27th Jul 2005 07:05
Prudential PLC27 July 2005 Part 2 IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS A Basis of preparation and audit status EU law (IAS Regulation EC 1606 / 2002) requires that the next annualconsolidated financial statements of the Group, for the year ending 31 December2005, be prepared in accordance with International Financial Reporting Standards(IFRS) adopted for use in the EU. This interim financial information has been prepared on the basis of therecognition and measurement requirements of those standards in issue that eitherare endorsed by the EU and effective (or available for early adoption) at 31December 2005 or are expected to be endorsed and effective (or available forearly adoption) at 31 December 2005, the Group's first IFRS annual reportingdate. Compared to the UK GAAP basis of presentation, the statutory IFRS basis resultsreflect the application of: (i) Measurement and recognition changes arising from policies the Groupexpects to apply on the adoption of all IFRS standards, other than IAS32("Financial Instruments: Disclosure and Presentation"), IAS39 ("FinancialInstruments: Recognition and Measurement"), and IFRS4 ("Insurance Contracts"),from 1 January 2004. The half year 2005 results include the expected effect ofthese three standards from 1 January 2005. (ii) Changes to the format of the results and other presentational changesthat the Group expects to apply in its full year 2005 financial statements in sofar as they affect the summary results included in this interim report. In addition, compared to the basis of preparing supplementary results andearnings per share basis information previously provided under UK GAAP, adiscretionary change of policy for the basis of determining longer-terminvestment returns included in operating profit based on longer-term investmentreturns has been applied in respect of the policy for determining longer-terminvestment returns included in operating profits. Details of the change aredescribed in note B. The statutory IFRS basis results for the 2005 and 2004 half years are unaudited.References to UK GAAP results throughout the statutory basis financialstatements contained in this report reflect the Group's previously publishedresults for the 2004 half year and full year. The UK GAAP basis results forthe 2004 half year are unaudited. The 2004 full year UK GAAP results have beenderived from the 2004 statutory accounts. The auditors have reported on the 2004statutory accounts and they have been delivered to the Registrar of Companies.The auditors' report was not qualified and did not contain a statement undersection 237(2) or (3) of the Companies Act 1985. B Significant changes of basis of preparation and accounting policy The changes of accounting policy that arise on the conversion to IFRS basisreporting are numerous and extend to many items of income, expenditure, assetsand liabilities. Comprehensive details of the changes were included with theannouncement of restated 2004 comparative results on 2 June 2005 and areavailable at the Group's web-site at www.prudential.co.uk or on request. Thepolicy changes from the 2004 UK GAAP audited financial statements which are ofsignificance to reported results are as follows:- 2004 and 2005 results Basis of preparation Under UK GAAP, the Group's consolidated financial statements were previouslyprepared in accordance with applicable accounting standards under UK GAAPincluding being in accordance with the Statement of Recommended Practice issuedin November 2003 by the Association of British Insurers. The statutory basis financial statements included in this report have beenprepared on the basis of policies expected to be applied under IFRS for the yearending 31 December 2005. The 2004 full year results included in the IFRSfinancial information within this report establish the comparative financialinformation in summary format that the Group expects to be included in theGroup's first set of IFRS financial statements for the year ending 31 December2005. However, due to the continuing work of the IASB and possible amendmentsto the interpretative guidance, the Group's accounting policies and consequentlythe information presented may change for the Group's full year 2005 results. The date of adoption of IFRS is 1 January 2004. As at that date the Group hasapplied all IASB standards on a basis prescribed or permitted by those standardsin the preparation of its consolidated financial statements. In general, a Group is required to determine its IFRS accounting policies andapply those retrospectively to determine its opening balance sheet under IFRS.However, in accordance with IFRS1 ("First-time Adoption of InternationalFinancial Reporting Standards"), the Group has applied the mandatory exceptionsand certain optional exemptions from full retrospective application of IFRS. Significant exemptions from full retrospective application elected by the Groupare as follows: Business combinations The Group has elected not to apply retrospectively the provisions of IFRS3("Business Combinations") to business combinations that occurred prior to 1January 2004. At the date of adoption, therefore, no adjustment was madebetween UK GAAP and IFRS shareholders' funds for any historical businesscombination. Consistent with this approach, goodwill recognised in the openingbalance sheet at 1 January 2004 for acquired businesses that have previouslybeen consolidated is the same as previously shown under UK GAAP. Goodwill onnewly consolidated entities, for example on venture fund investments, isdetermined by reference to net assets at transition date. Comparatives The Group has taken advantage of the exemption within IFRS that allowscomparative information presented in the first year of adoption of IFRS not tocomply with the standards IAS32, IAS39 and IFRS4. Consolidation principles Inter-company transactions Previously, under UK GAAP, all inter-company