Final Results

RNS Number : 3991U
Manx Financial Group PLC
29 March 2019
 

FOR IMMEDIATE RELEASE                                                                                         29 March 2019

    

 

Manx Financial Group PLC (the 'Company')

 

Report and accounts for the year ended 31 December 2018

 

 

Manx Financial Group PLC (LSE: MFX), the financial services group which includes Conister Bank Limited, Edgewater Associates Limited and Manx FX Limited presents its audited, final results for the year ended 31 December 2018.

 

Jim Mellon, Executive Chairman, commented: "I am pleased to announce that the outcome for 2018 showed a broadly similar profit to 2017, despite the figures including the expense of further investments in infrastructure, the most important being the opening of a new UK full-service HQ in Newbury and a significant upgrade in our IT infrastructure. We have continued to strengthen our Balance Sheet and our new business pipeline remains buoyant for all our core activities. As a result, we are in an excellent position to report further success, both at the Interims and at the full year."

                                

The 2018 Audited Annual Report and Accounts will be available from the Company's website www.mfg.im shortly.

 

Contacts:

 

Manx Financial Group PLC

 

Denham Eke, Chief Executive

Tel: +44 (0)1624 694694

 

Beaumont Cornish Limited

Roland Cornish/James Biddle

Tel: +44 (0)20 7628 3396

 

Britton Financial PR

Tim Blackstone

Tel: +44 (0)7957 140416

Chairman's Statement

 

Dear Shareholders,

 

When I wrote to you in the Interim Results for 2018, I was confident that the full year would continue our growth in profitability. This has proved to be the case, but the effect of the two positive initiatives undertaken during the second half of the year has had a temporary impact on the Income Statement. The first being the investment in the UK by opening a new full-service UK Headquarters in Newbury, with a satellite branch in Manchester. These offices will source new business and manage our UK lending portfolio through our subsidiary Conister Finance and Leasing Limited, thus demonstrating our commitment to this increasingly important segment of our business. Secondly, the increasing economic uncertainty surrounding both the Isle of Man and the United Kingdom has reinforced your Board's decision to adopt an ultra-conservative approach to provisioning under the requirements of the International Financial Reporting Standard 9 ("IFRS 9") by recognising an additional buffer to strengthen the Balance Sheet. I must emphasise that this action does not represent a realized cash outlay and is there, if ever required, solely to protect our future profitability. Indeed, the quality of our underwriting is such that our actual ratio of bad debts written off stands at an enviable 0.6% (2017: 0.5%).

 

As a consequence, our profit before tax is broadly similar to 2017 at £2.7 million (2017: £2.7 million). However, our total assets have increased by 13.8% to £196.9 million (2017: £173.0 million) and our total shareholder equity has increased by a corresponding 14.3% to £19.7 million (2017: £17.3 million). Whilst the latter figure is gratifying, I am deeply aware that as I write, our market capitalisation stands at only £11.5 million, being a discount of 42%. This discount is regrettable, especially when ranked against our peer group.

 

Of our core businesses, Conister Bank has enjoyed excellent new business generation, offset by the run-off by mutual agreement of two discontinued lending streams, both nearly complete, but representing a decrease of £14.8 million during the year (2017: £12.7 million). Thus, the fall in interest income to £19.1 million (2017: 19.9 million) belies a total new lending of £102.1 million for 2018 (2017: £73.7 million). I discuss this further below, but suffice to say, this bodes well for the future by diversifying our risk profile. Manx FX Limited produced an encouraging profit before tax of £0.5 million (2017: £0.1 million) and Edgewater Associates Limited, although experiencing a market downturn during the last two months of 2018, produced a profit before tax of £0.3 million (2017: £0.8 million).

 

Corporate governance

It is important for shareholders to understand the emphasis both I and the Board place upon corporate governance. In May 2018, we adopted the Quoted Companies Alliance corporate governance code ("QCA") with which we expect to be fully compliant in our reporting for the year-end statutory accounts. In essence, the code has ten principles to aid investors in their understanding of our Group and to help build and develop long term trust and maximise our relationship with shareholders. As Chairman, it is my responsibility to make a clear statement on corporate governance and the value we place upon this. Our full year accounts will provide a detailed explanation of how we observe the QCA, but meanwhile, I am keen for investors to understand our strategic objectives both in the near and longer term.

 

Our key objectives for 2019

Your Board's fundamental objective remains that of increasing shareholder value, both in a prudent yet progressive manner. Thus, our strategic concentration continues to be: -

 

n Providing the highest quality service throughout our operations to all customers, ensuring that their treatment is both fair and appropriate;

n Adopting a pro-active strategy of managing risk, especially following the implementation of IFRS 9 in full. In doing so, we are committed to regularly review our loan book to allow for any credit impairment resulting from observing strict Expected Credit Loss criteria;

n Concentrating on developing our core businesses by considered acquisitions, increased prudential lending and augmenting the range of financial services we offer;

n Implementing an enhanced and scalable IT infrastructure to better service the operational requirements of a growing Group without the requirement for a disproportionate increase in headcount;

n Focusing on the liabilities side of our balance sheet by introducing a new treasury management function and structure; and

n Managing our balance sheet to exceed, as far as possible, the regulatory requirements for capital adequacy.

 

We implemented the General Data Protection Regulation on 25 May 2018. Doing this required changes in policy, procedures and technology across the Group to manage how we process and secure data and protect the rights of individuals. Both our Internal Audit and Compliance teams have reviewed the process and will continue to be involved in making sure that the post implementation requirements continue to be met.

 

We have also instituted an important new position, that of Head of Risk and Compliance, to enhance and monitor our control functions, ensuring that these meet the highest banking standards and are commensurate with the growth in our operations.

 

Financial performance review

 

Conister Bank Limited (the "Bank")

Despite the shadow of economic uncertainty, all our lending targets for the year were exceeded. We have been able to make significant inroads into the UK commercial sector, while increasing our lending in the Isle of Man. As I reported above, net new lending increased by 38.4% to £102.1 million (2017: £73.7 million), driven by a 41.9% uplift in lending on the Isle of Man and a substantial increase in demand for our structured product range in the UK. Thus, the net loan book growth of 21.0% to £148.3 million (2017: £122.5 million) has been achieved with no deterioration in loan book quality as performing loans remained at 97.2%. In anticipation of this increase in UK demand, we have opened fully equipped new offices in Newbury and in Manchester. We are confident that we have invested in the most experienced teams available to develop this important market segment.

 

I have previously explained that improving our technology is of primary importance as we increase in scale. During 2018, we successfully installed a new deposit system, representing an investment of £1.0 million spread over five years. This has helped manage the growth of our deposit base by 11.4% to £158.5 million (2017: £142.3 million). One of our key efficiency measures, our Loan to Deposit Ratio, improved by 7.5% to 93.6% (2017: 86.1%) which reflects the improved use of our cash balances. We also continue to almost exactly match our loan terms to our deposit maturities. We note, however, that the average term of our loan book has marginally reduced, reflecting the uncertainty in the market in response to the current economic outlook.

 

As I mentioned in my 2017 Chairman's Report, we instituted a policy to eliminate any reliance upon UK introducers where we suffer a disproportionately adverse commission-sharing cost. This initiative has continued throughout 2018. Thus, commission expense decreased by 27.4% to £6.1 million (2017: £8.4 million). This movement resulted in net interest income increasing by 13.1% to £12.8 million (2017: £11.3 million) despite interest expense increasing by 8.9% to £3.5 million following the increase in deposit balances. As a result of these factors, trading income improved by 15.9% to £9.5 million (2017: £8.2 million) leading to a 16.3% increase in operating income £9.8 million (2017: £8.4 million).

 

Although operating expenses decreased in by £0.2 million to £6.0 million (2017: £6.2 million), this masks the investment we have made in new personnel, systems and controls, enhancing our skill set throughout the business. The increase in impairment provision, to which I have already referred, to £0.9 million (2017: £0.6 million) reflects a prudent buffer against a potentially adverse outcome following any conclusion of the current economic uncertainty. It is important to note that, despite our conservative approach to approving advances, this figure still only represents 2.0% of the enlarged gross loan book, with the total impairment provision in the Balance Sheet standing at £3.4 million (2017: £2.7 million). Other costs net to £0.2 million (2017: £0.0 million) as the gain last year from the write-off an intercompany payable has not been repeated. Thus, profit before tax improved by 26.0% to £2.2 million (2017: £1.7 million) leading to a 24.0% increase in post-tax profit contribution by the Bank to £2.0 million (2017: £1.6 million).

 

Total assets, benefitting by a loan book growth of £25.6 million, part financed by the conversion of cash and debt securities of £5.7 million, showed a 13.0% increase to £190.1 million (2017: £168.7 million). As a consequence, shareholder equity improved by 25.0% to £21.1 million (2017: £16.9 million). 

 

Included in the Balance Sheet is a VAT debtor amounting to £1.1 million. This figure represents the VAT recovery relating to a claim under the revised Partial Exemption Special Method. Since the publication of our last financial statements, the Court of the European Union determined in favour of Volkswagen Financial Services Limited in a parallel dispute against HM Revenue & Customs. This is an extremely encouraging development and sets a precedent. Thus, discussions with the Isle of Man Government Customs and Excise Division have commenced regarding a full recovery of this debtor.

 

During the year, as part of our drive to maximise new business, the Group financed the issue of £2.4 million of new ordinary shares by the Bank which, together with the increase in retained earnings, improved total Tier 1 capital by 23.0% to £19.8 million (2017: £16.1 million). This in turn improved total regulatory capital expressed as a percentage of total risk-weighted assets by 0.6% to 18.1% (2017: 17.5%), well above our notification threshold of 15.0%.  

 

Edgewater Associates Limited ("EWA")

Although fee income appears to have remained steady at £2.6 million (2017: £2.6 million), an unexpected change in UK legislation meant a temporary halt to our ability to service pension transfers to the Isle of Man during the second half of the year. Notwithstanding, all other fee-based services showed encouraging growth. As a result, we were required to make a final top-up payment of £0.1 million to the vendor of our recent acquisitions. This, coupled with the effect of a full year increase in administration costs, including investment in improved systems, to £2.3 million (2017: £1.8 million) caused the profit contribution to decline to £0.2 million (2017: £0.7 million).

 

Total assets reduced by 2.0% to £3.1 million (2017: £3.2 million), reflecting a decrease in debtors. However, creditors also reduced, resulting in an improvement in net assets to £2.3 million (2107: £2.0 million). Shareholder equity increased by 12% to £2.3 million (2017: £2.0 million).

 

The underlying business continues to experience considerable excess demand, but is limited by the difficulty of recruiting suitably qualified advisors. Notwithstanding, EWA remains the Isle of Man's largest IFA. We remain encouraged by the opportunities available for this important part of the Group's business and I am pleased to note that we have already seen a meaningful improvement in profitability from the beginning of 2019.

Manx FX Limited ("MFX")

This business is still very much in its infancy. Because of the low-cost structure, relatively small increases in income can generate unusually positive consequences. For example, the introduction of a hedging strategy for clients during the year doubled turnover to £0.8 million (2017: £0.4 million). While this level of income is not necessarily expected to be repeated in 2019, MFX continues to attract new clients, and now services an active Isle of Man customer base of 87 (2017: 58). This rapid growth means that we continue to develop and invest in an enhanced operational infrastructure to provide the necessary resilience in our control functions. As a consequence, our administration expenses have increased to £0.3 million (2017: £0.2 million), leading to a significant profit contribution from MFX of £0.5 million (2017: £0.1 million).

 

Turning to the balance sheet, total assets increased to £0.6 million (2017: £0.2 million) and shareholder equity stands at £0.6 million (2017: £0.1 million).

 

Outlook

The widely reported current economic uncertainties and potential changes in interest rates will have an impact on credit markets both in the Isle of Man and the UK. Notwithstanding, I believe that the Bank's strategy of asset-backed lending to carefully selected sectors will allow us to continue to grow. We continue to develop new loan products to those entities with significant balance sheets which demonstrate both affordability and credit resilience. Thus far, we have experienced no downturn in demand in both the commercial and consumer marketplace in both jurisdictions and are more than able to maintain rigorous credit and risk control in our underwriting.

 

In conjunction with this, the Bank continues to seek out suitable acquisitions for our strategy of consolidation, particularly in the UK. So far this year, we have acquired 20% of the issued share capital of Beer Swaps Limited, trading as Ninkasi Brewkit Rentals, a relatively new company financing brewery equipment, together with an option to acquire the remaining shares by April 2021. We have also acquired 30% of the issued share capital of PayItMonthly Limited which provides web-based finance solutions to retailers without the need for them to maintain an onerous compliance resource, allowing their customers the ability to spread repayments over one year, together with an option to acquire the remaining shares after August 2021. Although these initiatives are individually small in scale, they will be integrated to form our own specialist introducer network using the synergies available from central funding, systems, risk management and controls, augmented with dedicated staff capable of developing this important aspect of our portfolio.

