to IFRS. 13(d) Retirement benefits Under UK GAAP, the group used SSAP 24 to account for pension obligations. UnderSSAP 24, the annual charge to the profit and loss account reflected the totalcost of providing pensions (including actuarial gains and losses) spread overthe working lives of employees. Differences between cash contributions made tothe scheme and the pension charge in the profit and loss account were held onthe balance sheet. Under IFRS, the accounting for defined benefit pension schemes is balance sheetfocussed with pension deficits/surpluses recognised on the balance sheet. Thereare a number of alternative treatments of actuarial gains and losses under IAS19 - the group has reflected such gains and losses in a statement of recognisedincome and expense rather than the income statement which is now permitted underIAS 19. This approach is similar to that of FRS 17 which is effective under UKGAAP from 1 January 2005. The income statement adjustments reflect the difference between the UK GAAP SSAP24 charge and the IAS 19 charge. The balance sheet adjustment represents thereversal of the UK GAAP pension prepayment and full recognition of the pensiondeficit under IFRS. The deferred tax asset on the pension deficit has beenreflected separately from the pension deficit as IFRS does not allow an offsetto be made. 13(e) Share-based payments Under UK GAAP, the intrinsic value (market value of the share at date of grantless exercise price of the option) was charged to the profit and loss accountover the employee performance period. Save As You Earn (SAYE) schemes werehistorically exempt from share-based payment accounting under UK GAAP. IFRS 2 requires a fair value based method of accounting for share-based paymentswhich takes into account the value of the option, not just the market price ofthe share on date of grant. The cost of share-based payments is recognised overthe relevant vesting period which is broadly comparable with UK GAAP. There isno exemption in IFRS for SAYE schemes. The adjustments in the reconciliations represent the recognition of the incomestatement charge for share-based payments under IFRS. As permitted by IFRS 2,the adjustment has been calculated based on all share options and SAYE schemesgranted since 7 November 2002 but which had not vested by 1 January 2005. Thebalance sheet impact reflects the creation of a corresponding reserve withinequity shareholders' funds to offset the income statement charge. 13(f) Derivative financial instruments Under UK GAAP, derivatives (e.g. interest rate swaps, foreign currencycontracts) were recorded at cost and accounted for on an accruals basis.Foreign currency loans which were the subject of currency hedging arrangementswere retranslated at each period end using the contracted rate. IAS 39 requiresall derivatives to be recognised on the balance sheet at their fair value.Movements in fair value should be reflected in the income statement unlessprescriptive hedge accounting criteria are met. The group manages interest rate and foreign exchange risk through the use ofderivative financial instruments. Accordingly, these are reflected on thebalance sheet at their fair value under IFRS. The group has attained hedgeaccounting from 1 January 2004 for the majority of its derivatives and,therefore, for those derivatives that qualify for hedge accounting, movements infair value are either deferred in a hedging reserve within shareholders' equityand released to the income statement in line with the underlying hedged item(cash flow hedge) or taken to the income statement and offset by a correspondingmovement in the fair value of the underlying hedged item (fair value hedge).The income statement charge reflects the movement in fair value of those hedgesthat do not qualify for hedge accounting and any small amounts of hedgeineffectiveness arising on those that do qualify. In addition to the above, IAS 21 'Effects of Changes in Foreign Exchanges Rates'requires all monetary assets and liabilities to be retranslated at the year endexchange rate regardless of hedging arrangements in place. Accordingly, thegroup's foreign currency borrowings which under UK GAAP are retranslated at thecontracted rate of exchange have been retranslated using the rates of exchangeruling at the balance sheet date. The movement in the liability has been offsetby movements in the fair value of the cross currency swaps which are in place tohedge the loans. As a result, there is no impact on the income statement. 13(g) Dividends Under UK GAAP, dividends declared after the balance sheet date were recorded inthe accounts as at the balance sheet date. Under IFRS, dividends declared afterthe balance sheet date cannot be included as a liability at the balance sheetdate. The adjustments in the reconciliations reflect the reversal of the periodend proposed dividends in the balance sheet. Independent review report to Provident Financial plc Introduction We have been instructed by the company to review the financial information forthe half-year ended 30 June 2005 which comprises the consolidated interim incomestatement, statement of recognised income and expense, consolidated interimbalance sheet, consolidated interim cash flow statement and related notes. Wehave read the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in note 2, the next annual accounts of the group will be preparedin accordance with accounting standards adopted for use in the European Union.This interim report has been prepared in accordance with the basis set out innote 2. The accounting policies are consistent with those that the directors intend touse in the next annual accounts. As explained in note 2, there is, however, apossibility that the directors may determine that some changes are necessarywhen preparing the full annual accounts for the first time in accordance withaccounting standards adopted for use in the European Union. As disclosed innote 2, the directors have anticipated that the revised IAS 19 'EmployeeBenefits - Actuarial Gains and Losses', which has yet to be formally adopted foruse in the European Union, will be so adopted in time to be applicable to thenext annual accounts. The IFRS standards and IFRIC interpretations that will beapplicable and adopted for use in the European Union at 31 December 2005 are notknown with certainty at the time of preparing this interim financialinformation. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly, we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for thecompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the half-year ended30 June 2005. PricewaterhouseCoopers LLPChartered Accountants and Registered AuditorsLeeds 14 September 2005 Information for shareholders 1. The shares will be marked ex-dividend on 21 September 2005. 2. The interim report will be posted to shareholders on 23 September 2005. 3. The interim dividend will be paid on 14 October 2005 to shareholders on theregister at the close of business on 23 September 2005. Dividend warrants/vouchers will be posted on 12 October 2005. 4. The Provident Financial Company Nominee Scheme ('the scheme') enablesshareholders who are eligible, namely individuals, to take advantage of theCREST system for settling transactions in shares in the company by means of alow-cost dealing service. It includes a dividend reinvestment scheme for thosewho wish to use this facility. Shareholders who wish to take advantage of thescheme should contact the company's registrar, Capita Registrars, The Registry,34 Beckenham Road, Beckenham, Kent BR3 4TU (telephone: 0870 162 3100) to requestan information pack. The registrar's website is www.capitaregistrars.com. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
PFG.L