transactions were eliminated onconsolidation except for investment management fees charged by M&G and theGroup's US and Asia fund management operations to long-term business funds. Under IFRS, all inter-company transactions are eliminated on consolidation.Investment management fees charged by M&G, and the Group's US and Asia fundmanagement operations to long-term business funds are recorded withininter-segment revenue and expenditure as set out in note D but eliminated onconsolidation in the summary income statement. Entities subject to consolidation Previously, under UK GAAP, the assets and liabilities and results of entitieswere consolidated where Prudential had a controlling interest under the terms ofCompanies Act legislation, FRS2 ("Accounting for subsidiary undertakings") andother relevant UK GAAP interpretations. Entities are consolidated under IFRS if they fall within the scope of IAS27("Consolidated and Separate Financial Statements") and the IFRIC interpretation,SIC12 ("Consolidation - Special Purpose Entities"), of the IASB. Under IFRS,certain investment vehicles are newly consolidated due to the requirementsdiffering from UK GAAP. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) B Significant changes of basis of preparation and accounting policy(continued) 2004 and 2005 results (continued) Basis of presentation of tax charges Under Companies Act requirements, previously, tax charges attributable topolicyholders and unallocated surplus of with-profits funds and unit linkedpolicies were charged, together with tax charges attributable to the long-termbusiness result attributable to shareholders, as an expense in the long-termbusiness technical account of the Company's Act format of the profit and lossaccount. In the non-technical section (i.e. the summary profit and loss sectionattributable to shareholders) the post-tax balance transferred from thelong-term business technical account was grossed up by attributable shareholdertax to derive the pre-shareholder tax long-term business result. Tax charges inthe non-technical account reflected the aggregate of the shareholder tax on thelong-term business result and on the Group's other results. Under UK Listing Authority rules, profit before tax is required to be presented.This requirement, coupled with the fact that IFRS does not contemplate taxcharges which are attributable to policyholders and unallocated surplus ofwith-profits funds and unit linked policies, necessitates the reporting of totaltax charges within the presented results. The result before all taxes i.e.'profit before tax' is shown in the income statement as "IFRS basis income(representing income, net of post-tax transfers to unallocated surplus ofwith-profits funds, before tax attributable to policyholders and unallocatedsurplus of with-profits funds, unit linked policies and shareholders)".Separately, within the income statement "Profit from continuing operations(including actual investment returns) before tax attributable to shareholders"is shown after deduction of taxes attributable to policyholders and unallocatedsurplus of with-profits funds and unit linked policies. Tax charges on thismeasure of profit reflect the tax charges attributable to shareholders. Indetermining the tax charges attributable to shareholders, the Group has applieda methodology consistent with that previously applied under UK GAAP reflectingthe broad principles underlying the tax legislation on life assurance companies. Pension costs Under UK GAAP, the Group applied the provisions of SSAP24 ("Pension Costs").Consistent with the surplus financial position of the Prudential Staff PensionScheme (PSPS) (which accounts for 90 per cent of the liabilities of the Group'sdefined benefit pension schemes) at 5 April 2002, when the scheme was lastsubject to a full triennial actuarial valuation, and the scheme rules overminimum levels of funding, no SSAP24 basis prepayment or provision has beenreported in the Group's UK GAAP balance sheet. Additional disclosures were madein the notes to the Group's financial statements concerning the Group's UKdefined benefit schemes, applying the methodology prescribed by FRS17("Retirement Benefits"). Under IAS19 ("Employee Benefits") the impact of the surplus or deficit ofdefined benefit pension schemes on the consolidated net assets of the Group isdetermined by the difference between the market value of assets held within theschemes and the net present value of projected future cash flows based onaccrued liabilities. The net present value is determined by applying a discountrate based on the yield at the balance sheet date on high quality corporatebonds. The deficits on the Group's defined benefit pension schemes are apportionedbetween shareholders' equity and unallocated surplus of the PAC with-profitsfund based on the weighted cumulative activity attaching to the contributionspaid into the schemes in the past. For the PSPS scheme it is currently estimatedthat 80 per cent of the deficit is attributable to the PAC with-profits fund and20 per cent to shareholder backed operations. The IAS income statement charge for pension costs comprises two items, namely (a) The aggregate of the actuarially determined service cost of thecurrently employed personnel, the unwind of discount on liabilities at the startof the period, less the expected investment return on the scheme assets at thestart of the reporting period, and (b) Actuarial gains and losses. These gains and losses arise from changesin assumptions, the difference between actual and expected investment return onthe scheme assets, and experience gains and losses on liabilities. Goodwill Under UK GAAP, with effect from 1 January 1998, goodwill arising fromacquisitions was reflected as an asset on the balance sheet and amortisedthrough the consolidated profit and loss account on a straight line basis overits estimated useful life, not exceeding 20 