 

Now that the businesses have fully integrated, EWA has the real potential to grow financial advisory services, not only on the Isle of Man but also within the UK, especially as the need to finance a longer retirement becomes a necessity. We continue to review suitable acquisitions capable of increasing profitability. EWA not only has a strong new business pipeline, but approximately half of its income derives from renewals. Our only limitation to this growth is the recruitment of suitably qualified advisors. To counter this, we are concentrating on an internal program of staff development which is proving to be extremely successful.

 

MFX also has the potential for further growth and, conversely, has the capability of benefitting from any uncertainties in the financial environment as its clients seek the optimum solutions to manage foreign currency exposures. Only a relatively few Isle of Man businesses maintain in-house foreign exchange expertise and the MFX proposition has limited competition.

 

In short, I believe that the Group as a whole is well placed to achieve continued expansion. Each of our principal operations are profitable and each has identified opportunities, yet unrealised. It is this which will allow us to meet our 2019 strategic priorities. Whilst our organic growth continues to be excellent, any significant growth will require further acquisitions, strategic partnerships and the development of specialist products to meet the ever-changing market needs. Each solution we offer will be assessed in terms of risk profile and subsequent reward. Clearly, those opportunities that utilise technology to the full and fit well within our current operations are of the greatest interest. Meanwhile, we remain in an excellent position to report further success, both at the Interims and the year-end.

 

I, and the Board, recognise the need to address the question of shareholder return. As ever, the conflicting demands of utilizing shareholder equity as the regulatory platform to support growth versus the compounded cost of a dividend payment are difficult to reconcile. As an example, currently for every £1,000 paid as a dividend, the Group would forgo £6,000 worth of new business with its attendant yield. Added to which, as the Group utilises relatively expensive non-dilutive term loans to augment regulatory capital, we would effectively be undertaking additional borrowing to make payment. Notwithstanding, we are considering potential arrangements which will, we believe, be of benefit to shareholders but without reducing our potential to reach the scale whereby the Group becomes capable of self-generating regulatory capital. It is unlikely that we will be able to implement any scheme during 2019, but depending upon this year's outcome, we may be in a better position to implement a scheme thereafter.

 

Finally, and as always, I would like to thank our shareholders for your continued support, our customers and clients for their loyalty, and also our excellent staff for their outstanding efforts in continuing to develop the Group.

 

 

Jim Mellon

Executive Chairman

27 March 2019

 


Consolidated statement of profit or loss and other comprehensive income

For the year ended 31 December

Notes


2018

£000


Restated

(Note 5)

2017                              £000  

 







 

Interest income



19,115


19,893

 

Interest expense



(3,547)


(3,256)

 







 







 

Net interest income

10


15,568


16,637

 







 

Fee and commission income

11


3,371


3,115

 

Fee and commission expense

11


(6,109)


(8,413)

 







 







 

Net trading income



12,830


11,339

 

Other operating income



131


91

 

Loss on trading assets

21


(4)


(21)

 

Realised gains on debt securities

20


135


36

 

Terminal funding

12


74


90

 







 







 

Operating income



13,166


11,535

 







 

Personnel expenses

13


(5,703)


(4,783)

 

Other expenses

14


(3,465)


(3,152)

 

Impairment on loans and advances to customers

15


(857)


(585)

 

Depreciation

24


(184)


(134)

 

Amortisation and impairment of intangibles

25


(396)


(286)

 

Share of profit of equity accounted investees, net of tax

32


30


38

 

VAT recovery

23


119


65

 







 







 

Profit before tax payable

16


2,710


2,698

 







 

Income tax expense

17


(243)


(240)

 







 







 

Profit for the year



2,467


2,458

 







 

Other comprehensive income: -






 







 

Items that will be reclassified to profit or loss






 

Unrealised gain/(losses) on debt securities

20


44


(93)

 







 

Items that will never be reclassified to profit or loss






 

Actuarial (losses)/gains on defined benefit pension scheme taken to equity

30


(50)


30

 







 

Total comprehensive income for the period attributable to owners



2,461


2,395

 







 

Basic earnings per share (pence)

18


1.88


2.17

 

Diluted earnings per share (pence)

18


1.54


1.70

 







 



 

Company statement of profit or loss and other comprehensive income

For the year ended 31 December

Notes


2018

£000


2017                              £000  







Interest income



466


-













Operating income



466


-







Personnel expenses



(177)


(22)

Administration expenses



(132)


(112)

Depreciation expense



(41)


(40)













Profit before tax payable

16


116


(174)







Tax payable



-


-













Profit for the year



116


(174)







Total comprehensive income for the year



116


(174)


Company statement of financial position

 

 

 

As at 31 December

 

 

 

Notes




 

 

2018

£000


Restated

(Note 5)

2017

£000


Restated

(Note 5)

2016

£000

 

Assets










Cash and cash equivalents

19




9,753


9,745


6,129

Debt securities

20




30,534


34,272


23,991

Trading asset

21




20


24


70

Loans and advances to customers

22




148,278


122,546


115,929

Trade and other receivables

23




2,491


1,908


2,064

Property, plant and equipment

24




1,384


450


719

Intangible assets

25




1,952


1,719


1,316

Goodwill

32




2,344


2,344


2,344

Investment in associate

32




158


38


-





















Total assets





196,914


173,046


152,562





















Liabilities










Deposits from customers

26




158,500


142,272


125,952

Creditors and accrued charges

27




2,010


3,164


2,975

Block creditors

28




138


751


1,390

Loan notes

29




15,871


8,995


8,545

Pension liability

30




584


560


614

Deferred tax liability

17




88


42


40





















Total liabilities





177,191


155,784


139,516





















Equity










Called up share capital

31




20,732


20,732


18,933

Profit and loss account





(1,009)


(3,470)


(5,887)





















Total equity





19,723


17,262


13,046





















Total liabilities and equity





196,914


173,046


152,562





















 

 

 

As at 31 December

 

Notes






2018

£000


2017

£000

 

Assets










Cash and cash equivalents

19






1,646


200

Trade and other receivables

23






32


22

Amounts due from Group undertakings

32






-


16

Property, plant and equipment

24






126


166

Investment in Group undertakings

32






16,172


13,772

Subordinated loans

32






7,778


5,778





















Total assets







25,754


19,954





















Liabilities










Creditors and accrued charges

27






94


139

Amounts due to Group undertakings

32






1,370


2,517

Loan notes

29






15,871


8,995





















Total liabilities







17,335


11,651





















Equity










Called up share capital

31






20,732


20,732

Profit and loss account







(12,313)


(12,429)





















Total equity







8,419


8,303





















Total liabilities and equity







25,754


19,954











 


Consolidated and company statements of changes in equity

 

 

Company



Share Capital

£000


Profit and loss account

£000


Total

equity

£000

















Balance as at 1 January 2017



18,933


(12,277)


6,656









Loss for the year



-


(174)


(174)









Transactions with owners: -








Share-based payment expense (see notes 16 and 31)



-


22


22

Shares issued



1,799


-


1,799

















Balance as at 31 December 2017



20,732


(12,429)


8,303









Profit for the year



-


116


116









Transactions with owners: -








Share-based payment expense (see notes 16 and 31)



-


-


-

























Balance as at 31 December 2018



20,732


(12,313)


8,419









 

Consolidated statement of cash flows

 

 

For the year ended 31 December

 

 

Notes


 

2018

£000


 

2017

£000







RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS

 






Profit before tax



2,710


2,698

 

Adjustments for:






Depreciation

24


184


134

Amortisation and impairment of intangibles

25


396


286

Realised gains on debt securities

20


(135)


(36)

Share in net assets of associate

32


(30)


(38)

Equity settled share-based payment transactions

16, 31


-


22
















3,125


3,066

Changes in:






Trading asset

21


4


46

Trade and other receivables



(583)


156

Creditors and accrued charges



(1,169)


(21)













 

Net cash flow from trading activities



1,377


3,247

 

Changes in:






Loans and advances to customers



(25,732)


(6,617)

Deposits from customers



16,228


16,320

Pension contribution

30


(26)


(24)













Cash (outflow)/inflow from operating activities



(8,153)


12,926







 

CASH FLOW STATEMENT












Cash from operating activities






Cash (outflow)/inflow from operating activities



(8,153)


12,926

Income taxes paid



(182)


(28)













Net cash (outflow)/inflow from operating activities



(8,335)


12,898







Cash flows from investing activities






Purchase of property, plant and equipment

24


(1,118)


(122)

Purchase of intangible assets

25


(629)


(452)

Sale of tangible fixed assets



-


20

Acquisition of associate

32


(90)


-

Sales/(Purchase) of debt securities at FVOCI

20


3,917


(4,806)

Purchase of debt securities at amortised cost

20


-


(5,532)













Net cash inflow/(outflow) from investing activities



2,080


(10,892)







Cash flows from financing activities






Receipt of loan notes

29


6,876


450

Increase in share capital



-


1,799

(Decrease) in borrowings from block creditors

28


(613)


(639)



















Net cash inflow from financing activities



6,263


1,610







Net increase in cash and cash equivalents



8


3,616







Cash and cash equivalents at 1 January



9,745


6,129



















Cash and cash equivalents at 31 December



9,753


9,745













Included in cash flows are: -






Interest received - cash amounts



18,362


19,109

Interest paid - cash amounts



(3,434)


(3,152)













 

Company statement of cash flows

 

 

 

For the year ended 31 December

 

 

Notes


 

2018

£000


 

2017

£000







RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS












Profit before tax



116


(174)







Adjustments for:






- Depreciation

24


41


41

- Share-based payment expense

32


-


22
















157


(111)







Changes in:






Amounts due from group undertakings



16


280

Trade and other receivables



(10)


7

Creditors and accrued charges



(45)


57

Amounts due to group undertakings



(1,147)


18













Cash (outflow)/inflow from operating activities



(1,029)


251













CASH FLOW STATEMENT












Cash from operating activities






Cash (outflow)/inflow from operating activities



(1,029)


251

Income taxes paid



-


-













Net cash (outflow)/inflow from operating activities



(1,029)


251













Cash flows from investing activities






Increase in investment in group undertakings

32


(2,400)


(1,700)

Issue of subordinated loans

32


(2,000)


(600)













Net cash outflow from investing activities



(4,400)


(2,300)







Cash flows from financing activities






Receipt of loan notes

29


6,875


450

Increase in share capital



-


1,799



















Net cash inflow from financing activities



6,875


2,249













Net increase in cash and cash equivalents



1,446


200







Cash and cash equivalents at 1 January



200


-













Cash and cash equivalents at 31 December



1,646


200

























 

 

 

Notes to the consolidated financial statements

 

1.    Reporting entity

Manx Financial Group PLC is a company incorporated in the Isle of Man. The consolidated financial statements of Manx Financial Group PLC (the "Company") for the year ended 31 December 2018 comprise the Company and its subsidiaries (the "Group").

 

2.    Basis of accounting

The consolidated and the separate financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and International Financial Reporting Interpretations Committee ("IFRIC") interpretations applicable to companies reporting under IFRS, including International Accounting Standards ("IAS").

 

This is the first set of the Group's annual financial statements in which IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers have been applied. Changes to significant accounting policies are described in Note 5.

 

3.   Functional and presentation currency

These financial statements are presented in pounds sterling, which is the Group's functional currency. All amounts have been rounded to the nearest thousand, unless otherwise indicated. All subsidiaries of the Group have pounds sterling as their functional currency.

 

4.    Use of judgements and estimates

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

 

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

 

Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties at year-end that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year is included in the following notes:-

n Note 23 - measurement of VAT receivable: key assumptions underlying carrying amount;

n Note 30 - measurement of defined benefit obligations: key actuarial assumptions;

n Note 25 and 32 - impairment test of intangible assets and goodwill: key assumptions underlying recoverable amounts; and

n Note 38(I)(vii) - measurement of ECL allowance for loans and advances to customers and assessment of specific impairment allowances where loans are in default or arrears: key assumptions in determining the weighted-average loss rate.

 

5.   Changes in accounting policies

A number of other new standards are also effective from 1 January 2018 but they do not have a material effect on the Group's financial statements.

Except for the changes below, the Group has consistently applied the accounting policies as set out in Note 38 to all periods presented in these financial statements.

