IFRS Transition Report

Man Group plc 05 July 2005 5 July 2005 Man Group plc Man Group plc releases IFRS Transition Report Man Group plc, the global provider of alternative investment products and agency brokerage, today releases the restatement of financial information for the Half Year to 30 September 2004 and Full Year to 31 March 2005 in accordance with International Financial Reporting Standards (IFRS). Man Group plc has moved to reporting its financial results in accordance with IFRS, as endorsed by the EU, from 1 April 2005. IFRS will apply for the first time in the Group's Annual Report for the year ending 31 March 2006 and the Group's financial results for the six months ending 30 September 2005 will be prepared under the provisional IFRS accounting policies set out in the IFRS transition report. Further detail is provided in the attached appendices and is also available at http://www.mangroupplc.com/investor/investors_pressRel.cfm A conference call for investors and analysts, hosted by Peter Clarke (Finance Director) will take place today at 2.00pm BST. The dial-in number is +44 (0) 208 609 0685 or 0800 358 2175 (Pin code 599211#). A replay of this conference call will be available for 48 hours. The dial-in number for the replay is +44 (0) 20 8609 0289 or 0800 358 2189 (Conference reference 129114). Enquiries Man Group plc 020 7144 1000 Peter Clarke David Browne ABOUT MAN Man Group is a leading global provider of alternative investment products and solutions as well as one of the world's largest futures brokers. The Group employs over 3,000 people in 15 countries, with key centres in London, Pfaeffikon (Switzerland), Chicago, New York, Paris, Singapore and Sydney. Man Group plc is listed on the London Stock Exchange (EMG.L) and is a constituent of the FTSE 100 Index. Man Investments, the Asset Management division, is a global leader in the fast growing alternative investments industry. It provides access for private and institutional investors worldwide to hedge fund and other alternative investment strategies through a range of products and solutions designed to deliver absolute returns with a low correlation to equity and bond market benchmarks. Man Investments has a twenty year track record in this field, supported by strong product development and structuring skills, and an extensive investor service and global distribution network. Man Financial, the Brokerage division, is one of the world's leading providers of brokerage services. It acts as a broker of futures, options and other equity derivatives for both institutional and private clients and as an intermediary in the world's metals, energy and foreign exchange markets with offices in key financial centres. Man has consistently achieved a leading position on the world's largest futures and options exchanges, with particular strengths in interest rate products, metals and the energy markets. Page 1 IFRS Transition Report Man Group plc Restatement of financial information for the Half Year to 30 September 2004 and Full Year to 31 March 2005 in accordance with International Financial Reporting Standards CONTENTS Page Introduction 2 Overview 3 Consolidated IFRS income statements and summarised segmental 6 information Consolidated IFRS balance sheets 7 Changes in accounting policies : key differences from UK GAAP 8 Special purpose audit report 11 Basis of preparation 13 Provisional IFRS accounting policies 15 Reconciliations of the consolidated income statements for the 6 months ended 30 September 2004 and year ended 31 March 2005, and consolidated balance sheets at 1 April 2004, 30 September 2004 and 31 March 2005, to the previously published UK GAAP financial information comprise pages 27 to 31 of the IFRS transition report. These pages are available on the Group's website at www.mangroupplc.com /investor/investors_pressRel.cfm Page 2 INTRODUCTION Man Group plc has moved to reporting its financial results in accordance with International Financial Reporting Standards (IFRS), as endorsed by the EU, from 1 April 2005. The financial information given in this document has been prepared on the basis set out in the basis of preparation statement on pages 13 and 14. IFRS will apply for the first time in the Group's Annual Report for the year ending 31 March 2006 and the Group's financial results for the six months ending 30 September 2005 will be prepared under the provisional IFRS accounting policies set out on pages 15 to 26. This document explains how the Group's previously reported UK GAAP performance and financial position (prepared in accordance with the accounting policies as set out in the 2005 Annual Report) are reported under IFRS. It includes, on an IFRS basis: •The Group's consolidated income statement for the six months ended 30 September 2004 and the year ended 31 March 2005, and summarised segmental information; •The Group's consolidated balance sheet at 1 April 2004, the Group's transition date to IFRS, at 30 September 2004 and at 31 March 2005; •A description of the significant changes in accounting policy and an analysis of their impact on the Group's financial information; •The provisional accounting policies which the Group proposes to adopt in preparation of its 2005 interim and 2006 annual financial statements; and •Reconciliations of the consolidated income statements for the 6 months ended 30 September 2004 and year ended 31 March 2005, and consolidated balance sheets at 1 April 2004, 30 September 2004 and 31 March 2005, to the previously published UK GAAP financial information. Further standards and interpretations may be issued that could be applicable for the Group's financial year ending 31 March 2006 and other possible changes may arise as the application of IFRS develops. The Group's first interim and annual IFRS financial statements may, therefore, be prepared in accordance with different accounting policies to those used in this document and, as a result, the financial information in this document could be subject to change. The consolidated IFRS balance sheets at 1 April 2004 and 31 March 2005, the related consolidated IFRS income statement and segmental analysis of profit before income tax for the year ended 31 March 2005 and the associated IFRS reconciliations to the previously published UK GAAP financial information have been audited by PricewaterhouseCoopers LLP. Their audit report to the Company is set out on pages 11 and 12. Page 3 OVERVIEW Impact on the year to March 2005 The consequences of the adoption of IFRS for the Group's financial year ended 31 March 2005, compared to the audited reported UK GAAP results for the same period, are as follows: • A small increase in diluted underlying earnings per share (182 cents versus 181 cents). Underlying earnings excludes net performance fee income, the results of Sugar Australia (now sold), goodwill amortisation and exceptional items; • A significant increase in diluted earnings per share on total operations (266 cents versus 182 cents). This is almost entirely the result of a one-off exceptional fair value gain of $202 million in the year on the conversion option component of the Group's exchangeable bonds and the reversal of the UK GAAP post-tax goodwill amortisation charge ($85 million); • 12% increase in net assets ($2,712 million versus $2,424 million); • No impact on cash flow or the underlying economics or risk profile of the Group; and • 12% increase in the Group's net cash position as at the year end as a result of the split accounting treatment of the Group's exchangeable bonds, which reduces the debt component of the bonds. The key financial highlights are set out in the table below. The Group will be reporting its Interim Results for the period ending 30 September 2005 under IFRS and for comparative purposes a restatement of the Group's UK GAAP results for the six months to 30 September 2004 is also shown. Half Year to Year to 30 September 2004 31 March 2005 ------------- ------------- ------- ------- -------- ------- UK GAAP IFRS UK GAAP IFRS $m $m $m $m Profit before tax (excl. exceptional items) 318 362 789 863 Exceptional items - 251 (5) 195 ------- ------- -------- ------- Profit before tax (incl. exceptional items) 318 613 784 1,058 Net assets 2,155 2,187 2,424 2,712 EPS on total operations (diluted) 74c 161c 182c 266c Underlying EPS (diluted) 79c 80c 181c 182c Return on equity (annualised)* 22.7% 28.5% 26.8% 29.8% Net (debt)/cash position (191) (94) 903 1,011 * excludes gains on fair valuing the embedded equity derivative component of the exchangeable bonds. Page 4 There are changes to the UK GAAP reported pre-tax segmental profits. A reconciliation of these is shown in the table below. IFRS adjustments ------------------------------------------------------------- Share of Restated UK associates Exchangeable under GAAP Goodwill tax bonds Hedging Other IFRS $m $m $m $m $m $m $m Asset Management Net management fee income 614 (1) (10) (13) 2 2 594 Net performance fee income 119 - (3) - 1 2 119 Goodwill amortisation (79) 79 - - - - - Exceptional items (5) - - - - (2) (7) ------ -------- -------- --------- ------- ------ ------- 649 78 (13) (13) 3 2 706 Brokerage Net income 145 (1) - (3) 3 4 148 Goodwill amortisation (12) 12 - - - - - ------ -------- -------- --------- ------- ------ ------- 133 11 - (3) 3 4 148 Sugar Australia 2 - - - - - 2 Unallocated exceptional item - Fair value gain on exchangeable bonds - - - 202 - - 202 ------ -------- -------- --------- ------- ------ ------- 784 89 (13) 186 6 6 1,058 ------ -------- -------- --------- ------- ------ ------- ------ ------- The most significant elements contributing to the changes in financial information are: • The split accounting treatment applied to the exchangeable bonds, resulting in the cash settlement conversion option being accounted for as an equity derivative and hence being fair valued through the income statement until 5 November 2004. At that date the cash settlement feature was removed and the conversion option was recognised as an equity instrument; subsequent to that date the fair value was not remeasured. This fair value adjustment is shown as a separately identified item in the IFRS income statement and will not be recurring (see page 8 for a further explanation); • The cessation of goodwill amortisation; • The recognition on the balance sheet of defined benefit pension scheme deficits; • The change in timing of when dividends are recognised; • The inclusion of certain financial assets at fair value; • The recognition in equity of fair value gains on effective cash flow hedges; and • As a result of applying IAS 32 and IAS 39 to all periods presented, a significant grossing up effect on assets and liabilities of the Brokerage business. There is no impact on profits or net assets as a result of this change. Page 5 The increase in net assets in the year to 31 March 2005 can be analysed as follows: Movement in net assets Net assets $m $m Net assets under UK GAAP 2,424 Exchangeable bonds (IAS 32/39) 90 Defined benefit pension scheme deficits (IAS 19) (73) Reversal of goodwill amortisation (IFRS 3) 89 Deferral of final dividend for FY 2005 (IAS 10) 127 Fair value gains re available for sale financial assets (IAS 39) 45 Other 10 ---------- IFRS adjustments 288 --------- Net assets under IFRS 2,712 --------- As from 1 April 2005, the Group's regulatory capital position is based on IFRS figures, subject to adjustments as set out by the Financial Services Authority in Policy Statement 05/5. The main regulatory capital implication for the Group of converting to IFRS is the reclassification of unamortised sales commissions, which are paid upfront to intermediaries following a sales launch and amortised over five years, from prepayments to intangible assets. However, based on IFRS figures the Group still has a significant level of regulatory capital headroom. Likely continuing impact The likely continuing impact of IFRS on the Group's reported results going forward, compared to that which would have been reported under UK GAAP, is as follows: • Group profit before tax will increase as a result of the cessation of goodwill amortisation; • To a lesser extent, pre-tax profit will be reduced by: the transfer of the tax charge relating to associates and joint ventures to pre-tax profit; and the additional finance charge relating to the exchangeable bonds (however neither of these will have any impact on diluted earnings per share); • The increased use of fair values may, to some extent, result in the income statement being exposed to greater volatility; and • The impact on diluted underlying earnings per share, the calculation of which excluded goodwill amortisation under UK GAAP and will now include the adding back of the additional finance charge on the exchangeable bonds, is not expected to be material. Page 6 CONSOLIDATED IFRS INCOME STATEMENTS (Unaudited) Year Half-year ended ended 31-Mar-05 30-Sep-04 $m $m Net operating income 1,573 713 Operating expenses (764) (368) Fair value gains on conversion option of the exchangeable bonds 202 251 Loss on sale of businesses (7) - Finance income 107 44 --------- --------- Net operating profit 1,111 640 Finance costs (77) (34) Share of results of associates and joint ventures after tax 24 7 --------- --------- Profit before income tax 1,058 613 Income tax expense (173) (72) --------- --------- Profit for the period 885 541 --------- --------- Profit attributable to: Equity shareholders 885 541 Minority interests - - --------- --------- 885 541 --------- --------- Basic earnings per ordinary share 292c 178c Diluted earnings per ordinary share 266c 161c SEGMENTAL ANALYSIS OF PROFIT BEFORE INCOME TAX (Unaudited) Year Half-year ended ended 31-Mar-05 30-Sep-04 $m $m Asset Management - net management fee income 594 259 Asset Management - net performance fee income 119 31 Asset Management - loss on sale of businesses (7) - --------- --------- Asset Management - total 706 290 Brokerage 148 70 Sugar Australia 2 2 Fair value gains on conversion option of the exchangeable bonds 202 251 --------- --------- 1,058 613 --------- --------- The presentation of the income statement and segmental analysis for the Half Year ending 30 September 2005 and the Year ending 31 March 2006 will be in full accordance with IAS 1 and IAS 14, which will require some changes to the presentation of the above tables. Page 7 CONSOLIDATED IFRS BALANCE SHEETS (Unaudited) As at As at As at 31-Mar-05 30-Sep-04 01-Apr-04 $m $m $m ASSETS Non-current assets Property, plant and equipment 64 62 62 Goodwill 832 836 812 Other intangible assets 354 308 285 Investments in associates and joint ventures 240 224 270 Other investments 105 98 75 Deferred income tax assets 24 27 34 Other non-current assets 42 48 38 -------- --------- --------- 1,661 1,603 