years. Prior to 1 January 1998,goodwill relating to acquisitions was charged directly to shareholders' funds.As permitted under the transitional arrangements of FRS10, ("Goodwill andIntangible Assets"), amounts previously charged to shareholders' funds were notreinstated as assets in the UK GAAP balance sheet. Under IFRS, the goodwill balance at 1 January 2004 reflects the carrying valueof UK GAAP goodwill for previously consolidated entities at that date on thebasis described above, as well as goodwill on certain newly consolidatedentities. Under IFRS, goodwill is no longer amortised. However, impairmenttesting is required annually and on adoption. In addition, as prescribed byIFRS1 ("First-time Adoption of International Financial Reporting Standards"),goodwill previously charged to shareholders' funds on transition is nottransferred to the income statement upon disposal of the relevant entity. Forhalf year 2005 an impairment charge in respect of goodwill attaching to theJapan Life Insurance business was appropriate. Share based payments The Group offers share awards and option plans for certain key employees and aSave As You Earn (SAYE) plan for all UK and certain overseas employees. Thearrangements for distribution to employees of shares held in trusts relating toshare award plans and for entitlement to dividends depend upon the particularterms of each plan. Shares held in trusts relating to non-SAYE plans areconditionally gifted to employees. Previously, under UK GAAP, compensation fornon-SAYE plans was recorded over the periods to which share awards or optionswere earned based on intrinsic value. No costs were required to be recorded forSAYE plans. Under IFRS, share based payments are accounted for on a fair value basis. Thefair value is recognised in the income statement over the relevant vestingperiod and adjusted for lapses and forfeitures with the number of sharesexpected to lapse or be forfeited estimated at each balance sheet date prior tothe vesting date. The only exception is where the share based payment dependsupon vesting outcomes attaching to market based performance conditions such asin the case of the Restricted Share Plan. Under these circumstances additionalmodelling is required to take into account these market based performanceconditions which effectively estimate the number of shares expected to vest. Nosubsequent adjustment is then made to the fair value charge for shares that donot vest on account of these performance conditions not being met. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) B Significant changes of basis of preparation and accounting policy(continued) 2004 and 2005 results (continued) Shareholders' dividends Previously, under UK GAAP, shareholders' dividends were accrued in the period towhich they related regardless of when they were declared. Under IFRS, dividendsdeclared after the balance sheet date in respect of the prior reporting periodare treated as a non-adjusting event. The appropriation reflected in themovement on capital and reserves for a half year period therefore reflects thefinal dividend in respect of the prior year. Additional significant changes for the 2005 results Adoption of IAS32, IAS39 and IFRS4 The Group has chosen to apply the exemption within IFRS that allows comparativeinformation presented in the first year of adoption of IFRS not to comply withIAS32 ("Financial Instruments: Disclosure and Presentation"), IAS39 ("FinancialInstruments: Recognition and Measurement") and IFRS4 ("Insurance Contracts").These standards have been formally adopted on 1 January 2005. The principaleffects of adopting these standards arises in the Group' UK and Europe long-termbusiness contracts, JNL's fixed income securities and derivative instruments,and Egg's banking assets, liabilities and derivatives positions. Long-term business On adoption of these standards, the measurement basis of assets and liabilitiesof long-term business contracts is dependent upon the classification of thecontracts under IFRS4 as either "insurance" contracts, if the level of insurancerisk in the contracts is significant, or "investment" contracts, if the risk isinsignificant. Insurance contracts are permitted to be accounted for underpreviously applied GAAP. The Group has chosen to apply this approach. However,as an improvement to accounting policy, permitted by IFRS, the Group has appliedthe requirements of the UK standard FRS27 ("Life Assurance") to its UKwith-profits funds as explained in note I. For those "investment" contractswith discretionary participating features, IFRS4 also permits the continuedapplication of previously applied GAAP. The Group has chosen to apply thisapproach. For those "investment" contracts that do not contain discretionary participatingfeatures, IAS39 and, where the contract includes an investment managementelement, IAS18 ("Revenue") apply measurement principles to the assets andliabilities attaching to the contract that may diverge from those previouslyapplied under UK GAAP. The changes primarily arise in respect of deferredacquisition costs, deferred income reserves and provisions for future expensescommonly called "sterling reserves". Under UK GAAP, acquisition expenses are deferred with amortisation on a basiscommensurate with the anticipated emergence of margins under the contract.Under IFRS, acquisition costs for investment contracts are deferred to theextent that is appropriate to recognise an asset that represents the entity'scontractual right to benefit from providing investment management services andis amortised as the entity recognises the related revenue. IAS18 furtherreduces the costs potentially capable of deferral to incremental costs only.Deferred acquisition costs are amortised to the income statement in line withservice provision. Deferred income provisions for front end fees and similar arrangements arerequired to be established for investment management