IFRS 9 Financial Instruments

IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The requirements of IFRS 9 represent a significant change from IAS 39. The new standard brings fundamental changes to the accounting for financial assets and to certain aspects of the accounting for financial liabilities.

The key changes to the Group's accounting policies resulting from the Group's adoption of IFRS 9 are summarised below. The full impact of adopting the standard is set out in Note 6 and 8.

Classification of financial assets and financial liabilities

IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). IFRS 9 classification is generally based on the business model in which a financial asset is manged and its contractual cash flows. The standard eliminates the previous IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale.

IFRS 9 largely retains the existing requirements in IAS 39 for classification of financial liabilities. However, although under IAS 39 all fair value changes of liabilities designated under the fair value option were recognised in profit or loss, under IFRS 9 fair value changes are generally presented as follows:

n the amount of change in fair value that is attributable to changes in the credit risk of the liability is presented in Other Comprehensive Income ("OCI"); and

n the remaining amount of change in the fair value is presented in profit or loss.

For an explanation of how the Group classifies financial assets and liabilities under IFRS 9, See Note 38(I)(ii).

Impairment of financial assets

IFRS 9 replaces the 'incurred loss' model in IAS 39 with an 'expected credit loss' model.

Under IFRS 9, credit losses are recognised earlier than under IAS 39. For an explanation of how the Group applies the impairment requirements of IFRS 9, see Note 38(I)(vii).

Transition

Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively,

For more information and details on the changes and implications resulting from the adoption of IFRS 9, see note 6 and 8(A)(iv).

B. IFRS 15 Revenue from Contracts with Customers

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations.

The Group initially applied IFRS 15 on 1 January 2018 retrospectively in accordance with IAS 8 without any practical expedients. The timing or amount of the Group's fee income from contracts with customers was not impacted by the adoption of IFRS 15.

6. Classification of financial assets and financial liabilities

For description of how the Group classifies financial assets and liabilities, see Note 38(I)(ii)

 

The following table provides reconciliation between line items in the statement of financial position and categories of financial instruments.

 

 

31 December 2018


Mandatorily at FVTPL

Designated as at FVTPL

FVOCI - debt instruments

FVOCI - equity instruments

Amortised cost

Total carrying amount

Cash and cash equivalents






9,753

9,753

Debt securities


-

-

30,534

-

-

30,534

Trading assets


20

-

-

-

-

20

Loans and advances to customers


-

-

-

-

148,278

148,278

Trade and other receivables


-

-

-

-

2,491

2,491

Total financial assets


20

-

30,534

-

160,522

191,076









Deposits from customers


-

-

-

-

158,500

158,500

Creditor and accrued charges


-

-

-

-

2,010

2,010

Block creditors


-

-

-

-

138

138

Loan notes


-

-

-

-

15,871

15,871

 

Total financial liabilities


 

-

 

-

 

-

 

-

 

176,519

 

176,519

 

 

 

31 December 2017


Mandatorily at FVTPL

Designated as at FVTPL

FVOCI - debt instruments

FVOCI - equity instruments

Amortised cost

Total carrying amount

Cash and cash equivalents


-

-

-

-

9,745

9,745

Debt securities


-

-

28,740

-

5,532

34,272

Trading assets


24

-

-

-

-

24

Loans and advances to customers


-

-

-

-

122,546

122,546

Trade and other receivables


-

-

-

-

1,908

1,908

Total financial assets


24

-

28,740

-

139,731

168,495









Deposits from customers


-

-

-

-

142,272

142,272

Creditor and accrued charges


-

-

-

-

3,164

3,164

Block creditors


-

-

-

-

751

751

Loan notes


-

-

-

-

8,995

8,995

 

Total financial liabilities


 

-

 

-

 

-

 

-

 

155,182

 

155,182

 

The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group's financial assets and liabilities at 1 January 2017.

 

 

1 January 2017


Original classification under IAS 39

New classification under IFRS 9

Original carrying amount under IAS 39

New carrying amount under IFRS 9

Cash and cash equivalents


Loans and receivables

Amortised cost

6,129

6,129

Trading assets


FVTPL

FVTPL (Mandatory)

70

70

Debt securities


Available-for-sale

FVOCI

23,991

23,991

Debt securities - Certificates of Deposit


Amortised cost

Amortised cost

-

-

Loans and advances to customers


Amortised cost

Amortised cost

116,053

115,929

Trade and other receivables


Loans and receivables

Amortised cost

2,064

2,064

Total financial assets




148,307

148,183







 

 

 

1 January 2017


Original classification under IAS 39

New classification under IFRS 9

Original carrying amount under IAS 39

New carrying amount under IFRS 9

Deposits from customers


Amortised cost

Amortised cost

125,952

125,952

Creditor and accrued charges


Amortised cost

Amortised cost

2,975

2,975

Block creditors


Amortised cost

Amortised cost

1,390

1,390

Loan notes


Amortised cost

Amortised cost

8,545

8,545

 

Total financial liabilities




 

138,862

 

138,862

 

In applying IFRS 9 both in the current period and retrospectively in previous periods, there were no reclassifications in the measurement category.  As a result, there has been no financial adjustment in transitioning to IFRS 9 with respect to adopting the revised measurement categories.

 

7. Fair value of financial instruments

For description of the Group's fair value measurement accounting policy, see Note 38(I)(vi).

The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position.

 

 

31 December 2018

Level 1

£000


Level 2

£000


Level 3

£000


Total

£000

 

 








Debt securities

30,534


-


-


30,534

Trading assets

20


-


-


20


30,554


-


-


30,554

 

 

31 December 2017

Level 1

£000


Level 2

£000


Level 3

£000


Total

£000

 

Investment securities








Debt securities

28,740


-


5,532


34,272

Trading assets

24


-


-


24


28,764


-


5,532


34,296

 

Financial instruments not measured at fair value

The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised: -

 

 

 

31 December 2018

 

Level 1

£000


 

Level 2

£000


 

Level 3

£000


Total fair values

£000


Total carrying amount

£000

 

Assets










Cash and cash equivalents

-


9,753


-


9,753


9,753

Loans and advances to customers

-


-


148,278


148,278


148,278

Investment in associate

-


-


158


158


158

Trade and other receivables

-


-


2,491


2,491


2,491


-


9,753


150,927


160,680


160,680











Liabilities










Deposits from customers

-


158,500


-


158,500


158,500

Creditors and accrued charges

-


-


2,010


2,010


2,010

Block creditors

-


-


138


138


138

Loan notes

-


-


15,871


15,871


15,871


-


158,500


18,019


176,519


176,519

 

 

 

31 December 2017

 

Level 1

£000


 

Level 2

£000


 

Level 3

£000


Total fair values

£000


Total carrying amount

£000

 

Assets










Cash and cash equivalents

-


9,745


-


9,745


9,745

Debt securities - certificates of deposit

-


-


5,532


5,532


5,532

Loans and advances to customers

-


-


122,546


122,546


122,546

Investment in associate

-


-


24


24


24

Trade and other receivables

-


-


1,908


1,908


1,908


-


9,745


130,010


139,755


139,755











Liabilities










Deposits from customers

-


142,272


-


142,272


142,272

Creditors and accrued charges

-


-


3,164


3,164


3,164

Block creditors

-


-


751


751


751

Loan notes

-


-


8,995


8,995


8,995


-


142,272


12,910


155,182


155,182

 

The fair value of loans and advances is estimated using valuation models, such as discounted cash flow techniques. Input into the valuation techniques includes expected lifetime credit losses, interest rates, prepayment rates. For collateral-dependent impaired loans, the fair value is measured based on the value of the underlying collateral. Input into the models may include data from third party brokers based on over the counter trading activity, and information obtained from other market participants, which includes observed primary and secondary transactions.

 

8. Financial risk review

Risk management

This note presents information about the Group's exposure to financial risks and the Group's management of capital. For information on the Group's financial risk management framework, see Note 36.

 

A. Credit risk

For definition of credit risk and information on how credit risk is mitigated by the Group, see Note 36.

 

i. Credit quality analysis

 

Loans and advances to customers

 

Explanation of the terms 'Stage 1', 'Stage 2' and 'Stage 3' is included in Note 38 (I)(vii).

 

An analysis of the credit risk on loans and advances to customers is as follows: -

 

 

Stage 1

£000

Stage 2

£000

Stage 3

£000

2018

£000

2017

£000







Grade A1

139,695

-

-

139,695

118,373

Grade B

760

5,308

85

6,153

3,090

Grade C

-

1,746

4,078

5,824

3,770







Gross value

140,455

7,054

4,163

151,672

125,233







Allowance for impairment

(125)

(143)

(3,126)

(3,394)

(2,687)

Carrying value

140,330

6,911

1,037

148,278

122,546







1 Loans are graded A to C depending on the level of risk. Grade C relates to agreements with the highest of risk, Grade B with medium risk and Grade A relates to agreements with the lowest risk.

 

The following table sets out information about the overdue status of loans and advances to customers in Stage 1, 2 and 3.

 

 

31 December

Stage 1

£000

Stage 2

£000

Stage 3

£000

2018

£000

2017

£000







Current

137,196

-

-

137,196

115,267

Overdue < 30 days

2,499

-

-

2,499

3,106

Overdue > 30 days

760

7,054

4,163

11,977

6,860








140,455

7,054

4,163

151,672

125,233

 

 

Debt securities, Cash and cash equivalents

The following table sets out the credit quality of liquid assets:



2018

2017

31 December


£000

£000





Government bonds and treasury bills




Rated A to A+


30,534

28,740





Corporate bonds




Rated A to A+


-

5,532





Cash and cash equivalents




Rated A to A+


9,754

9,745

 

 


 

40,288

 

44,017

The analysis has been based on Standard & Poor's ratings.

 

ii. Collateral and other credit enhancements

The Group holds collateral in the form of the underlying assets (typically private and commercial vehicles, plant and machinery) to loan arrangements as security for HP, finances leases, vehicle stocking plans, block discounting, wholesale funding arrangements, integrated wholesale funding arrangements and secured commercial loan balances, which are sub-categories of loans and advances to customers. In addition, the commission share schemes have an element of capital indemnified.  During 2018, 37.9% of loans and advances fell into this category (2017: 41.7%). 

 

Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. At the time of granting credit within the sub-categories listed above, the loan balances due are secured over the underlying assets held as collateral.

 

iii. Amounts arising from ECL

See accounting policy in Note 38(I)(vii)

IFRS 9 significantly overhauled the requirements and methodology used to assess credit impairments by transitioning to a forward-looking approach based on an expected credit loss model.  The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments.  Under IFRS 9, credit losses are recognised earlier than under IAS 39.

After a detailed review, the Group devised and implemented an impairment methodology in light of the IFRS 9 requirements outlined above noting the following:

§ A SICR is always deemed to occur when the borrower is 30 days past due on its contractual payments.  If the Group becomes aware ahead of this time of non-compliance or financial difficulties of the borrower, such as loss of employment, avoiding contact with the Group then a SICR has also deemed to occur.

§ A receivable is always deemed to be in default and credit-impaired when the borrower is 90 days past due on its contractual payments or earlier if the Group becomes aware of severe financial difficulties such as bankruptcy, IVA, abscond or disappearance, fraudulent activity and other similar events.

§ The ECL was derived by reviewing the Group's loss rate and loss given default over the past 8 years by product and geographical segment.

§ The Group has assumed that the future economic conditions will broadly mirror the current environment and therefore the forecasted loss levels in the next 3 years will match the Group's experience in recent years.

§ For portfolios where the Group has never had a default in its history or has robust credit enhancements such as credit insurance or default indemnities for the entire portfolio, then no IFRS 9 provision is made. 