1,576 Current assets Trade and other receivables 10,181 7,647 7,089 Short term investments 3,089 2,619 2,346 Cash and cash equivalents 2,149 1,164 1,703 -------- --------- --------- 15,419 11,430 11,138 -------- --------- --------- TOTAL ASSETS 17,080 13,033 12,714 -------- --------- --------- LIABILITIES Current liabilities Short term borrowings and overdrafts (3) (33) (149) Trade and other payables (13,136) (9,484) (9,779) -------- --------- --------- (13,139) (9,517) (9,928) Non-current liabilities Long term borrowings (1,135) (1,225) (842) Deferred income tax liabilities (11) (9) (14) Pension obligations (59) (61) (61) Other creditors (24) (34) (43) -------- --------- --------- (1,229) (1,329) (960) -------- --------- --------- TOTAL LIABILITIES (14,368) (10,846) (10,888) -------- --------- --------- -------- --------- --------- NET ASSETS 2,712 2,187 1,826 -------- --------- --------- EQUITY Capital and reserves attributable to the Company's equity holders Share capital 55 56 57 Share premium account 354 352 337 Merger reserve 722 722 729 Other capital reserves 222 4 4 Available for sale reserve 29 25 19 Cash flow hedge reserve - 1 20 Retained earnings 1,330 1,027 659 -------- --------- --------- 2,712 2,187 1,825 Equity minority interests - - 1 -------- --------- --------- TOTAL EQUITY AND RESERVES 2,712 2,187 1,826 -------- --------- --------- Page 8 CHANGES IN ACCOUNTING POLICIES : KEY DIFFERENCES FROM UK GAAP The Group's financial information has been changed as a result of changing its accounting policies to comply with the requirements of IFRS. A description and analysis of the significant changes in accounting policies are set out below. Exchangeable bonds (IAS 32/39) The UK GAAP approach was to treat the exchangeable bonds as debt instruments, without anticipating exchange. Under IFRS, the exchangeable bonds are compound financial instruments as defined by IAS 32. As such, the debt and conversion option components have to be separately classified and measured. As at 12 November 2002, the date of issue, the fair value of the exchangeable bonds in US dollar terms was $735 million, the debt component being $598 million with the remaining $137 million allocated to the conversion option. The fair value of the debt component was determined on the issue date using a market interest rate for an equivalent non-exchangeable bond. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the bonds. The finance cost charged to the income statement includes the discount (which did not exist under UK GAAP), interest coupon and issue costs. The remainder of the proceeds received on issue was allocated to the conversion option. From 5 November 2004, when the cash settlement alternative option that existed on issue was revoked, the conversion option was recognised as an equity instrument as part of equity (included in other capital reserves) and not subsequently remeasured. Before this date, the conversion option was classified as a derivative within liabilities and fair valued through the income statement. As a result of movements in Man Group plc's share price during the period between 12 November 2002 and 5 November 2004, under IFRS the fair value gains and losses on the conversion option posted to the income statement are significant in the comparative year to 31 March 2005, but will not reoccur in future periods. The Group has entered into interest rate swap agreements to hedge the fixed interest rate on the exchangeable bonds into a floating rate. Hedge accounting was effectively applied to these swaps under UK GAAP; under IFRS, hedge accounting cannot be achieved and these swaps are fair valued through the income statement. Hedge accounting (IAS 39) The Group currently applies hedge accounting in a limited number of instances. The main application of hedge accounting is to future sterling and Swiss franc overhead payments. The other application is to interest rate swaps used to hedge fixed interest rates to floating rates on US private placement debt. Under UK GAAP, fair value movements on hedging derivatives were deferred off balance sheet and recognised in the same period in which gains or losses on the hedged item were recognised. Under IAS 39, for cash flow hedges, such as the hedge of non-US dollar overheads, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. Gains and losses relating to any ineffective portion are recognised immediately in the income statement. Fair value gains and losses accumulated in equity are recycled in the income statement in the periods when the hedged item affects profit or loss (for instance when the forecast payment that is hedged takes place). Under IAS 39, for fair value hedges, such as the hedging of interest rates, changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Pensions (IAS 19) Under UK GAAP, the Group accounted for pensions in accordance with SSAP 24, which spreads the costs of providing benefits over the estimated average remaining service lives of the employees. The Group will apply the IFRS 1 exemption to recognise all cumulative actuarial gains and losses in relation to employee defined benefit schemes at the date of transition, 1 April 2004. The standard permits a number of options for the recognition of actuarial gains and losses going forward. The Group's policy is to apply the 'corridor' approach requiring actuarial gains and losses in excess of 10% of the greater of the scheme's assets and defined benefit obligations to be recognised in the income statement, but spread over the estimated average remaining working lives of the employees concerned. Page 9 Goodwill (IFRS 3) UK GAAP requires goodwill to be amortised over its estimated useful life, which the Group has typically estimated to be between three and 15 years. Under IFRS, goodwill is considered to have an indefinite life and is therefore not amortised, but is subject to an annual impairment test. The value of goodwill is therefore frozen as at the transition date and amortisation reported under UK GAAP for the financial year ended 31 March 2005 has been reversed as an IFRS adjustment. Dividends (IAS 10) Under UK GAAP normal practice is to account for dividends proposed relating to any given accounting period in that period. Under IFRS, a dividend is not recognised as a liability until the dividend is declared (and approved if required), which is usually after the accounting period to which it relates. Accordingly, there is an IFRS adjustment to the 1 April 2004 balance sheet for the final dividend for the financial year ended 31 March 2004, which is not recognised until the first half of the following financial year. The balance sheets for 30 September 2004 and 31 March 2005 contain a similar adjustment for the interim and final dividends respectively. Grossing-up of Man Financial's assets and liabilities (IAS 32) In the UK GAAP Accounts, where Man Financial acts as an intermediary and assumes minimal risk, the Group's policy was for assets and liabilities to be netted on the balance sheet. Under IFRS, netting is only permitted where there is the ability and the intention to settle net. This is often not the case for Man Financial, hence certain assets and liabilities on the Group's balance sheet are required to be grossed-up. Reclassification of various assets as intangibles (IAS 38) IAS 38 revises the UK GAAP definition of an intangible asset with the result that a wider