contracts under IAS18 withamortisation over the expected life of the contract in line with serviceprovision. In contrast to UK GAAP, sterling reserves are not permitted to berecognised under IFRS. An additional feature is that investment contracts arecloser in nature to a deposit style arrangement between the policyholder and thecompany. Under IFRS premiums and withdrawals for these contracts are recordedwithin the balance sheet directly as a movement on the policyholder liability.After making these and other consequential changes, the IFRS income statementreflects fee income on the contracts, expenses and taxation rather than the UKGAAP basis revenue account. The investment contract classification applies primarily to certain unit linkedand similar contracts in the UK Insurance Operations and Guaranteed InvestmentContracts of Jackson National Life (JNL). However, significant differencesbetween the timing of recognising profitability under UK GAAP and IFRS bases areconfined to the UK contracts only. JNL fixed income securities and derivative instruments Under IAS39, except for loans and receivables, and unless designated under thevery restrictive held to maturity classification on an asset by asset basis,most financial assets, including derivatives, are carried in the balance sheetat fair value. To this extent IAS39 is consistent with the basis of valuationapplied under UK GAAP for most financial assets of the Group's UK and Asianinsurance operations. On application of IAS39, movements in the fair value ofinvestments are recorded either in the income statement or directly toshareholders' reserves in the balance sheet, depending upon the designation andthe impact of hedge accounting rules. Derivative instruments are carried at fairvalue with value movements being recorded in the income statement. Hedgeaccounting, whereby value movements on derivatives and hedged items are recordedtogether in the performance statements, is permissible only if certain criteriaare met regarding the establishment of documentation and continued measurementof hedge effectiveness. The changes from UK GAAP to the basis applied from 1 January 2005 arising fromthese valuation requirements are concentrated on the accounting for theinvestments and derivatives of JNL. Previously the fixed income securities ofJNL, unless impaired, were accounted for at amortised cost with derivativessimilarly treated. On adoption of IAS39, the Group has decided to account forJNL's fixed income securities on an "available-for-sale" (AFS) basis whereby thefixed income securities are accounted for at fair value with movements in fairvalue being recorded in the Statement of Recognised Income and Expense i.e.directly to shareholders' reserves rather than the income statement. Valuemovements for JNL's derivatives are however booked in the income statement asrequired by IAS39. The Group has decided not to seek to hedge account for the majority of JNL'sderivatives under IAS39. To do so would require a wholesale re-configuration ofJNL's derivative book into much smaller components than currently applied by JNLthrough its economic hedge programme, and accompanied by an extra layer ofhedging instruments, beyond what is economically rational. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) B Significant changes of basis of preparation and accounting policy(continued) Additional significant changes for the 2005 results (continued) Egg The changes of policy for Egg arising from the adoption of IAS39 arise primarilyin respect of determination of effective interest rates, impairment losses onloans and advances to customers, carrying values of wholesale financialinstruments and equity savings products. For credit card receivables, under UK GAAP, the carrying amount of credit cardreceivables with low or zero rate interest on balance transfers are carried atcost with interest being accrued at 0% during the incentive period and then atthe standard rate thereafter. Under IAS39, these receivables are measured on anamortised cost basis. For loans and advances to customers, specific and formulated provisions areraised against non-performing loans and a general provision against the balance.Under IAS39, an impairment loss is only recognised when there is objectiveevidence that a debt is impaired. Wholesale instruments, under UK GAAP, were previously accounted for on anaccruals cost basis. Under IAS39, certain wholesale financial instruments arerequired to be measured at fair value, and depending on whether they have beenclassified as fair value through the profit and loss or available-for-sale, thechanges in fair value are recognised in the income statement or in equityrespectively. The adjustments for wholesale financial instruments also includethe impact of designating some of Egg's derivatives as cash flow hedges. Certain equity savings products contain embedded derivatives. Previously thesederivatives have been accounted for on an amortised cost basis. Under IAS39,they are required to be fair valued. Supplemental earnings information and discretionary non-IFRS change of policyfor longer-term investment returns Previously, under UK GAAP, the Group used operating profit based on longer-terminvestment returns before amortisation of goodwill as a supplemental measure ofits results. For the purposes of measuring operating profit, investment returnson shareholder financed business were based on the expected longer-term rates ofreturn. For fixed income securities, the longer-term returns (including lossesarising on the recognition of permanent diminutions in value) were averaged overfive years for inclusion in operating profit. Under IFRS, the Group continues to use operating profit based on longer-terminvestment returns as a supplemental measure of its results, as disclosed innote E. For the purposes of measuring operating profit, investment returns onshareholder financed business continue to