§ If the Group holds objective evidence through specifically assessing a credit-impaired receivable and believes it will go on to completely recover the debt due to the collateral held and cooperation with the borrower, then no IFRS 9 provision is made.

iv. Reconciliation of the primary statements from IAS 39 to IFRS 9

As a result of the change to the Group's accounting policy in regards to credit-impairments, it has restated the previous periods in accordance with IFRS 9.  A reconciliation of the primary statements is as follows:

Consolidated Income Statement

31 December 2017







Impact of adopting IFRS 9 at 31 December £000          

















Profit for the year







2,508

Increase to provision for impairment on loan assets







(50)

















Restated profit for the year







2,458

















Reduction in basic earnings per share (pence)







(0.04)

Reduction in diluted earnings per share (pence)







(0.03)







 

Consolidated Statement of Other Comprehensive Income

31 December 2017







Impact of

adopting IFRS 9

at 31 December £000         

















Total comprehensive income for the year attributable to owners





2,445

Increase to provision for impairment on loan assets







(50)

















Restated Total comprehensive income for the year attributable to owners







2,395

















Reduction in basic earnings per share (pence)







(0.04)

Reduction in diluted earnings per share (pence)







(0.03)







 

Consolidated Statement of Financial Position

 

 






Impact of adopting IFRS 9 at 31 December 2017

£000


Impact of adopting IFRS 9 at 31 December 2016

£000










Assets







Loans and advances to customers




122,720


116,053

Increase to provision for impairment on loan assets






(174)


(124)



















Restated loans and advances to customers






122,546


115,929



















Equity







Profit and loss account




(3,296)


(5,763)

Increase to provision for impairment on loan assets






(174)


(124)



















Restated profit and loss account






(3,470)


(5,887)










 

Consolidated Statement of Cash Flows

Total cash flows from operating, investing and financing activities remains unchanged due to the increase in impairments on loan assets being a non-cash item.

Consolidated Statement of Changes in Equity

For an analysis of the retrospective impact of IFRS 9, see the Consolidated Statement of Changes in Equity which analyses in each year the effect of adopting IFRS 9 for that year.

 

v. Concentration of credit risk

Geographical

Lending is restricted to individuals and entities with Isle of Man, UK or Channel Islands addresses.

 

Segmental

The Bank is exposed to credit risk with regard to customer loan accounts, comprising HP and finance lease balances, unsecured personal loans, secured commercial loans, block discounting, vehicle stocking plan loans and wholesale funding agreements.  In addition, the Bank lends via significant introducers into the UK.  There was one introducer that accounted for more than 20% of the Bank's total lending portfolio at the end of 31 December 2018 (2017: one introducer).

 

B. Liquidity risk

For the definition of liquidity risk and information on how liquidity risk is manged by the Group see Note 36.

 

i. Exposure to liquidity risk

The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers and short-term funding. For this purpose, 'net liquid assets' includes cash and cash equivalents and investment-grade debt securities for which there is an active and liquid market.

 

Details of the reported Group ratio of net liquid assets to deposits from customers at the reporting date and during the reporting period were as follows:

 

 

 

 

2018

 

2017

At 31 December

25%

27%

Average for the period

32%

26%

Maximum for the period

40%

30%

Minimum for the period

25%

23%


ii. Maturity analysis for financial liabilities and financial assets

 

The table below shows the Group's financial liabilities classified by their earliest possible contractual maturity, on an undiscounted basis including interest due at the end of the deposit term. Based on historical data, the Group's expected actual cash flow from these items vary from this analysis due to the expected re-investment of maturing customer deposits.

 

Residual contractual maturities of financial liabilities as at the reporting date (undiscounted)

 

 

31 December 2018

Sight-

8 days

£000


>8 days

- 1 month

£000


>1 month

- 3 months

£000


>3 months

- 6 months

£000


>6 months

- 1 year

£000


>1 year

- 3 years

£000


>3 years

- 5 years

£000


>5 years

£000


Total

£000





































Deposits from customers

1,754


5,012


14,397


34,028


35,032


56,643


11,634


-


158,500

Other liabilities

2,061


200


230


216


928


8,705


8,063


584


20,987





































Total liabilities

3,815


5,212


14,627


34,244


35,960


65,348


19,697


584


179,487



















 

 

 

31 December 2017

Sight-

8 days

£000


>8 days

- 1 month

£000


>1 month

- 3 months

£000


>3 months

- 6 months

£000


>6 months

- 1 year

£000


>1 year

- 3 years

£000


>3 years

- 5 years

£000


>5 years

£000


Total

£000





































Deposits from customers

2,579


3,136


12,710


24,241


30,207


60,820


12,567


-


146,260

Other liabilities

3,094


89


318


1,540


1,754


3,326


3,322


560


14,003





































Total liabilities

5,673


3,225


13,028


25,781


31,961


64,146


15,889


560


160,263



















 

Maturity of assets and liabilities at the reporting date

 

 

31 December 2018

Sight-

8 days

£000


>8 days

- 1 month

£000


>1 month

- 3 months

£000


>3 months - 6 months

£000


>6 months

- 1 year

£000


>1 year

- 3 years

£000


>3 years

- 5 years

£000


>5 years

£000


Total

£000

 



















 

Assets


















 

Cash & cash equivalents

9,753


-


-


-


-


-


-


-


9,753

 

Debt securities

-


17,995


5,989


-


-


-


6,550


-


30,534

 

Loans and advances to customers

5,273


1,047


9,724


15,977


35,246


64,099


16,910


2


148,278

 

Other assets

20


225


145


-


-


-


-


7,959


8,349

 



















 



















 

Total assets

15,046


19,267


15,858


15,977


35,246


64,099


23,460


7,961


196,914

 



















 



















 

Liabilities


















 

Deposits from customers

1,754


5,012


14,397


34,028


35,032


56,643


11,634


-


158,500

 

Other liabilities

2,098


146


92


-


500


7,690


7,581


584


18,691

 



















 



















 

Total liabilities

3,852


5,158


14,489


34,028


35,532


64,333


19,215


583


177,191

 



















 

 

 

31 December 2017

Sight-

8 days

£000


>8 days

- 1 month

£000


>1 month

- 3 months

£000


>3 months- 6 months

£000


>6 months

- 1 year

£000


>1 year

- 3 years

£000


>3 years

- 5 years

£000


>5 years

£000


Total

£000

 



















 

Assets


















 

Cash & cash equivalents

9,745


-


-


-


-


-


-


-


9,745

 

Debt securities

-


1,998


16,983


8,524


-


-


6,767


-


34,272

 

Loans and advances to customers

3,708


3,649


7,945


10,808


25,849


54,872


15,695


21


122,546

 

Other assets

103


194


192


-


-


-


-


5,994


6,483

 



















 

Total assets


















 


13,556


5,841


25,120


19,332


25,849


54,872


22,462


6,015


173,046

 



















 

Liabilities


















 

Deposits from customers

2,570


3,105


12,654


24,112


29,716


57,711


12,404


-


142,272

 

Other liabilities

3,086


55


234


169


3,333


2,945


3,130


560


13,512

 



















 

Total liabilities

5,656


3,160


12,888


24,281


33,049


60,656


15,534


560


155,784

 



















 

iii. Liquidity reserves

The following table sets out the components of the Group's liquidity reserves.

 


2018

Carrying amount

2018

Fair

value

2017

Carrying amount

2017

 

Fair value


£000

£000

£000

£000






Balances with other banks

9,753

9,753

9,745

9,745

Unencumbered debt securities issued by sovereigns

30,534

30,534

34,272

34,272

Total liquidity reserves

40,287

40,287

44,017

44,017

 

C. Market risk

For the definition of market risk and information on how the Group manages the market risks of trading and non-trading portfolios, see Note 36.

 

The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios.

 



Market risk measure

 

 

Carrying amount

Trading portfolios

Non-trading portfolios

31 December 2018

£000

£000

£000





Assets subject to market risk




Trading assets

20

20

-

Debt securities

30,534

-

30,534

Total

30,554

20

30,534

 



Market risk measure

 

 

Carrying amount

Trading portfolios

Non-trading portfolios

31 December 2017

£000

£000

£000





Assets subject to market risk




Trading assets

24

24

-

Debt securities

34,272

-

34,272

Total

34,296

24

34,272

 

i. Exposure to interest rate risk - Non-trading portfolio

 

The following tables present the interest rate mismatch position between assets and liabilities over the respective maturity dates. The maturity dates are presented on a worst-case basis, with assets being recorded at their latest maturity and deposits from customers at their earliest.

 

 

 

31 December 2018

Sight-

        1 month

  £000


>1month

- 3months

£000


>3months

- 6months

        £000


                >6months- 1 year

                £000


>1 year

- 3 years

                £000


      >3 years

- 5 years

                £000


      >5 years

                £000


                Non-Int.            Bearing

                £000


Total

£000





































 

Assets


















Cash & cash equivalents

9,753


-


-


-


-


-


-


-


9,753

Debt securities

17,995


5,989


-


-


-


6,550


-


-


30,534

Loans and advances to customers

6,319


9,724


15,977


35,247


64,099


16,910


2


-


148,278

Other assets

245


145


-


-


-


-


-


7,959


8,349





































Total assets

34,312


15,858


15,977


35,247


64,099


23,460


2


7,959


196,914





































Liabilities and equity


















Deposits from customers

6,766


14,397


34,028


35,032


56,643


11,634


-


-


158,500

Other liabilities

2,244


92


-


500


7,690


7,581


584


-


18,691

Total equity

-


-


-


-


-


-


-


19,723


19,723





































Total liabilities and equity

9,010


14,489


34,028


35,532


64,333


19,215


584


19,656


196,914



















 

Interest rate sensitivity gap

25,302


1,369


(18,051)


(285)


(234)


4,245


(582)


(11,764)


 

-





































Cumulative

25,302


26,671


8,620


8,335


8,101


12,346


11,764


-


-



















 

 

 

31 December 2017

    Sight-

1 month

      £000


>1month

-3months

       £000


>3months

- 6months

        £000


                        >6months

                        - 1 year

                        £000


>1 year

- 3 years

      £000


>3 years

- 5 years

      £000


>5 years

      £000


                        Non-Int.                    Bearing

                        £000


Total

£000





































 

Assets


















Cash & cash equivalents

9,745


-


-


-


-


-


-


-


9,745

Debt securities

1,998


 16,983


8,524


-


-


6,766


-


-


34,427

Loans and advances to customers

7,356


7,945


10,808


25,849


54,872


15,695


22


-


122,547

Other assets

297


      192


-


-


-


-


-


5,994


6,483



















Total assets



















19,396


25,120


19,332


25,849


54,872


22,461


22


5,994


173,046





































Liabilities and equity


















Deposits from customers

5,675


12,654


24,112


29,716


57,711


12,404


-


-


142,272

Other liabilities

3,141


234


169


3,333


2,945


3,130


560


-


13,512

Total equity

-


-


-


-


-


-


-


17,262


17,262



















Total liabilities and equity

8,816


12,888


24,281


33,049


60,656


15,534


560


17,262


173,046





































Interest rate sensitivity gap

10,580


12,232


(4,949)


(7,200)


(5,784)


6,927


(538)


(11,268)


-





































Cumulative

10,580


22,812


17,863


10,663


4,879


11,806


11,268


-


-



















 

The Bank monitors the impact of changes in interest rates on interest rate mismatch positions using a method consistent with the FSA required reporting standard. The methodology applies weightings to the net interest rate sensitivity gap in order to quantify the impact of an adverse change in interest rates of 2.0% per annum (2017: 2.0%). The following tables set out the estimated total impact of such a change based on the mismatch at the reporting date: -

 

 

 

31 December 2018

Sight-

1 month

                £000


>1month

-3months

£000


>3months

- 6months

                £000


>6months

                - 1 year

                £000


>1 year

- 3 years

                £000


>3 years

- 5 years

      £000


>5 years

                £000


Non-Int.               Bearing

                £000


Total

£000



















 



















Interest rate sensitivity gap

25,302


1,369


(18,051)


(285)


(234)


4,245


(582)


(11,764)


-





































Weighting

0.000


0.003


0.007


0.014


0.027


0.054


0.115


0.000


-





































£000

-


4


(126)


(4)


(6)


229


(67)


-


30



















 

 

 

31 December 2017

Sight-

1 month

                        £000


>1month

-3months

£000


>3months

-6months

                        £000


>6months

                        - 1 year

                        £000


>1 year

- 3 years

         £000


>3 years

- 5 years

                        £000


>5 years

                        £000


Non-Int.                     Bearing

                        £000


Total

£000























































Interest rate sensitivity gap

10,580


12,232


(4,949)


(7,200)


(5,784)


6,927


(538)


(11,268)


-





































Weighting

0.000


0.003


0.007


0.014


0.027


0.054


0.115


0.000


-





































£000

-


37


(35)


(101)


(156)


374


(62)


-


57



















 

 

D. Capital Management

i. Regulatory capital

The lead regulatory of the Group's wholly owned subsidiary, Conister Bank Limited ('Bank'), is the Isle of Man Financial Services Authority ('FSA'). The FSA sets and monitors capital requirements for the Bank.

 

The Bank's regulatory capital consists of the following elements.

n Common Equity Tier 1 (CET1) capital, which includes ordinary share capital, retained earnings and reserves after adjustment for deductions for goodwill, intangible assets, intercompany receivable.

n Tier 2 capital, which includes qualifying subordinated liabilities and any excess of impairment over expected losses.