range of assets meets the definition. Sales commissions are paid when a fund product is first launched. Under both UK GAAP and IFRS these upfront commissions are capitalised on the balance sheet and amortised over the period over which the Group expects the investor to be invested in the fund product, currently estimated to be a weighted average of five years. Under UK GAAP these sales commissions were classified as prepayments, within debtors; under IFRS they are classified as intangible assets. This has a significant impact on the Group's regulatory capital headroom (see overview on page 5) but has no impact on the income statement or net assets. Computer software was included within tangible fixed assets under UK GAAP. Under IFRS, only computer software which is integral to another fixed asset is included in fixed assets. All other computer software is classified as an intangible asset. Exchange shares / market seats and long-term investments in funds (IAS 39) Under UK GAAP, Man Financial's exchange shares and market seats, and investments in the funds held by Man Investments for the long-term, were classified as fixed asset investments and held at cost less any impairment. Under the IFRS definition of a financial asset the majority are classified as available for sale assets and measured at fair value, with gains and losses, except impairment losses, being posted to equity and recycled through the income statement on disposal of the asset. Other adjustments There are a number of other less significant adjustments and reclassifications, which include: • Functional currency (IAS 21): The functional currency of each Group entity has been reviewed. Under IFRS, the functional currency of certain entities has changed to US dollars to reflect the functional currency of the parent company. Page 10 • Share-based payments (IFRS 2): The current treatment under UK GAAP is to charge the intrinsic value of share awards/grants as at the date of award/ grant to the income statement. Where shares or options are granted at no cost to the employee (such as the Group's Co-investment scheme and long-term incentive plan) the income statement was charged with an amount equal to the market price on the date of award/grant, spread over the performance period. For share options granted at market price, there was no charge to the income statement. In accordance with IFRS 2, for those equity-settled share awards/grants made after 7 November 2002, which had not vested at 1 April 2004, which covers the majority of unvested awards/grants, the charge to the income statement represents the fair value of the award/grant at the date of award/grant and is spread over the vesting period. The Group has used appropriate present economic valuation models and methodologies for calculating the fair value of each share award/option, including using a binomial option pricing model for valuing executive share options. Although the calculation is different, the resultant charge is not materially different from that under UK GAAP. • Effective interest method (IAS 39): IAS 39 requires receivables and certain financial liabilities to be measured at amortised cost using the effective interest method. Largely as a result of discounting certain long-term receivables and payables, the application of the effective interest method has resulted in a small net change to the finance charge. • Taxation (IAS 12): The scope of IAS 12 'Income taxes' is wider than the corresponding UK GAAP standards, and requires deferred tax to be provided on all temporary differences rather than just timing differences as under UK GAAP. The main additional provisions for the Group for deferred tax assets/ liabilities, required by IFRS, relate to the provision of deferred tax in respect of the Group's liabilities under its defined pension schemes arrangements and on other employee benefits such as share award/option schemes. Deferred tax is provided on unrealised fair value gains/losses relating to hedging instruments and available for sale assets. • Share of results of associates/joint ventures (IAS 28/31): Under UK GAAP, the Group's share of operating profit/loss from associates and joint ventures was shown before interest and tax - these were included in the interest and taxation lines on the income statement. IFRS requires the profit/loss from associates and joint ventures to be shown as a single figure, representing the net profit/loss attributable to the Group. This leads to a reclassification adjustment removing the share of the associates'/joint ventures' interest and tax from those lines in the income statement and include them in the share of operating profit/loss from the associates and joint ventures line. Page 11 Special Purpose Audit Report of PricewaterhouseCoopers LLP to Man Group plc on its International Financial Reporting Standards (IFRS) Financial Information We have audited the accompanying consolidated IFRS balance sheets of Man Group plc and its subsidiaries ('the Group') as at 1 April 2004 and 31 March 2005, the related consolidated IFRS income statement and segmental analysis of profit before income tax for the year ended 31 March 2005 set out on pages 6 and 7 and the associated IFRS reconciliations to the previously published UK GAAP financial information set out on pages 27 to 31 prepared in accordance with the basis of preparation and the provisional accounting policies set out on pages 13 to 26 (hereinafter referred to as 'the IFRS financial information'). In addition to the above noted opening and year end balance sheets, full year income statement, segmental analysis of profit before income tax and associated IFRS reconciliations, included with the financial information set out on pages 6 and 7 and 27 to 31 are the half-year balance sheet, half-year income statement, half-year segmental analysis of profit before income tax and associated IFRS reconciliations. We have not audited the half-year balance sheet, half-year income statement, half-year segmental analysis of profit before income tax and associated IFRS reconciliations and these are not covered by this opinion and do not form part of the above defined IFRS financial information. The IFRS financial information has been prepared by the Group as part of its transition to IFRS and to establish the financial position and results of operations of the Group to provide the comparative financial information expected to be included in the first complete set of consolidated IFRS financial statements of the Group for the year ending 31 March 2006. Respective responsibilities of the directors and PricewaterhouseCoopers The directors of the Company are responsible for the preparation of the IFRS financial information which has been prepared as part of the Group's conversion to IFRS. Our responsibilities, as independent auditors, are established in the United Kingdom by the Auditing Practices Board, our profession's ethical guidance and the terms of our engagement. Under the terms of engagement we are required to report our opinion as to whether the IFRS financial information has been prepared, in all material respects, in accordance with the basis of preparation and provisional accounting policies set out on pages 13 to 26. This report, including the opinion, has been prepared for and only for the Company for the purposes of assisting with the Group's transition to IFRS and for no other purpose. To the fullest extent permitted by law, we do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We read the other information contained in this document and consider its implications for our report if we become aware of any apparent misstatements or material inconsistencies with the above defined IFRS financial information. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the UK Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the IFRS financial information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the IFRS financial information, and of whether the accounting policies are appropriate to the Group's circumstances and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the IFRS financial information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the IFRS financial information. Page 12 Emphasis of matter Without qualifying our opinion, we draw attention to the fact that the IFRS financial information may require adjustment before its inclusion as comparative information in the Group's first set of IFRS financial statements for the year ending 31 March 2006. This is because International Financial Reporting Standards currently in issue and adopted by the EU are subject to interpretation issued from time to time by the International Financial Reporting Interpretations Committee (IFRIC) and further Standards may be issued by the International Accounting Standards Board (IASB) that will be adopted for financial years beginning on or after 1 April 2005. Additionally, without qualifying our opinion, IFRS is currently being applied in the United Kingdom and in a large number of other countries simultaneously for the first time. Furthermore, due to a number of new and revised Standards included within the body of Standards that comprise IFRS, there is not yet a significant body of established practice on which to draw in forming opinions regarding interpretation and application. Accordingly, practice is continuing to evolve. At this preliminary stage, therefore, the full financial effect of reporting under IFRS as it will be applied and reported on in the Group's first IFRS financial statements for the year ending 31 March 2006 may be subject to change. Moreover, we draw attention to the fact that, under IFRS, only a complete set of financial statements comprising a balance sheet, income statement, statement of changes in equity and a cash flow statement, together with comparative financial information and explanatory notes, can provide a fair presentation of the Group's financial position, results of operations and cash flows in accordance with IFRS. Opinion In our opinion, the accompanying IFRS financial information comprising the consolidated IFRS balance sheets at 1 April 2004 and 31 March 2005, the related consolidated income statement and segmental analysis of profit before income tax for the year ended 31 March 2005, set out on pages 6 and 7, and the associated IFRS reconciliations to the previously published UK GAAP financial information, set out on pages 27 to 31, has been prepared, in all material respects, in accordance with the basis of preparation and provisional accounting policies set out on pages 13 to 26, which describe how IFRS will be applied and the policies expected to be adopted when the directors of the Company prepare the first complete set of IFRS financial statements of the Group for the year ending 31 March 2006. PricewaterhouseCoopers LLP Chartered Accountants Southwark Towers 32 London Bridge Street London SE1 9SY 4 July 2005 Page 13 BASIS OF PREPARATION The Group will adopt the requirements of all International Financial Reporting Standards (IFRS), which include International Accounting Standards (IAS) and interpretations issued by the International Accounting Standards Board (IASB) and its committees, for the first time for the purpose of preparing financial statements for the year ending 31 March 2006. The standards applied in this IFRS transition report are those that have been issued by the IASB as endorsed (or where there is a reasonable expectation of endorsement) by the European Union (EU) as at 31 March 2006. In November 2004, the EU endorsed an amended version of IAS 39, 'Financial Instruments: Recognition and measurement' rather than the full version as previously published by the IASB. The EU endorsed version of IAS 39 relaxes some of the hedge accounting requirements and prohibits the designation of financial liabilities at fair value through profit or loss. The Group has not taken advantage of any of the relaxed hedge accounting requirements and does not designate any non-trading financial liabilities at fair value through profit or loss. Consequently, the financial information in this document is in accordance with both the EU endorsed version and the IASB version of IAS 39. Further standards and interpretations may be issued that could be applicable for financial years ending 31 March 2006 or later accounting periods but with the option for earlier adoption. The Group's first annual financial statements prepared under IFRS may, therefore, be prepared in accordance with different accounting policies to those used in the preparation of the financial information in this document. IFRS is also being applied in the EU and other countries for the first time and practice on which to draw in applying the standards is still developing. Consequently, the financial information in this document could be subject to change. In many instances, trail commissions are paid to intermediaries as long as an investor maintains an investment in fund entities of which the Group is the investment manager. Under UK GAAP, trail commissions are charged to net operating income as incurred. The Group is considering the appropriate treatment of these contracts under IFRS, in particular whether the net present value of the future obligation should be recognised as a financial liability, together with a matching financial asset at the time the obligation arises. To the extent it is deemed to be appropriate to recognise a liability, and a corresponding asset, assets and liabilities on the balance sheet will be grossed up. At present, the maximum gross up effect is approximately $650 million; this will be reduced to the extent that the trail commission payments to intermediaries are for continuing services provided by the intermediaries. There is no impact in aggregate on the income statement over the life of the fund product, but there could potentially be some volatility in the income statement in any discrete period due to timing differences, as the asset and liability will be amortised through the income statement at different rates. Whilst the exact impact of these timing differences is not yet certain, the impact on the Group's income statement is likely to be immaterial. IFRS 1 exemptions IFRS 1 'First-time Adoption of International Financial Reporting Standards' sets out the procedures that the Group is required to follow when it adopts IFRS for the first time as the basis for preparing its consolidated financial statements. The Group is required to establish its IFRS accounting policies as at 31 March 2006 and, in general, apply these retrospectively to determine its opening balance sheet at its date of transition (1 April 2004) and subsequent comparative information. IFRS 1 provides a number of optional exemptions to this general