be based on the expected longer-termrate of return. However, for fixed income securities, the five year averagingapproach described above has been replaced with a basis that more closelyreflects longer-term experience. The amount included in operating results forlonger-term capital returns comprises two components. These are a risk marginreserve based charge for expected defaults, which is determined by reference tothe credit quality of the portfolio, and amortisation of interest relatedrealised gains and losses to operating results to the date when sold bonds wouldhave otherwise matured. This change has been applied following a comprehensivereview of the Group's accounting policies and is unrelated to the requirementsof IFRS. Items excluded from operating profit, but included in total pre-tax profit ofcontinuing operations, include goodwill impairment charges, short-termfluctuations in investment returns (i.e. actual less longer-term returns) andactuarial gains and losses on defined benefit pension schemes. For the purposesof distinguishing actuarial gains and losses on defined benefit pension schemes,the component for short-term fluctuations in investment returns is determined byreference to plan assets plus any Prudential policies held by the scheme. Totalprofits are unaffected by the change of basis of determining longer-terminvestment returns. The supplemental earnings information in the statutory basis financialstatements is presented for 2005 but not for 2004 comparative results. This isbecause the comparative 2004 results do not incorporate the effects of adoptionof IAS32, IAS39 and IFRS4 and are thus inconsistent with the basis ofpreparation for the 2005 results. A comparison of supplemental earningsinformation based on the statutory IFRS basis results for 2005 and proforma IFRSresults for 2004, which reflect the estimated effects of adoption of these threestandards on the 2004 results of the Group's insurance operations is included inthe supplementary IFRS results within this report. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) C Reconciliations of summary income statements Half Year 2004 Full Year 2004 IFRS adjustments IFRS adjustments ----------------------------------------- --------------------------------------------- UK Presentation Recognition, Statutory UK GAAP Presentation Recognition, Statutory GAAP of measurement IFRS (note C of measurement IFRS (note C UK GAAP and basis (i)) UK GAAP and basis (i)) in IFRS other in IFRS other format changes format changes (note C (i))(note C (ii)) (note C (i))(note C (ii)) £m £m £m £m £m £m £m £m---------------------------------------------------------------------------------------------------------Insurance contract 7,397 0 0 7,397 16,099 0 0 16,099revenuesInvestment 2,380 987 (122) 3,245 13,917 2,074 (249) 15,742incomeUK fund management 79 (79) 0 0 136 (136) 0 0resultUS broker dealer (2) 2 0 0 (14) 14 0 0and fundmanagementresultAsia fund 10 (10) 0 0 19 (19) 0 0managementresultUK banking result 30 (30) 0 0 63 (63) 0 0(continuingoperations)Other 0 350 536 886 0 760 1,266 2,026income ---------------------------------------------------------------------------------------------------------Total revenue 9,894 1,220 414 11,528 30,220 2,630 1,017 33,867---------------------------------------------------------------------------------------------------------Benefits and (8,410) (7) (165) (8,582) (26,598) (37) 51 (26,584)claims forinsurancecontracts, andmovement inunallocatedsurplus ofwith-profits fundsdetermined aftercharging taxesborne bypolicyholders andunallocatedsurplus ofwith-profits fundsand unit linkedpoliciesAcquisition costs (901) (1,119) (188) (2,208) (2,069) (2,397) (1,060) (5,526)and otheroperatingexpenditureInterest on (94) (94) (196) (196)structuralborrowingsAmortisation of (48) 0 48 0 (94) 0 94 0goodwill (continuingoperations)---------------------------------------------------------------------------------------------------------Total charges (9,359) (1,220) (305) (10,884) (28,761) (2,630) (915) (32,306)--------------------------------------------------------------------------------------------------------- IFRS basis income, 535 109 644 1,459 102 1,561net of post-taxtransfers tounallocatedsurplus ofwith-profitsfunds, before taxattributable topolicyholders andunallocatedsurplus ofwith-profitsfunds, unit linkedpolicies andshareholdersIncome tax (226) (23) (249) (701) (10) (711)attributable topolicyholders andunallocatedsurplus ofwith-profits fundsand unit linkedpolicies---------------------------------------------------------------------------------------------------------Profit from 309 86 395 758 92 850continuing operations(including actualinvestmentreturns) beforetax attributableto shareholders--------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------Income tax(expense) benefitattributable toshareholders: Total tax (354) (33) (387) (947) (4) (951) attributable to policyholders and unallocated surplus of with-profits funds, unit linked policies and shareholders Less: Income 226 23 249 701 10 711 tax attributable to policyholders and unallocated surplus of with-profits funds and unit linked policies---------------------------------------------------------------------------------------------------------Income tax (128) (10) (138) (246) 6 (240)attributable to shareholders---------------------------------------------------------------------------------------------------------Profit from 181 76 257 512 98 610continuingoperations aftertaxDiscontinued (18) 1 (17) (94) (94)operations (net of tax)---------------------------------------------------------------------------------------------------------Profit for the 163 77 240 418 98 516period --------------------------------------------------------------------------------------------------------- Attributable to: Equity holders 156 77 233 428 89 517 of the parent company Minority 7 0 7 (10) 9 (1) interest ---------------------------------------------------------------------------------------------------------Profit for the 163 77 240 418 98 516period --------------------------------------------------------------------------------------------------------- Notes C (i) UK GAAP results The UK GAAP basis results shown above reflect those previouslyrecorded in the technical accounts and non-technical account of the Group'sprofit and loss account under Companies Act requirements. These results arethen reconfigured to be consistent with the format expected to be applied forreporting in the Group's 2005 full year financial statements under IFRS. C (ii) Recognition, measurement and other changes Changes to profit from continuing operations (including actualinvestment returns) before and after tax attributable to shareholders, for HalfYear 2004 and Full Year 2004 reflect the expected effects of IFRS adoption. Insummary the effects are for: Half Year 2004 Full Year 2004 £m £m Egg - primarily relates to charges for 1 (2) share based payments in respect of Egg shares Additional pension costs and share based (2) (4) payments costs in respect of Prudential plc shares not allocated by business unit Amortisation of goodwill not permitted 48 94 under IFRS Actuarial gains and losses of defined 48 (7) benefit schemes recognised under IFRS Value movements of US investment funds (9) 2 newly consolidated under IFRS Share of profits of venture investment 0 9 companies and property partnerships of the PAC with-profits fund, newly consolidated under IFRS, that is attributable to external investors. -------- -------- Total changes before tax 86 92 Related tax (10) 6 -------- -------- Total changes after tax 76 98 -------- -------- Changes to revenue, charges, and related tax of the Group's with-profits fundsprincipally relate to measurement differences on investments, consolidationcriteria for venture and subsidiaries, and pension cost accounting. The totalchange to IFRS basis income for these changes for Half Year 2004 and Full Year2004 after related tax adjustments was £160m and £(22)m respectively. Theseamounts have been reflected by changes of an equal and opposite amount totransfers to unallocated surplus with no net effect on shareholder results. ForHalf Year 2004, £126m of that £160m change relates to pension costs due toactuarial gains on the Group's UK defined benefit pension schemes. A summarised explanation of the changes of accounting policies that give rise tothese adjustments is contained in note B. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) Half Year Half YearD Segment disclosure 2005 £m 2004 £m-------------------------------------- ------- -------- Revenue---------Long-term business, including revenue of PAC venture fund and other 17,679 10,661investment subsidiariesBanking 682 591Broker dealer and fund management 420 384Unallocated corporate 67 35Intragroup revenue eliminated on consolidation (147) (143)-------------------------------------- ------- -------- 18,701 11,528Total revenue per income statement-------------------------------------- ------- -------- Charges (before income tax attributable to policyholders and unallocatedsurplus of long-term insurance funds)------------------------------------------------------------------------- Long-term business, including expenditure of PAC venture fund and other (16,964) (10,082)investment subsidiaries and post-tax transfers to unallocated surplus ofwith-profits fundsBanking (669) (558)Broker dealer and fund management (329) (291)Unallocated corporate (244) (96)Intragroup charges eliminated on consolidation 147 143-------------------------------------- ------- -------- (18,059) (10,884)Total charges per income statement-------------------------------------- ------- -------- Segment results - Revenue less chargesLong-term business 715 579Banking 13 33Broker dealer and fund management 91 93Unallocated corporate (177) (61)-------------------------------------- ------- -------- IFRS basis income, net of post-tax transfers to unallocated surplus of 642 644with-profits funds, before tax attributable to policyholders andunallocated surplus of with-profits funds, unit linked policies, andshareholders Income tax attributable to policyholders and unallocated surplus of (182) (249)with-profits funds and unit linked policies-------------------------------------- ------- --------Profit from continuing operations (including actual investment returns) 460 395before tax attributable to shareholders ------- ---------------------------------------------- E Supplementary analysis of profit from continuing operations (includingactual investment returns) before tax attributable to shareholders and related earnings per share Profit from continuing operations Half Year Half Year Full yearbefore tax 2005 £m 2004 £m 2004 £m --------------------------------- ------- ------- ------- Operating profit from continuing 469operations based on longer-terminvestment returns before exceptionalitemsGoodwill impairment charge (95) Not NotShort-term fluctuations in investment 94 applicable applicablereturns on shareholder backedbusinessShareholders' share of actuarial gains (8) (see note E (see note Eand losses on defined benefit pension (i)) (i))schemes--------------------------------- ------- ------- -------Profit from continuing operations 460(including actual investment returns) before tax attributable toshareholders--------------------------------- ------- ------- ------- Earnings per share from continuingoperations From operating profit based on 14.0plonger-term investment returns after taxand related minority interest of £331mAdjustment for goodwill impairment (4.0)p Not NotchargeAdjustment from post-tax longer-term 3.0p applicable applicableinvestment returns to post-tax actualinvestment returns (after relatedminority interest)Adjustment for post-tax shareholders' (0.3)p (see note E(i)) (see note Eshare of actuarial gains and losses on (i))defined benefit pension schemes --------------------------------- ------- ------- -------Based on profit from continuing 12.7poperations after minority interest of £299m--------------------------------- ------- ------- ------- Note E (i) The supplementary analysis of statutory IFRS basis results shown abovehas been presented only for half year 2005. Details have not been provided for2004 as the results would not be comparable. This is due to IAS32, IAS39 andIFRS4 being only adopted from 1 January 2005. Additional analysis of the 2005 result, and proforma basis comparative resultsfor 2004 as if these standards had been applied by the Group's insuranceoperations from 1 January 2004, is provided as supplementary information tothese financial statements. The analysis on those pages does not form part ofthe financial statements. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) F Reconciliations of equity and balance sheets At 1 January 2004 Shareholders' Minority Total equity interest equity £m £m £m-----------------------------------------------------------------------------------Changes on adoption of statutory IFRS basis----------------------------------------------Treasury shares adjustment for Prudential plc (40) (40)shares held by unit trusts newly consolidatedunder IFRS (note F(i))Minority share of equity of consolidated 32 32venture investments companies and propertypartnerships of the PAC with-profits fund(note F(i))Shareholders' share of deficits (net of tax) (110) (110)of UK defined benefit pension schemes (note F(ii))Timing difference on recognition of dividend 214 214declared after balance sheet date (note F(iii))Other items (8) (2) (10)-----------------------------------------------------------------------------------Total 56 30 86 Equity at 1 January 2004----------------------------As previously published under UK GAAP 3,240 107 3,347-----------------------------------------------------------------------------------As restated under statutory IFRS 3,296 137 3,433----------------------------------------------------------------------------------- IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) F Reconciliations of equity and balance sheets (continued) At 30 June 2004 Effect of changes on implementation of IFRS Recognition and measurement changes ------------------------------------------------------------------- UK Newly Defined Other Grossing- Total Statutory GAAP consoli- benefit recognition up IFRS IFRS dated pension and and changes basis entities schemes measurement other (note F accounting changes format (i)) (note F (note F changes (ii)) (iii)) £m £m £m £m £m £m £m----------------------------------------------------------------------------------------------Assets Goodwill: Attributable to 565 565 565 PAC with-profits fund Attributable to 1,456 48 48 1,504 shareholdersInvestments: per IFRS 2,124 (21) 153,046 155,149 155,149balance sheetInvestments: per UK 120,061 (120,061) (120,061) 0GAAP analysis(non-linked, linkedand banking businessassets)Other items 42,717 1,366 56 122 (32,163) (30,619) 12,098----------------------------------------------------------------------------------------------Total assets 164,234 4,055 56 149 822 5,082 169,316---------------------------------------------------------------------------------------------- Equity andliabilitiesEquityAttributable to 3,320 (51) (78) 161 32 3,352shareholders of theparent companyMinority interest 103 70 (2) 68 171----------------------------------------------------------------------------------------------Total equity 3,423 19 (78) 159 100 3,523----------------------------------------------------------------------------------------------LiabilitiesBanking customer 6,699 6,699 6,699accounts: per IFRSbalance sheetBanking business 12,245 (12,245) (12,245) 0liabilities: per UKGAAP balance sheetInsurance liabilities: Contract 123,091 (115) 5 (110) 122,981 liabilities (non-linked and linked business) Unallocated 12,110 28 (312) (8) (292) 11,818 surplus of with-profits fundsBorrowings: per IFRSbalance sheet Core structural 2,596 2,596 2,596 borrowings of shareholder financed operations (excluding Egg) Other borrowings 1,086 9 6,156 7,251 7,251 attributable to shareholder financed operations Borrowings 1,642 98 109 1,849 1,849 attributable to with-profits fundsBorrowings: per UK 4,589 (4,589) (4,589) 0GAAP balance sheet(subordinatedliabilities, debentureloans and otherborrowings)Dividend payable 109 (109) (109) 0Other non-insurance 8,667 1,280 561 (5) 2,096 3,932 12,599liabilities ----------------------------------------------------------------------------------------------Total liabilities 160,811 4,036 134 (10) 822 4,982 165,793---------------------------------------------------------------------------------------------- Total equity and 164,234 4,055 56 149 822 5,082 169,316liabilities ---------------------------------------------------------------------------------------------- At 31 December 2004 Effect of changes on implementation of IFRS Recognition and measurement changes ------------------------------------------------------------------- UK Newly Defined Other Grossing Total Statutory GAAP consoli- benefit recognition -up IFRS IFRS dated pension and and changes basis entities schemes measurement other (note F accounting changes format (i)) (note F (note F changes (ii)) (iii)) £m £m £m £m £m £m £m----------------------------------------------------------------------------------------------AssetsGoodwill: Attributable to 754 754 754 PAC with-profits fund Attributable to 1,367 94 94 1,461 shareholdersInvestments: per IFRS 1,978 35 162,459 164,472 164,472balance sheetInvestments: per UK 129,468 (129,468) (129,468) 0GAAP analysis(non-linked, linkedand banking businessassets)Other items 43,741 1,477 102 50 (32,155) (30,526) 13,215----------------------------------------------------------------------------------------------Total