 

The lead FSA's approach to the measurement of capital adequacy is primarily based on monitoring the relationship of the capital resources requirement to available capital resources. The FSA sets individual capital guidance (ICG) for the Bank in excess of the minimum capital resources requirement. A key input to the ICG setting process is the Bank's internal capital adequacy assessment process (ICAAP).

 

The Bank is also regulated by the Financial Conduct Authority in the United Kingdom for credit and brokerage related activities.

 

ii. Capital allocation

 

Management uses regulatory capital ratios to monitor its capital base. The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily on regulatory capital requirements.

 

9. Operating segments

Segmental information is presented in respect of the Group's business segments. The Directors consider that the Group currently operates in one geographic segment comprising of the Isle of Man, UK and Channel Islands. The primary format, business segments, is based on the Group's management and internal reporting structure. The Directors consider that the Group operates in five (2017: five) product orientated segments in addition to its investing activities: Asset and Personal Finance (including provision of HP contracts, finance leases, personal loans, commercial loans, block discounting, vehicle stocking plans and wholesale funding agreements); Manx Incahoot; Conister Card Services; Edgewater Associates; and Manx FX.

 

 

 

For the year ended 31 December 2018

Asset and

Personal

Finance

£000


 

Manx Incahoot

£000

Conister

Card

Services

£000


 

Edgewater Associates

£000


 

 

Manx FX

£000


 

Investing

Activities

£000


 

 

Total

£000















Net interest income

15,568


-


-


-


-


-


15,568

Operating income /(loss)

9,306


12


-


2,562


493


-


13,166















Profit / (loss) before tax payable

2,267


(189)


(3)


245


490


(100)


2,710





























Capital expenditure

1,589


1


-


150


6


1


1,747





























Total assets

190,923


78


-


3,153


608


2,152


196,914















 

 

 

 

For the year ended 31 December 2017

Asset and

Personal

Finance

£000


 

Manx Incahoot

£000

Conister

Card

Services

£000


 

Edgewater Associates

£000


 

 

Manx FX

£000


 

Investing

Activities

£000


 

 

Total

£000















Net interest income

16,637


-


-


-


-


-


16,637

Operating income /(loss)

8,298


44


(104)


2,625


447


-


11,310















Profit / (loss) before tax payable

1,910


(293)


(104)


742


249


(186)


2,318





























Capital expenditure

254


1


-


319


-


-


574





























Total assets

168,052


307


18


2,252


181


2,236


173,046















 

10. Net interest income


2018

2017


£000

£000




Interest income



Loans and advances to customers

19,037

19,839

Total interest income calculated using the effective interest method

19,037

19,839

Other interest income

78

54

Total interest income

19,115

19,893




Interest expense



Deposits from customers

(2,744)

(2,690)

Subordinated liabilities

(773)

(495)

Block funders

(30)

(71)

Total interest expense

(3,547)

(3,256)




Net interest income

15,568

16,637

 

11. Net fee and commission income

 

A. Disaggregation of fee and commission income

In the following table, fee and commission income from contracts with customers in the scope of IFRS 15 is disaggregated by major type of services. The table includes a reconciliation of the disaggregated fee and commission income with the Group's reportable segments.

 


2018

2017


£000

£000

Major service lines



Independent financial advice income

2,547

2,625

FX trading income

824

490

Fee and commission income

3,371

3,115

 

Fee and commission expense

 

(6,109)

 

(8,413)

 

Net fee and commission expense

 

(2,738)

 

(5,298)


12. Terminal funding

 

In September 2014, the Bank discontinued funding handheld payment devices (referred to as Terminal Funding) due to the volume of write offs.  Ever since, the book is being run off whilst the Bank vigorously pursues historical write off.  A decision was made by the Board during 2016 to cease funding and run-off the book upon the final repayment date of August 2019.

 


2018

£000


2017

£000









Interest income

181


377

Fee and commission expense

(5)


(92)

Provision for impairment on loan assets

(102)


(195)










74


90





 

13. Personnel expenses

 

 

 

2018

£000


2017

£000









Gross salaries

(4,233)


(3,479)

Executive Directors' remuneration

(241)


(214)

Non-executive Directors' fees

(145)


(185)

Executive Directors' pensions

(19)


(21)

Executive Directors' performance related pay

(50)


(36)

Pension costs

(259)


(226)

National insurance and payroll taxes

(527)


(432)

Training and recruitment costs

(229)


(190)










(5,703)


(4,783)





 

14. Other expenses

 

 

 

2018

£000


2017

£000









Professional and legal fees

(1,067)


(848)

Marketing costs

(237)


(211)

IT costs

(567)


(528)

Establishment costs

(434)


(376)

Communication costs

(146)


(137)

Travel costs

(174)


(149)

Bank charges

(119)


(142)

Insurance

(141)


(133)

Irrecoverable VAT

(303)


(180)

Other costs

(277)


(448)










(3,465)


(3,152)





 

15. Impairment on loans and advances to customers

The charge in respect of specific allowances for impairment comprises: -

 


2018

£000


2017

£000









Specific impairment allowances made

(1,246)


(1,295)

Reversal of allowances previously made

410


776









Total charge for specific provision for impairment

(836)


(519)





 

The charge in respect of collective allowances for impairment comprises: -

 


2018

£000


2017

£000









Collective impairment allowances made

(49)


(78)

Release of allowances previously made

28


12









Total charge for collective allowances for impairment

(21)


(66)









Total charge for allowances for impairment

(857)


(585)





 



 

16. Profit before tax payable

The profit before tax payable for the year is stated after charging: -

 


Group


Company

 


2018

£000


2017

£000


2018

£000


2017

£000

 

Share options expense

-


(22)


-


(22)

 

Auditor's remuneration: -   as Auditor current year

(108)


(90)


-


-

 

                                                non-audit services

(7)


(37)


-


-

 

Pension cost defined benefit scheme

(17)


(17)


-


-

 

Operating lease rentals for property

(251)


(220)


-


-

 









 

17. Income tax expense


2018


2017


£000


£000

Current tax expense




Current year

(197)


(226)

Changes to estimates for prior years

-


(12)


(197)


(238)

Deferred tax expense




Origination and reversal of temporary differences

(46)


(2)

Utilisation of previously recognised tax losses

-


-

Changes to estimates for prior years

-


-


(46)


(2)





Tax expense

(243)


(240)

 




2018




2017




£000




£000

Reconciliation of effective tax rate








Profit before tax



2,710




2,698

Tax using the Bank's domestic tax rate

(10.0)%


(271)


(10.0)%


(270)

Effect of tax rates in foreign jurisdictions

0.0 %


-


(1.6)%


(44)

Non-deductible expenses

(1.2)%


(33)


(1.0)%


(28)

Tax exempt income

0.3 %


8


 2.4%


67

Timing difference in current year

0.3 %


7


1.8%


49

Origination and reversal of temporary differences in deferred tax

1.7 %


46


(0.1)%


(2)

Changes to estimates for prior years

0.0 %


-


(0.4)%


(12)

Tax expense

(9.0)%


(243)


(8.9)%


(240)


The main rate of corporation tax in the Isle of Man is 0.0% (2017: 0.0%).  However the profits of the Group's Isle of Man banking activities are taxed at 10.0% (2017: 10.0%). The profits of the Group's subsidiaries that are subject to UK corporation tax are taxed at a rate of 19.0% (2017: 19.0%).

 

The value of tax losses carried forward reduced to nil and there is now a timing difference related to accelerated capital allowances resulting in a £88,000 liability (2017: £42,000 liability). This resulted in an expense of £50,000 (2017: £2,000) to the consolidated income statement.

 

18. Earnings per share

 

A. Basic and diluted earnings per share

 

The calculation of basic earnings per share has been based on the profit for the year and the weighted average number of ordinary shares outstanding.

The calculation of diluted earnings per share has been based on the profit for the year and the weighted average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares.

 




2018


2017







Total comprehensive income for the year



£2,461,000


£2,395,000

Weighted average number of ordinary shares in issue



131,096,235


110,880,711

Basic earnings per share (pence)



1.88


2.17

Diluted earnings per share (pence)



1.54


1.70







 

B. Reconciliation of earnings between basic and diluted earnings

 




2018


2017

Total comprehensive income for the year






As per basic earnings per share - total comprehensive income



£2,461,000


£2,395,000

Interest expense saved if all convertible loan notes were exchanged for equity (note 29)



£196,150


£196,150

As per dilutive earnings per share



£2,657,150


£2,591,150

 

C. Reconciliation of weighted average number of ordinary shares outstanding between basic and diluted

 




2018


2017







Reconciliation of weighted average number of ordinary shares in issue between basic and diluted earnings per share






As per basic earnings per share



131,096,235


110,880,711

Number of shares issued if all convertible loan notes were exchanged for equity (note 29)



41,666,667


41,666,667

Dilutive element of share options if exercised (note 31)



10,366


-







As per dilutive earnings per share



172,773,268


152,547,378

 

19. Cash and cash equivalents


Group


Company


2018

£000


2017

£000


2018

£000


2017

£000

















Cash at bank and in hand

9,753


9,745


1,646


200


9,753


9,745


1,646


200








 

Cash at bank includes an amount of £561,000 (2017: £63,000) representing receipts which are in the course of transmission.

 

20. Debt securities

 


Group


Company


2018

£000


2017

£000


2018

£000


2017

£000

















Financial assets at FVOCI:








UK Government Treasury Bills

30,534


28,740


-


-









Financial assets at amortised cost:








UK Certificates of Deposit

-


5,532


-


-


















30,534


34,272


-


-









UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in other comprehensive income. There were £135,000 (2017: £36,000) realised gains and £44,000 unrealised gains (2017: unrealised losses £93,000) during the year.

 

 

 

21. Trading asset

 

The investment represents shares in a UK quoted company, elected to be classified as a financial asset at fair value through profit or loss. The investment is stated at market value and is classified as a level 1 investment in the IFRS 13 fair value hierarchy. The cost of the shares was £471,000. The unrealised difference between cost and market value has been taken to the income statement. Dividend income of £355,000 (2017: £350,000) and £24,000 (2017: £24,000) of sale proceeds have been received from this investment since it was made. The investment made a net loss of £4,000 (2017: £21,000) during the year.

 

22. Loans and advances to customers

 

 

 

Group

 

Gross

Amount

£000


2018

Impairment

Allowance

£000


 

Carrying

Value

£000


 

Gross

Amount £000


2017

Impairment

Allowance

£000


 

Carrying

Value

£000

























HP balances

59,038


(1,416)


57,622


59,909


(1,327)


58,582

Finance lease balances

27,238


(1,551)


25,687


20,088


(1,101)


18,987

Unsecured personal loans

14,806


(382)


14,424


10,521


(255)


10,266

Vehicle stocking plans

1,486


-


1,486


1,613


-


1,613

Wholesale funding arrangements

22,944


-


22,944


5,830


-


5,830

Block discounting

17,316


-


17,316


13,523


-


13,523

Secured commercial loans

1,967


(45)


1,922


659


(4)


655

Secured personal loans

6,877


-


6,877


13,090


-


13,090














151,672


(3,394)


148,278


125,233


(2,687)


122,546













 

Collateral is held in the form of underlying assets for HP, finance leases, vehicles stocking plans, block discounting, secured commercial and personal loans and wholesale funding arrangements. An estimate of the fair value of collateral on past due or impaired loans and advances is not disclosed as it would be impractical to do so.

 

 

 

Specific allowance for impairment



2018

£000


2017

£000













Balance at 1 January



2,440


2,099

Specific allowance for impairment made



1,291


1,295

Release of allowances previously made



(410)


(776)

Write-offs



(195)


(178)

Balance at 31 December



3,126


2,440







 

 

Collective allowance for impairment



2018

£000


2017

£000













Balance at 1 January



247


57

Collective allowance for impairment made



49


202

Release of allowances previously made



(28)


(12)













Balance at 31 December



268


247













Total allowances for impairment



3,394


2,687







 

Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2018 £389,005 (2017: £347,328) had been lent on this basis. In the Group's ordinary course of business, advances may be made to Shareholders but all such advances are made on normal commercial terms.