principle. The most significant exemptions are set out below, together with a description of the treatment adopted by the Group: a) Business combinations (IFRS 3): The Group has elected not to restate business combinations prior to the transition date (1 April 2004). A significant consequence of this is that, in the opening balance sheet, goodwill arising from past business combinations remains as stated under UK GAAP at 31 March 2004. Page 14 b) Employee benefits (IAS 19): The Group has elected for all cumulative actuarial gains and losses in relation to employee benefit schemes to be recognised in full at the date of transition. c) Financial instruments (IAS 32 and IAS 39): The Group has applied IAS 32 and IAS 39 for all periods presented and has therefore not taken advantage of the exemption in IFRS 1 that would enable the Group to not present its comparatives in compliance with these standards. This approach will result in the first financial statements prepared under IFRS giving a more meaningful view and avoids the need to have a separate transition date for these two standards. d) Share-based payments (IFRS 2): The Group has applied IFRS 2 to all relevant share based transactions granted since 7 November 2002 but not vested as at 1 April 2004. The Group cannot use the exemption to apply this to grants prior to 7 November 2002 as it has not previously published the fair value of these transactions, determined at measurement date. However, the effect of applying IFRS 2 to such transactions would be immaterial. e) Cumulative translation differences (IAS 21): The Group has elected to apply IAS 21 prospectively in relation to determining the translation difference adjustment arising on the translation of foreign subsidiaries. As a result, all cumulative translation gains and losses are reset to zero at the transition date. Presentation of the financial information The financial information contained in this document is presented on the basis of IAS 1. However, where no definitive guidance on presentation exists, the Group has continued to follow its previous presentation in order to minimise the number of restatement adjustments. It is possible that certain aspects of the presentation of this financial information may change as further guidance is issued and as best practice develops. The financial information contained herein does not constitute statutory accounts as defined by Section 240 of the Companies Act 1985. Statutory accounts for the year to 31 March 2005, upon which the auditors have given an unqualified report, have been delivered to the Registrar of Companies and were posted to shareholders on 8 June 2005. Page 15 PROVISIONAL IFRS ACCOUNTING POLICIES Man Group plc's provisional accounting policies, expected to be applied from 1 April 2005 and used in the preparation of this document, are set out below. A Consolidation (1) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group's share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Inter-company transactions and balances between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (2) Associates and joint ventures Associates are all entities over which the Group holds a long-term interest and has significant influence but not control. Joint ventures are all entities over which the Group holds a long-term interest and which are jointly controlled by the Group and one or more other parties under a contractual arrangement. Investments in associates and joint ventures are generally accounted for by the equity method of accounting and are initially recognised at cost, except for investments in fund entities that are fair valued through profit or loss as described below. The Group's investment in associates and joint ventures includes goodwill (net of any accumulated impairment loss) identified on acquisition (see Note E). Under the equity method, the Group's share of its associates' and joint ventures' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture. Page 16 Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's interest in the associates and joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates and joint ventures have been changed to ensure consistency with the policies adopted by the Group. The fund entities, of which the Group is the investment manager, with certain exceptions do not meet the definition of a subsidiary undertaking. However, the Group has significant influence over the fund entities and therefore they are associates of the Group. The investments in these fund entities are either 'liquidity' investments, to aid investors wishing to buy and sell investments in the fund entities, or 'seeding' investments. These investments are not held for the long-term and there are frequent changes in the level of the Group's ownership of investments. These investments are measured at fair value with changes in fair value recognised in the income statement in the period of the change. B Segment reporting A business segment is a group of assets and operations engaged in providing services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing services within a particular economic environment that are subject to risks and returns that are different from those of components operating in other economic environments. C Foreign currency translation (1) Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in US dollars, which is the Company's functional and presentation currency and the currency in which the majority of the Group's revenue streams, assets, liabilities and funding are denominated. (2) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions, or where it is more practical a group entity may use an average rate for the week or month for all transactions in each foreign currency occurring during that week or month (as long as the relevant exchange rates do not fluctuate significantly). Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in net operating income in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. (3) Group companies The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (a) assets and liabilities for each balance sheet are translated at the closing rate at the date of that balance sheet; (b) income and expenses for each income statement are translated at average exchange rates for the relevant accounting periods; Page 17 (c) all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate at each balance sheet date. D Property, plant and equipment All property, plant and equipment is shown at cost, less subsequent depreciation and impairment, except for land, which is shown at cost less impairment. Cost includes expenditure that is directly attributable to the acquisition of the assets. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repair and maintenance expenditures are charged to the income statement during the financial period in when they are incurred. Depreciation is calculated using the straight-line method to allocate the cost of each asset to its residual value over its estimated useful life as follows: • Buildings life of the lease • Equipment 3 - 10 years Major renovations are depreciated over the remaining useful life of the related asset or to the date of the next major renovation, whichever is sooner. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (see Note F). Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the income statement. Any borrowing costs associated with purchasing property, plant and equipment are expensed. E Intangible assets (1) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the group's share of the net identifiable assets of the acquired subsidiary/ associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investment in associates. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Page 18 (2) Sales commissions In Asset Management, sales commissions are paid to intermediaries (agents) and to employees. Sales commissions are recognised as follows: (a) Upfront commissions paid to intermediaries In many instances, upfront commissions are paid to intermediaries when a fund product is first launched, and are calculated based on the number of shares in a particular fund product that the intermediary has sold. These upfront commissions are capitalised as intangible assets in the balance sheet when the payment is made, and are amortised over five years, the weighted average period over which the Group expects the investor to be invested in the fund product. In addition, if the investor withdraws from the fund product within a specified period, then the investor is required to pay a redemption penalty. In the event of an early redemption, the non-amortised portion of the intermediary's commission is written off to the income statement in the same period as the penalty fee is received. (b) Internal commissions paid to employees Internal commissions paid to employees are calculated based on the level of fund products sold. On payment, the majority of these commissions are capitalised as intangible assets in the balance sheet and are amortised over five years, the period over which the Group expects that it will receive management fee income generated from the sales made. In addition, if the investor withdraws from the fund product within this five year period, then the investor is required to pay a redemption penalty. In the event of an early redemption, the non-amortised portion of the employees' commission relating to the redemption (based on linking the commission payment to the underlying fund product) is calculated and written off to the income statement in the same period as the penalty fee is received. (c) Trail commissions Trail commissions paid to intermediaries are charged to the income statement in the period in which they are incurred (this policy is being reviewed as discussed in the basis of preparation statement on page 13). All unamortised sales commission, relating to (a) and (b) above, is subject to impairment testing each period to ensure that the fair value of future economic benefits arising from each fund product sale made is in excess of the remaining unamortised commission. (3) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised using the straight-line method over their estimated useful lives (three to five years). Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include software development and associated employee costs. Computer software development costs recognised as assets are amortised on a straight-line basis over their estimated useful lives (not exceeding three years). (4) Exchange shares and market seats Where exchange shares or market seats meet the definition of a financial asset as stated in IAS 39, they are categorised as available for sale financial assets and measured at fair value (see Note G). Page 19 Where exchange shares and market seats are not categorised as available for sale financial assets they are accounted for as intangible assets. These shares and seats are shown at cost less subsequent amortisation and impairment. Where these shares and seats are deemed to have an indefinite life, an annual impairment test is performed (see Note F). For all those with a finite life, amortisation is calculated using the straight line method to allocate the costs of shares and seats over their estimated useful lives. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (see Note F). Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the income statement. F Impairment of assets Goodwill and assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement in the period in which it occurs for the amount by which the asset's carrying amount exceeds its estimated recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. Value in use is calculated by discounting the expected future cash flows obtainable as a result of the assets continued use, including those resulting from its ultimate disposal, at a market based discount rate on a pre-tax basis. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). G Investments (1) Classification The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of investments at initial recognition and re-evaluates, where permitted, this designation at each reporting date. (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money or services directly to a debtor with no intention of trading the receivable. They are included in current assets, except for maturities greater than 12 months after the balance sheet date, which are classified as non-current assets. Loans and receivables are included in trade and other receivables in the balance sheet (see Note H). Page 20 (c) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. (2) Measurement Purchases and sales of investments are recognised on trade-date - the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets and liabilities at fair value through profit or loss are subsequently carried at fair value in the balance sheet. Loans and receivables are carried at amortised cost using the effective interest method. Fair value gains and losses arising from changes in the fair value of the 'financial assets and liabilities at fair value through profit or loss' category are included in the income statement in the period in which they arise. Unrealised gains and losses arising from changes in the fair value of available-for-sale financial assets, except foreign exchange gains and losses on monetary assets (see Note C), are recognised in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investment securities. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using appropriate valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models refined to reflect the issuer's specific circumstances (see Note R). The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on the financial asset previously recognised in profit or loss - is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on available-for-sale equity instruments are not reversed through the income statement. H Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement. Page 21 I Segregated balances As a required by the United Kingdom Financial Services and Markets Act 2000 and by the US Commodity Exchange Act, the Group maintains certain balances on behalf of clients with banks, exchanges, clearing houses and brokers in segregated accounts. These amounts and the related liabilities to clients, whose recourse is limited to the segregated accounts, are not included in the balance sheet. The reason for their exclusion from the balance sheet is that the Group does not have a liability to its clients in the event that a third party depository institution, where the segregated funds are held, does not return all the segregated funds. The corresponding asset, which is not co-mingled with the Group's funds and over which the Group's control is severely restricted, is