assets 174,576 4,209 102 179 836 5,326 179,902---------------------------------------------------------------------------------------------- Equity andliabilitiesEquityAttributable to 4,281 (30) (117) 356 209 4,490shareholders of theparent companyMinority interest 71 76 (2) 74 145----------------------------------------------------------------------------------------------Total equity 4,352 46 (117) 354 283 4,635----------------------------------------------------------------------------------------------LiabilitiesBanking customer 6,607 6,607 6,607accounts: per IFRSbalance sheetBanking business 11,216 (11,216) (11,216) 0liabilities: per UKGAAP balance sheetInsurance liabilities: Contract 129,101 (125) 4 1 (120) 128,981 liabilities (non-linked and linked business) Unallocated 16,686 6 (472) (34) (500) 16,186 surplus of with-profits fundsBorrowings: per IFRSbalance sheet Core structural 2,797 2,797 2,797 borrowings of shareholder financed operations (excluding Egg) Other borrowings 972 9 5,891 6,872 6,872 attributable to shareholder financed operations Borrowings 1,828 105 144 2,077 2,077 attributable to with-profits fundsBorrowings: per UK 4,673 (4,673) (4,673) 0GAAP balance sheet(subordinatedliabilities, debentureloans and otherborrowings)Dividend payable 253 (253) (253) 0Other non-insurance 8,295 1,357 816 (6) 1,285 3,452 11,747liabilities ----------------------------------------------------------------------------------------------Total liabilities 170,224 4,163 219 (175) 836 5,043 175,267---------------------------------------------------------------------------------------------- Total equity and 174,576 4,209 102 179 836 5,326 179,902liabilities ---------------------------------------------------------------------------------------------- IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) F Reconciliations of equity and balance sheets (continued) Notes F(i) Newly consolidated entities Under IAS27 and SIC12, the Group is required to consolidate theassets and liabilities of certain entities which have previously not beenconsolidated. The principal change to shareholders' equity arises from anadjustment in respect of Prudential plc shares held by unit trusts that arenewly consolidated. These shares are accounted for as treasury stock and thecost of purchase of £44m, £44m and £29m is deducted from shareholders' equity at1 January 2004, 30 June 2004 and 31 December 2004 respectively. The change tothe minority share of equity reflects external parties' interest in consolidatedventure investment companies and property partnerships of the PAC with-profitsfund. Measurement changes to the carrying value of these companies that areattributable to the PAC with-profits fund share are reflected in unallocatedsurplus. F(ii) Defined benefit pension schemes accounting Provisions for deficits on the Group's defined benefit pensionschemes are absorbed by the unallocated surplus of the PAC with-profits fund andshareholders' funds on a basis that reflects the weighted cumulative activityattaching to the contributions paid in the past, and after deduction of deferredtax. The M&G scheme held Prudential Group's Insurance policies as scheme assetsof £115m at 30 June 2004 and £125m at 31 December 2004. The asset and liabilityare eliminated on consolidation. F(iii) Other recognition and measurement changes Under IFRS, dividends declared after the balance sheet date are notrecognised as a liability. In addition, goodwill under IFRS represents thebalance sheet carrying value at adoption date as discussed in note B.Adjustments in the table are to write-back amortisation previously charged underUK GAAP from 1 January 2004. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) G Effect of adoption of IAS32, IAS39, and IFRS4 at 1 January 2005 Effect of adoption of IAS32, IAS39 and IFRS4 Recognition and measurement changes ----------------------------------------------------------------------- Statutory UK Jackson Banking Grossing- Total Statutory IFRS and National and up effect IFRS basis Europe Life non- and basis at insurance (note insurance other at 1 Jan 31 operations G(ii)) operations format 2005 Dec (note G (note changes 2004 (i)) G(iii)) (note F) £m £m £m £m £m £m £m----------------------------------------------------------------------------------------------AssetsGoodwill: Attributable to PAC 754 754 with-profits fund Attributable to 1,461 1,461 shareholders Deferred acquisitioncosts: PAC with-profits 798 (798) (798) 0 fund (note I) Other operations 2,122 43 (456) (413) 1,709Investments 164,472 (145) 1,262 145 55 1,317 165,789Other assets (excluding 10,295 26 66 (118) (26) 10,269deferred acquisition costs and goodwill)----------------------------------------------------------------------------------------------Total assets 179,902 (874) 872 27 55 80 179,982---------------------------------------------------------------------------------------------- Equity and liabilitiesEquity Attributable to 4,490 (12) 273 (25) 236 4,726 shareholders of the parent company Minority interest 145 (3) (3) 142---------------------------------------------------------------------------------------------- Total equity 4,635 (12) 273 (28) 233 4,868----------------------------------------------------------------------------------------------LiabilitiesBanking customer 6,607 84 84 6,691accountsInsurance liabilities: Contract 128,981 7,020 (51) 6,969 135,950 liabilities (non-linked and linked business) Unallocated surplus 16,186 (7,840) (7,840) 8,346 of with-profits fundsBorrowings: Core structural 2,797 2,797 borrowings of shareholder financed operations (excluding Egg) Other borrowings 6,872 207 62 269 7,141 attributable to shareholder financed operations Borrowings 2,077 2,077 attributable to with-profits fundsOther non-insuranceliabilities: Deferred tax 2,244 (91) 218 (6) 121 2,365 liabilities Other 9,503 49 225 (85) 55 244 9,747Related Shares:
Prudential