 

As detailed below, at the end of the current financial year 15 loan exposures (2017: 3) exceeded 10.0% of the capital base of the Bank: -

 

 

 

 

Exposure

Outstanding Balance

2018

£000


Outstanding Balance

2017

£000


 

Facility

limit

£000







Block discounting facility

14,211


9,487


23,500

Wholesale funding agreement

21,423


-


24,500







 

HP and finance lease receivables

Loans and advances to customers include the following HP and finance lease receivables: -

 

 

 



2018

£000


2017

£000







Less than one year



42,532


36,227

Between one and five years



60,184


60,576







Gross investment in HP and finance lease receivables



102,716


96,803







 

The investment in HP and finance lease receivables net of unearned income comprises: -

 

 

 



2018

£000


2017

£000







Less than one year



37,508


29,317

Between one and five years



49,289


50,680







Net investment in HP and finance lease receivables



86,797


79,997







 

23. Trade and other receivables


Group


Company


2018

£000


2017

£000


2018

£000


2017

£000

















Prepayments

382


285


32


22

VAT recoverable

936


817


-


-

Other debtors

1,173


806


-


-










2,491


1,908


32


22









 

Included in trade and other receivables is an amount of £936,000 (2017: £817,000) relating to a reclaim of VAT.  The Bank, as the Group VAT registered entity, has for some time considered the VAT recovery rate being obtained by the business was neither fair nor reasonable, specifically regarding the attribution of part of the residual input tax relating to the HP business not being considered as a taxable supply. Queries have been raised with the Isle of Man Government Customs & Excise Division ("C&E"), and several reviews of the mechanics of the recovery process were undertaken by the Company's professional advisors.

 

The decision of the First-Tier Tax Tribunal released 18 August 2011 in respect of Volkswagen Financial Services (UK) Limited ("VWFS") v HM Revenue & Customs (TC01401) ("VWFS Decision") added significant weight to the case put by the Bank and a request for a revised Partial Exemption Special Method was submitted in December 2011. The proposal put forward by the Bank was that the revised method would allocate 50.0% of costs in respect of HP transactions to a taxable supply and 50.0% to an exempt supply. In addition, a Voluntary Disclosure was made as a retrospective claim for input VAT under-claimed in the last 4 years. A secondary claim was also made to cover periods Q4 2012 to Q1 2016 for the value of £230,000 and an amount of £249,000 has been accrued to cover periods Q2 2016 to Q4 2018.

 

In November 2012, it was announced that the HMRC Upper Tribunal had overturned the First-Tier Tribunal in relation to the VWFS Decision. VWFS has subsequently been given leave to appeal and this was scheduled to be heard in October 2013. However, this was delayed and the case was heard by the Court of Appeal on 17 April 2015 who overturned the Upper Tribunal's decision ruling in favour of VWFS. HMRC have appealed this decision to the Supreme Court, which has referred the issue to the European Court of Justice.

 

The Court of Justice of the European Union ("CJEU") has published its determination concerning the Volkswagen Financial Services (UK) Limited ("VWFS") vs HMRC case. The judgement addressed all specific questions referred and agreed with VWFS on all material points. Specifically, the judgment clarifies that a partial exemption method must reflect the taxable sale of the goods, even where general costs are commercially passed on as part of the exempt supplies of credit. We have approached Customs and Excise with a view of commencing conversations to finalise our historic claims, rolling up the claim to date and agreeing a new partial exempt method going forward.

 

The Bank's total exposure in relation to this matter increased to £1,049,000, comprising the debtor balance referred to above plus an additional £113,000 VAT reclaimed under the partial Exemption Special Method, in the period from Q4 2011 to Q3 2012 (from Q4 2012 the Bank reverted back to the previous method). On the basis of the discussions and correspondence which have taken place between the Bank and C&E, in addition to the VWFS case, the Directors are confident that the VAT claim referred to above will be secured.

 

24. Property, plant and equipment

 

 

Group


Leasehold

Improvements

£000

IT

Equipment

£000

Furniture &

Equipment

£000

Motor

Vehicles1

£000

 

Total

£000

























Cost












As at 1 January 2018



443


294


646


10


1,393













Additions



66


41


18


993


1,118

Disposals



-


-


-


-


-













As at 31 December 2018



509


335


664


1,003


2,511

























Accumulated depreciation












As at 1 January 2018



189


152


599


3


943













Charge for year



60


61


13


50


184

Disposals



-


-


-


-


-

























As at 31 December 2018



249


213


612


53


1,127

























Carrying value at 31 December 2018



260


122


52


950


1,384

























Carrying value at 31 December 2017



254


142


47


7


450













1Motor vehicles relate to operating leases with the Group as lessor.

 

 

 

Company


Leasehold

Improvements

£000

IT

Equipment

£000

Furniture &

Equipment

£000

 

Total

£000





















Cost










As at 1 January 2018



234


13


15


262

Additions



-


-


1


1

Disposals



-


-


-


-





















As at 31 December 2018



234


13


16


263





















Accumulated depreciation










As at 1 January 2018



92


2


2


96

Charge for year



39


1


1


41

Disposals



-


-


-


-





















As at 31 December 2018



131


3


3


137





















Carrying value at 31 December 2018



103


10


13


126





















Carrying value at 31 December 2017



142


11


13


166











 

25. Intangible assets

 

 

 

Group


 

Customer Contracts & Lists

£000

 

Intellectual

Property Rights

£000

IT Software and Website Development

£000

 

 

Total

£000





















Cost










As at 1 January 2018



1,284


388


1,550


3,222

Additions



-


-


496


496

Acquisition of MBL



133


-


-


133

Disposals



-


-


-


-











As at 31 December 2018



1,417


388


2,046


3,851





















Accumulated amortisation










As at 1 January 2018



130


162


1,211


1,503

Charge for year / impairment (note 32)



65


150


181


396

Disposals



-


-


-


-





















As at 31 December 2018



195


312


1,392


1,899





















Carrying value at 31 December 2018



1,222


76


654


1,952





















Carrying value at 31 December 2017



1,154


226


339


1,719











 

On 23 December 2016, the Company acquired the majority of the Isle of Man's IFA business held by Knox Financial Services Limited ("KFSL"). The initial acquisition included approximately 4,000 clients together with 6 members of staff. The basis of consideration was contingent, as it is determined by 4 times renewal income received in the first 12 months of ownership, reduced by any clawbacks in the same period.  The final value could not fall below £800,000.  The Company entered into a loan agreement with Conister Bank Limited (see note 32 for terms) and paid the non-refundable minimum of £800,000 and a further £200,000 into an escrow account until the final valuation was determined.  When the value was finalised, any surplus or shortfall was settled.

 

At acquisition, by reference to the renewal income received by KFSL in the 12 months prior to disposal, an estimate of £236,906 was assumed for income over the preceding 12 months, which would have generated a consideration sum of £947,624. Therefore, EWA accounted for this transaction by recognising an intangible asset of £947,624 and a receivable of £52,376 of the monies held in escrow.  Subsequent to acquisition this estimate was updated to an estimated purchase price of £989,400 as at 31 December 2017. Consequently, the receivable from escrow was reduced to £10,600. The final consideration for the purchase was determined to be £1,101,000. As acquisition accounting was finalised prior to final settlement, the £111,600 additional cost was recognised as an expense in the profit and loss during 2018. The fair value of the assets acquired was considered to be of the same amount as the sum estimated to be paid and principally relates to customer contracts. The period over which these contracts are to be amortised is estimated to be 18.75 years given the average duration of EWA's existing portfolio for renewal income.

 

In tandem, both parties entered into an option agreement, exercisable within three months from the transaction date, for EWA to acquire the remainder of the vendor's IFA business which included approximately 150 clients.  This option was exercised on 18 January 2017. The price of the acquisition was calculated by four times the renewal income received over the 12-month period subsequent to completion.  The purchase price was estimated to be £198,300 with £75,000 paid upon exercise of the option. During the year, the final purchase consideration was determined to be £231,759. The Company made a final settlement of £156,760 during the year in addition to the £75,000 option price paid during the prior year. This has resulted in a valuation adjustment of £33,403.

 

On 7 September 2018, the Company acquired a book of insurance and financial services clients from Westwinds Financial Services Limited for a final consideration of £100,000.

 

26. Deposits from customers

 

 



2018

£000


2017

£000







Retail customers: term deposits



153,735


137,399

Corporate customers: term deposits



4,765


4,873
















158,500


142,272







 

27. Creditors and accrued charges


Group


Company


2018

£000


2017

£000


2018

£000


2017

£000

















Commission creditors

758


2,042


-


-

Other creditors and accruals

897


774


94


139

Taxation creditors

355


348


-


-


















2,010


3,164


94


139









 

28. Block creditors

 

 



2018

£000


2017

£000







Drawdown 2 - repayable 25/07/2018, interest payable at 5.8%, secured on assets of MFL



-


95

Drawdown 3 - repayable 08/03/2019, interest payable at 6.5%, secured on assets of MFL



138


656
















138


751







 

29. Loan notes



Group


Company


 

Notes

2018

£000


2017

£000


2018

£000


2017

£000



















Related parties









J Mellon

JM

1,750


1,750


1,750


1,750

Burnbrae Limited

BL

1,200


1,200


1,200


1,200

Southern Rock Insurance Company Limited

SR

460


460


460


460

Life Science Developments Limited

LS

-


250


-


250





















3,410


3,660


3,410


3,660










Unrelated parties

UP

12,461


5,335


12,461


5,335












15,871


8,995


15,871


8,995










 

JM - Two loans, one of £500,000 maturing on 31 July 2022 with interest payable of 5.0% per annum, and one of £1,250,000 maturing on 26 February 2020, paying interest of 6.5% per annum. Both loans are convertible at the rate of 7.5 pence and 9 pence respectively.  

 

BL - One loan consisting of £1,200,000 maturing on 31 July 2022 with interest payable of 5.0% per annum.  Jim Mellon is the beneficial owner of BL and Denham Eke is also a director.  The loan is convertible at a rate of 7.5 pence. 

 

SR - One loan consisting of £460,000 maturing on 26 February 2020 with interest payable of 6.5% per annum.  The loan is convertible at a rate of 9 pence.   John Banks, a Non-executive Director, is also a director of SR and Arron Banks is a major shareholder of SR. 

 

LS - One loan of £nil (2017: £250,000) which matured on 3 January 2018 with interest payable of 5.0% per annum. Denham Eke is a director of LS. The loan was repaid on maturity.

 

UP - Thirty-three loans consisting of an average £377,606 with a weighted average interest payable of 5.4% per annum.  The earliest maturity date is 20 January 2019 and the latest maturity is 10 October 2023.

 

With respect to the convertible loans, the interest rate applied was deemed by the Directors to be equivalent to the market rate at the time with no conversion option.

 

30. Pension liability

The Conister Trust Pension and Life Assurance Scheme ("Scheme") operated by the Company is a funded defined benefit arrangement which provides retirement benefits based on final pensionable salary. The Scheme is closed to new entrants and the last active member of the Scheme left pensionable service in 2011.

 

The Scheme is approved in the Isle of Man by the Assessor of Income Tax under the Income Tax (Retirement Benefit Schemes) Act 1978 and must comply with the relevant legislation. In addition, it is registered as an authorised scheme with the FSA in the Isle of Man under the Retirement Benefits Scheme Act 2000. The Scheme is subject to regulation by the FSA but there is no minimum funding regime in the Isle of Man.

 

The Scheme is governed by two corporate trustees, Conister Bank Limited and Boal & Co (Pensions) Limited. The trustees are responsible for the Scheme's investment policy and for the exercise of discretionary powers in respect of the Scheme's benefits.

 

The rules of the Scheme state: - "Each Employer shall pay such sums in each Scheme Year as are estimated to be required to provide the benefits of the Scheme in respect of the Members in its employ".

 

Exposure to risk

The Company is exposed to the risk that additional contributions will be required in order to fund the Scheme as a result of poor experience. Some of the key factors that could lead to shortfalls are: -

 

investment performance - the return achieved on the Scheme's assets may be lower than expected; and

mortality - members could live longer than foreseen. This would mean that benefits are paid for longer than expected, increasing the value of the related liabilities.

 

In order to assess the sensitivity of the Scheme's pension liability to these risks, sensitivity analyses have been carried out. Each sensitivity analysis is based on changing one of the assumptions used in the calculations, with no change in the other assumptions. The same method has been applied as was used to calculate the original pension liability and the results are presented in comparison to that liability. It should be noted that in practice it is unlikely that one assumption will change without a movement in the other assumptions; there may also be some correlation between some of these assumptions. It should also be noted that the value placed on the liabilities does not change on a straight line basis when one of the assumptions is changed. For example, a 2.0% change in an assumption will not necessarily produce twice the effect on the liabilities of a 1.0% change.

 

No changes have been made to the method or to the assumptions stress-tested for these sensitivity analyses compared to the previous period. The investment strategy of the Scheme has been set with regard to the liability profile of the Scheme. However, there are no explicit asset-liability matching strategies in place.