therefore not recognised in the balance sheet. J Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. Cash and cash equivalents comprise cash on hand, deposits held on call with banks, other short-term, highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included within borrowings in current liabilities in the balance sheet. K Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options, or the acquisition of a business, are shown in equity as a deduction, net of tax, from the proceeds. Own shares held through an ESOP trust are recorded at cost, including any directly attributable incremental costs (net of income taxes), and are deducted from equity attributable to the Company's equity holders until the shares are transferred to employees or sold. Where such shares are subsequently sold, any consideration received, net of any directly attributable incremental transaction costs and the related tax effects, is included in equity attributable to the Company's equity holders. Derivative contracts on own shares that only result in the delivery of a fixed amount of cash or other financial asset for a fixed number of own shares are classified as equity instruments. All other contracts on own equity are treated as derivatives and fair valued through the income statement. L Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Long-term borrowings include exchangeable bonds. The fair value of the liability portion of exchangeable bonds is determined on the issue date using a market interest rate for an equivalent non-exchangeable bond. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the bonds. The remainder of the proceeds are allocated to the conversion options. These are recognised as equity instruments and included in equity, net of income tax effects, except for cash settlement conversion options, which are held as derivatives and fair valued through the income statement. Page 22 Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. M Employee benefits (1) Pension obligations Group companies operate various pension schemes. The schemes are funded through payments to trustee-administered funds or insurance companies, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines the amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate fund. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are not recognised in the current period unless the cumulative unrecognised gain or loss at the end of the previous reporting period exceeds the greater of 10% of the scheme assets or liabilities. In these circumstances the excess is charged or credited to the income statement over the employees' expected average remaining working lives. Past service costs are recognised immediately in the income statement, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period. For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligation once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. (2) Share-based compensation The Group operates equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the share awards and options granted is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares and options awarded/granted, excluding the impact of any non-market vesting conditions (for example, earnings per share and return on equity targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. Page 23 (3) Phantom equity-based compensation The Group also operates 'phantom' cash-settled, equity-based compensation plans. The equity base is typically some of the funds of which the Group is the investment manager. The fair value of the employee services received in exchange for the phantom equity awards is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the awards, remeasured at each reporting date until the vesting date is reached. The fair value of the awards equates to the fair value of the underlying investment in the nominated fund entity at the vesting date. (4) Profit-sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Company's shareholders above a hurdle rate based on the Group's cost of equity. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (5) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without realistic possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to present value. N Provisions Provisions for costs, such as restructuring costs and legal claims, are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. O Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Page 24 P Revenue recognition Revenue comprises the fair value for the provision of services, net of any value-added tax, rebates and discounts and after the elimination of sales within the Group. Revenue is recognised as follows: (1) Performance fees in Asset Management Performance fees are only recognised once they have been 'locked-in' and cannot subsequently be reversed. (2) Management fees in Asset Management Management fees, which include all non-performance related fees, are recognised in the period in which the services are rendered. (3) Fees and commissions in Brokerage Execution and clearing commissions are recognised in the period in which the services are rendered. To represent the substance of matched principal transactions entered into by the Group, where it acts as principal for the simultaneous purchase and sale of securities to third parties, commission income is the difference between the consideration received on the sale of the security and its purchase. (4) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount - being the estimated future cash flow discounted at original effective interest rate of the instrument - and continues unwinding the discount as interest income. (5) Dividend income Dividend income is recognised when the right to receive payment is established. Q Derivative financial instruments and hedging activities Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Group designates certain derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); (2) hedges of highly probable forecast transactions (cash flow hedges); or (3) hedges of net investments in foreign operations. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Page 25 (a) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (b) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast payment that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. (c) Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed of. (d) Derivatives that are held for trading purposes or that do not qualify for hedge accounting Certain derivative instruments are held for trading or are held for hedging purposes but do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that are held for trading or are held for hedging purposes but do not qualify for hedge accounting are recognised immediately in the income statement. R Fair value estimation The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current offer price. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. Page 26 S Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight line basis over the period of the lease. T Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liability in the Group's financial statements, and directly in equity, in the period in which the dividends are declared (and approved by the Company's shareholders, if required). This information is provided by RNS The company news service from the London Stock Exchange

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