 

Restriction of assets

No adjustments have been made to the statement of financial position items as a result of the requirements of IFRIC 14 issued by IASB's International Financial Reporting Interpretations Committee.

 

Scheme amendments

There have not been any past service costs or settlements in the financial year ending 31 December 2018 (2017: none).

 

Funding policy

The funding method employed to calculate the value of previously accrued benefits is the Projected Unit Method. Following the cessation of accrual of benefits when the last active member left service in 2011, regular future service contributions to the Scheme are no longer required. However, additional contributions will still be required to cover any shortfalls that might arise following each funding valuation.

 

The most recent triennial full actuarial valuation was carried out at 1 April 2016, which showed that the market value of the Scheme's assets was £1,379,000 representing 80.7% of the benefits that had accrued to members, after allowing for expected future increases in earnings. As required by IAS 19 this valuation has been updated by the actuary as at 31 December 2018.

 

The amounts recognised in the Consolidated Statement of Financial Position are as follows: -

 

 

Total underfunding in funded plans recognised as a liability



2018

£000


2017

£000







Fair value of plan assets



1,361


1,469

Present value of funded obligations



(1,945)


(2,029)
















(584)


(560)







 

 

Movement in the liability for defined benefit obligations



2018

£000


2017

£000







Opening defined benefit obligations at 1 January



2,029


2,034

Benefits paid by the plan



(65)


(68)

Interest on obligations



52


54

Actuarial (gain)/loss



(71)


9







Liability for defined benefit obligations at 31 December



1,945


2,029







 

 

Movement in plan assets



2018

£000


2017

£000







Opening fair value of plan assets at 1 January



1,469


1,420

Expected return on assets



37


37

Contribution by employer



41


41

Actuarial (loss)/gain



(121)


39

Benefits paid



(65)


(68)







Closing fair value of plan assets at 31 December



1,361


1,469







 

 

Expense recognised in income statement



2018

£000


2017

£000







Interest on obligation



52


54

Expected return on plan assets



(37)


(37)







 

 






Total included in personnel costs



15


17







 

 






Actual return on plan assets



(53)


76







 

 

Actuarial gain recognised in other comprehensive income



2018

£000


2017

£000







Actuarial (loss)/gain on plan assets



(121)


39

Actuarial gain/(loss)  on defined benefit obligations



71


(9)







 

 









50


30







 


2018


      2017           

Plan assets consist of the following

%


%





Equity securities

45


48

Corporate bonds

19


18

Government bonds

28


25

Cash

4


5

Other

4


4


100


100

 

The actuarial assumptions used to calculate Scheme liabilities under IAS19 are as follows: -



2018

%

2017

%

2016

%







Rate of increase in pension in payment: -






-           Service up to 5 April 1997



-

-

-

-           Service from 6 April 1997 to 13 September 2005



3.0

3.0

3.1

-           Service from 14 September 2005



2.1

2.1

2.1

Rate of increase in deferred pensions



5.0

5.0

5.0

Discount rate applied to scheme liabilities



2.6

2.6

2.7

Inflation



3.1

3.1

3.2







 

The assumptions used by the actuary are best estimates chosen from a range of possible assumptions, which due to the timescale covered, may not necessarily be borne out in practice.

 

31. Called up share capital

Ordinary shares of no par value available for issue


       Number

At 31 December 2018


200,200,000

At 31 December 2017


200,200,000

 

Issued and fully paid: - Ordinary shares of no par value

       Number

£000

At 31 December 2018

131,096,235

20,732

At 31 December 2017

131,096,235

20,732

 

There are four convertible loans of £3,410,000 (2017: £3,410,000) with no remaining warrants to exercise at 31 December 2018 (2017: £nil).

 

On 23 June 2014, 1,750,000 share options were issued to Executive Directors and senior management within the Group at an exercise price of 14 pence. The options vest over three years with a charge based on the fair value of 8 pence per option at the date of grant. The period of grant is for 10 years less 1 day ending 22 June 2024. Of the 1,750,000 share options issued, 1,050,000 (2017:1,050,000) remain outstanding; the balance lapsed during 2017.

 

Performance and service conditions attached to share options that have not fully vested are as follows: -

 

(a)   The options granted on 25 June 2010 (1,056,000 options) will vest if the mid-market share price of £0.30 is achieved during the period of grant (10 years ending 25 June 2020); and

(b)   The options granted on 25 June 2010 and 23 June 2014 require a minimum of three years' continuous employment service in order to exercise upon the vesting date.

 

The fair value of services received in return for share options granted is based on the fair value of share options granted, measured using a binomial probability model with the following inputs for each award: -

 




23 June

2014

25 June

2010











Fair value at date of grant



£0.08

£0.03

Share price



£0.14

£0.11

Exercise price



£0.14

£0.11

Expected volatility



55.0%

47.0%

Option life



3

3

Risk-free interest rate (based on government bonds)



0.5%

2.2%

Forfeiture rate



33.3%

0.0%






 

The charge for the year for share options granted was £nil (2017: £22,000).

 

Analysis of changes in financing during the year

 

Analysis of changes in financing during the year

2018

£000


2017

£000









Balance at 1 January

29,727


27,478

Issue of loan notes

6,876


450

Issue of shares

-


1,799






36,603


29,727





 

The 2018 closing balance is represented by £20,732,000 share capital (2017: £20,732,000) and £15,871,000 of loan notes (2017: £8,995,000).

 

32. Investment in Group undertakings

The Company has the following investments in subsidiaries incorporated in the Isle of Man: -

 

 

 

Carrying value of investments

Nature of

Business

31 December

2017

% Holding

Date of

Incorporation


Total

2018

£000


Total

2017

£000

























Conister Bank Limited

Asset and Personal Finance


100


05/12/1935


14,167


11,767

Edgewater Associates Limited

Wealth Management


100


24/12/1996


2,005


2,005

TransSend Holdings Limited

 Holding Company for Prepaid Card Division


100


05/11/2007


-


-

Bradburn Limited

Holding Company


100


15/05/2009


-


-








16,172


13,772













 

Amounts owed to and from Group undertakings are unsecured, interest-free and repayable on demand.       

 

Subordinated loans

MFG has issued several subordinated loans as part of its equity funding into the Bank and EWA.

 

Company



2018


2017

Creation

Maturity

Interest rate

£000


£000







Conister Bank Limited






11 February 2014

11 February 2024

7.0%

500


500

27 May 2014

27 May 2024

7.0%

500


500

9 July 2014

9 July 2024

7.0%

500


500

17 September 2014

17 September 2026

7.0%

400


400

22 July 2013

22 July 2033

7.0%

1,000


1,000

25 October 2013

22 October 2033

7.0%

1,000


1,000

23 September 2016

23 September 2036

7.0%

1,100


1,100

14 June 2017

14 June 2037

7.0%

450


450

12 June 2018

12 June 2038

7.0%

2,000


-







Edgewater Associates Limited






14 May 2012

14 May 2017

7.0%

-


-

28 February 2013

28 February 2018

7.0%

50


50

21 February 2017

21 February 2027

7.0%

150


150

14 May 2017

14 May 2027

7.0%

128


128




7,778


5,778

 

 

Goodwill



Group

2018

£000


Group

2017

£000













Edgewater Associates Limited ("EWA")



1,849


1,849

ECF Asset Finance PLC ("ECF")



454


454

Three Spires Insurance Services Limited ("Three Spires")



41


41




2,344


2,344







 

Goodwill impairment

The goodwill is considered to have an indefinite life and is reviewed on an annual basis by comparing its estimated recoverable amount with its carrying value.

 

The estimated recoverable amount in relation to the goodwill generated on the purchase of EWA is based on the forecasted 3 year cash flow projections, extrapolated to 10 years using a 2.0% annual increment, and then discounted using a 12.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on stable profit levels.

 

The estimated recoverable amount in relation to the goodwill generated on the purchase of ECF is based on forecasted 3 year sales interest income calculated at 5.0% margin, extrapolated to 10 years using a 2.0% annual increment, and then discounted using a 12.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15.0% and 20.0% on varying sales volumes.

 

There has been no change in the detailed method of measurement for EWA and ECF when compared to 2017.  The goodwill generated on the purchase of Three Spires has been reviewed at the current year end and is considered adequate given its income streams referred to EWA.  Based on the above reviews no impairment to goodwill has been made in the current  year.

 

Acquisition of Incahoot Limited

On 6 March 2015, the business of Incahoot Limited was acquired by Manx Incahoot Limited, a subsidiary of the Group.

 

On 9 December 2016, a valuation was conducted by an independent firm of professional advisers on the intellectual property rights acquired for the purpose of including within these financial statements. The independent firm addressed the three levels of the IFRS fair value hierarchy and concluded that level 3 was most appropriate as the intellectual property rights acquired had no active markets (Level 1), or comparable assets against which to index prices (Level 2).  Therefore, the report valued the intellectual property rights acquired based on internally generated data (Level 3) being: costs incurred to date and cash flow projections. The report averaged two valuation approaches, the replacement cost approach and the income approach using a discount factor of 42.5%, to arrive at a final valuation of £262,474. This created an impairment of £48,026. On 2 February 2018, the valuation was again updated which lead to a reduced valuation of £154,427. This created an additional impairment of £108,047.

 

The Directors performed an internal impairment assessment and consider the recoverable amount of the intellectual property rights to be £76,000 at 31 December 2018. The recoverable amount at 31 December 2017 was considered to be £154,427 based on an external valuation.

 

Investment in associates

 

 



Group

2018

£000


Group

2017

£000













The Business Lending Exchange ("BLX")



56


38

Beer Swaps Limited ("BSL")



10


-

Pay It Monthly Ltd ("PIML")



92


-




158


38

 

On December 2017, 40.0% of the share capital of BLX was acquired for nil consideration. The Group's share of the associate's total comprehensive income during the year was £18,000.

 

On April 2018, 20% of the share capital of BSL was acquired for nil consideration. The Group's share of the associates total comprehensive income post acquisition and up to year-end was £10,000.

 

On August 2018, 30% of the share capital of PIML was acquired for £90,000 consideration. The Group's resulting share of the associates total comprehensive income post acquisition and up to year-end was £2,000.

 

33. Related party transactions

Cash deposits

During the year, the Bank held cash on deposit on behalf of Jim Mellon (Executive Chairman of MFG) and companies related to Jim Mellon and Denham Eke (Chief Executive Officer of MFG).  Total deposits amounted to £173,157 (2017: £40,000), at normal commercial interest rates in accordance with the standard rates offered by the Bank. 

 

Staff and commercial loans

Details of staff loans are given in note 22.

 

Normal commercial loans have been made to various companies connected to Jim Mellon and Denham Eke. As at 31 December 2018, £113,000 of capital and interest was outstanding (2017: £299,000).

 

Intercompany recharges

Various intercompany recharges are made during the course of the year as a result of the Bank settling debts in other Group companies. EWA provides services to the Group in arranging its insurance and defined contribution pension arrangements.

 

Loan advance to EWA

On 14 December 2016, a loan advance was made to EWA by the Bank in order to provide the finance required to acquire MBL (see note 25).  The advance was for £700,000 at an interest rate of 8% repayable over 6 years.  A negative pledge was given by EWA to not encumber any property or assets or enter into an arrangement to borrow any further monies. The balance as at 31 December 2018 was £508,000 (2017: £700,000).


 

Loan advance to BLX

On 11 October 2017, a £4,000,000 loan facility was made available to BLX by the Bank in order to provide the finance required to expand its operations. The facility is for 12 months, followed by a 3 year amortisation period. Interest is charged at commercial rates. At 31 December 2018, £2,520,000 (2017: £550,000) had been advanced to BLX.

 

Loan advance to BSL

On 27 April 2018, a £1,000,000 loan facility was made available to BSL by the Bank in order to provide the finance required to expand its operations. On 10 October 2018, this facility was increased to £1,500,000. The facility is for 12 months. Interest is charged at commercial rates. At 31 December 2018, £1,099,000 (2017: £nil) had been advanced to BSL.

 

Loan advance to PIML

On 24 May 2018, a £500,000 loan facility was made available to PIML by the Bank in order to provide the finance required to expand its operations. The facility is for 12 months. Interest is charged at commercial rates. At 31 December 2018, £322,000 (2017: £nil) had been advanced to PIML. Post-year-end on 6 February 2019, the facility was increased to £1,000,000.

 

Investments

The Bank holds less than 1% equity in the share capital of an investment of which Jim Mellon is a shareholder (note 21).  Denham Eke acts as co-chairman.

 

Subordinated loans

The Company has advanced £7,450,000 (2017: £5,450,000) of subordinated loans to the Bank and £328,000 (2017: £328,000) to EWA at 31 December 2018.

 

Loan notes

See note 29 for a list of related party loan notes as at 31 December 2018 and 2017.

 

Key management remuneration including Executive Directors

 

 

 

2018

£000


2017

£000









Short-term employee benefits

297


300

 

34. Operating leases

Non-cancellable lease rentals are payable in respect of property and motor vehicles as follows: -

 


2018


2017


Leasehold

Property

£000


 

Other

£000


Leasehold

Property

£000


 

Other

£000

















Less than one year

214


-


178


-

Between one and five years

790


-


738


-

Over five years

162


-


276


-


















1,166


-


1,192


-









 

35. Subsequent events

There were no significant subsequent events identified after 31 December 2018.

 

36. Financial risk management

 

A. Introduction and overview

The Group has exposure to the following risks from financial instruments:

n credit risk;

n liquidity risk;

n market risks; and

n operational risks.

 

i. Risk management framework

The Company's Board have overall responsibility for the establishment and oversight of the Group's risk management framework. The Board of Directors have established the Group Audit, Risk and Compliance Committee ('ARCC'), which is responsible for approving and monitoring Group risk management policies. ARCC is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the ARCC.

 

The Group's risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, though its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

 

B. Credit risk

'Credit risk' is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's loans and advances to customers and investment debt securities. Credit risk includes counterparty, concentration, underwriting and credit mitigation risks.

 

Management of credit risk

 

The Bank's Board of Directors created the Credit Committee which is responsible for managing credit risk, including the following:

n Formulating credit policies in consultation with business units, covering collateral requirements, credit assessments, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements.

n Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisation limits are allocated to in line with credit policy.

n Reviewing and assessing credit risk: The Credit Committee assesses all credit exposures in excess of designated limits, before facilities are committed to customers. Renewals and reviews of facilities are subject to the same review process.

n Limiting concentrations of exposures to counterparties, geographies and industries, by issuer, credit rating band, market liquidity and country (for debt securities).

n Developing and maintaining risk grading's to categorise exposures according to the degree of risk of default. The current risk grading consists of 3 grades reflecting varying degrees of risk of default.

n Developing and maintaining the Group's process for measuring ECL: This includes processes for:

initial approval, regular validation and back-testing of the models used;

determining and monitoring significant increase in credit risk; and

incorporation of forward-looking information.

n Reviewing compliance with agreed exposure limits. Regular reports on the credit quality of portfolios are provided to the Credit Committee which may require corrective action to be taken.

 

C. Liquidity risk

'Liquidity risk' is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises from mismatches in the timing and amounts of cash flows, which is inherent to the Group's operations and investments.

 

Management of liquidity risk

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have enough liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The key elements of the Group's liquidity strategy are as follows:

 

n Funding base: offering six-months to five-year fixed term deposit structure with no early redemption option. This means the Bank is not subject to optionality risk where customers redeem fixed rate products where there may be a better rate available within the market;

n Funding profile: the Bank has a matched funding profile and does not engage in maturity transformation which means that on a cumulative mismatch position the Bank is forecast to be able to meet all liabilities as they fall due;

n Monitoring maturity mismatches, behavioural characteristics of the Group's financial assets and financial liabilities, and the extent to which the Group's assets are encumbered and so not available as potential collateral for obtaining funding.

n Liquidity buffer: the Bank maintains a liquidity buffer of 10.0% of its deposit liabilities, with strict short-term mismatch limits of 0.0% for sight to three months and -5.0% for sight to six months. This ensures that the Bank is able to withstand any short-term liquidity shock; and

n Interbank market: the Bank has no exposure to the interbank lending market. The Bank has no reliance on liquidity via the wholesale markets. In turn, if market conditions meant access to the wholesale funding was constrained as per the 2008 credit crisis, this would have no foreseeable effect on the Bank.

n The Bank's liquidity position is monitored daily against internal and external limits agreed with the FSA and according to the Bank's Liquidity Policy. The Bank also has a Liquidity Contingency Policy and Liquidity Contingency Committee in the event of a liquidity crisis or potential liquidity disruption event occur.

 

The Treasury department receives information from other business units regarding the liquidity profile of their financial assets and financial liabilities and details of other projected cash flows arising from projected future business. Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole.

 

Regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. The scenarios are developed considering both Group-specific events and market-related events (e.g. prolonged market illiquidity).

 

D. Market risk

'Market risk' is the risk that changes in market prices - e.g. interest rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor's/issuer's credit standing) will affect the Group's income or value of its holdings of financial instruments. The objective of the Group's market risk management is to manage and control market risk exposures within acceptable parameters to ensure the Group's solvency while optimising the return on risk.

Management of market risks

Overall authority for market risk is vested in Assets and Liabilities Committee ("ALCO") who sets up limits for each type of risk. Group finance is responsible for the development of risk management policies (subject to review and approval by ALCO) and for the day-to-day review of their implementation.

 

Foreign exchange risk

The Bank is not subject to foreign exchange risks and its business is conducted in pounds sterling.

 

Equity risk

The Group has investment in associates of £158,000 (2017: £38,000) which are carried at cost adjusted for the Group's share of net asset value. The investment is audited annually and the Bank has access to these accounts. The Bank's exposure to market risk is not considered significant given the low carrying amount of the investment.

 

The Group's investment in listed equities is not considered significant.

 

Interest rate risk

The principal potential interest rate risk that the Bank is exposed to is the risk that the fixed interest rate and term profile of its deposit base differs materially from the fixed interest rate and term profile of its asset base, or basis and term structure risk.

Additional interest rate risk may arise for banks where (a) customers are able to react to market sensitivity and redeem fixed rate products and (b) where a bank has taken out interest rate derivate hedges especially against longer term interest rate risk, where the hedge moves against the bank.

 

Interest rate risk for the Bank is not deemed to be currently material due to the Bank's matched funding profile. Any interest rate risk assumed by the Bank will arise from a reduction in interest rates, in a rising environment due to the nature of the Bank's products and its matched funded profile. The Bank should be able to increase its lending rate to match any corresponding rise in its cost of funds, notwithstanding its inability to vary rates on its existing loan book. The Bank attempts to efficiently match its deposit taking to its funding requirements.

 

E. Operational risk

 

'Operational risk' is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group's processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks - e.g. those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group's operations.

 

Management of operational risk

 

The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and innovation. In all cases, Group policy requires compliance with all applicable legal and regulatory requirements.

 

The Group has developed standards for the management of operational risk in the following areas:

n business continuity planning;

n requirements for appropriate segregation of duties, including the independent authorisation of transactions;

n requirements for the reconciliation and monitoring of transactions;

n compliance with regulatory and other legal requirements;

n documentation of controls and procedures;

n periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;

n requirements for the reporting of operational losses and proposed remedial action;

n development of contingency plans;

n training and professional development;

n ethical and business standards;

n information technology and cyber risks; and

n risk mitigation, including insurance where this is cost-effective.

 

Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with ARCC

 

37. Basis of measurement

 

The financial statements are prepared on a historical cost basis, except for the following material items.

 



Items

Measurement basis



Financial instruments at FVPL

Fair value

Financial assets at FVOCI

Fair value

Net defined benefit asset/liability

Fair value of plan assets less the present value of the defined benefit obligation

 

38. Significant accounting policies

 

Except for the changes explained in Note 5, the Group has consistently applied the following accounting policies to all periods presented in these financial statements.

 

A. Basis of consolidation of subsidiaries and separate financial statements of the Company

i. Business combinations

 

The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to issue of debt or equity securities.

 

ii. Subsidiaries

 

Subsidiaries are entities controlled by the Group. The Group 'controls' an entity if it is exposed to or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Group reassesses whether it has control if there are changes to one or more of the elements of control. This includes circumstances in which protective rights held (e.g. those resulting from a lending relationship) become substantive and lead to the Group having power over an investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

 

iii. Loss of control

 

When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related Non-Controlling Interest ("NCI") and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

 

iv. Transactions eliminated on consolidation

 

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

 

v. Separate financial statements of the Company

 

In the separate financial statements of the Company, interests in subsidiaries, associates and joint ventures are accounted for at cost.

 

B. Interests in equity accounted investees

The Group's interests in equity accounted investees may comprise interests in associates and joint ventures.

 

Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.

 

Interests in associates and joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group's share of the profit or loss and OCI of equity accounted investees, until the date on which significant influence or joint control ceases.

 

C. Foreign currency

Foreign currency assets and liabilities (applicable to the Conister Card Services division only) are translated at the rates of exchange ruling at the reporting date. Transactions during the year are recorded at rates of exchange in effect when the transaction occurs. The exchange movements are dealt with in the income statement.

 

D. Interest

Interest income and expense are recognised in profit or loss using the effective interest rate method.

 

Effective interest rate

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts of the financial instrument to the net carrying amount of the financial asset or financial liability. The discount period is the expected life or, where appropriate, a shorter period. The calculation includes all amounts receivable or payable by the Group that are an integral part of the overall return, including origination fees, loan incentives, broker fees payable, estimated early repayment charges, balloon payments and all other premiums and discounts. It also includes direct incremental transaction costs related to the acquisition or issue of the financial instrument. The calculation does not consider future credit losses.

 

Once a financial asset or a group of similar financial assets has been written down as a result of impairment, subsequent interest income continues to be recognised using the original effective interest rate applied to the reduced carrying value of the financial instrument.

 

E. Fees and commission income

Fees and commission income other than that directly related to the loans is recognised over the period for which service has been provided or on completion of an act to which the fees relate.

 

Income in respect of fiduciary deposit taking is recognised on an accruals basis.

 

F. Programme costs

Programme costs are direct expenditure incurred in relation to prepaid card programmes. The costs are recognised over the period in which income is derived from operating the programmes.

 

G. Leases

Leases in which the Group is a lessor

Finance leases and HP contracts

When assets are subject to a finance lease or HP contract, the present fair value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. HP and lease income is recognised over the term of the contract or lease reflecting a constant periodic rate of return on the net investment in the contract or lease. Initial direct costs, which may include commissions and legal fees directly attributable to negotiating and arranging the contract or lease, are included in the measurement of the net investment of the contract or lease at inception.

 

Operating leases

Assets held for operating leases are presented on the Statement of Financial Position according to the nature of the asset. Lease income is recognised over the lease term on a straight-line basis.

 

Leases in which the Group is a lessee

Operating 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.

 

H. Income tax

Current and deferred taxation

Current taxation relates to the estimated corporation tax payable in the current financial year.  Deferred taxation is provided in full, using the liability method, on timing differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred taxation is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred tax is realised. Deferred taxation 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.

 

I. Financial assets and financial liabilities

i. Recognition and initial measurement

The Group initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they are originated. All other financial instruments including regular-way purchases and sales of financial assets) are recognised on the trade date, which is the date on which the Group becomes party to the contractual provisions of the instrument.

 

A financial asset or financial liability is measured initially at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue.

 

ii. Classification

Financial assets

On initial recognition, a financial asset is classified as measured at: amortised cost, FVOCI or FVTPL.

 

A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:

n the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and

n the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI.

 

A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as FVTPL:

n the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

n the contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI.

 

On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis.

 

All other financial assets are classified as measured at FVTPL.

 

In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

 

Business model assessment

The group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information provided to management.

 

Assessment of whether contractual cash flows are solely payments of principal and interest

For the purposes of this assessment, 'principal' is defined as the fair value of the financial asset on initial recognition. 'Interest' is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin.

In assessing whether the contractual cash flows are SPPI, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition.

 

Reclassifications

Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets.

 

Financial liabilities

The Group classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost.

 

iii. Derecognition

Financial assets

The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.

 

On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss.

 

Financial liabilities

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.

 

iv. Modifications

Financial assets

If the terms of a financial asset are modified, then the Group evaluates whether the cash flows of the modified asset are substantially different.

 

If the cash flows are substantially different, the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value plus any eligible transaction costs.

 

If the cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximise recovery of the original contractual terms rather than to originate a new asset with substantially different terms. If the Group plans to modify a financial asset in a way that would result in forgiveness of cash flows, then it first considers whether a portion of the asset should be written off before the modification takes place. This approach impacts the result of the quantitative evaluation and means that the derecognition criteria are not usually met in such cases.

 

If the modification of a financial asset measured at amortised cost or FVOCI does not result in derecognition of the financial asset, then the Group first recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognises the resulting adjustment as a modification gain or loss in profit or loss. Any costs or fees incurred and fees received as part of the modification adjust the gross carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. If such modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income calculated using the effective interest rate method.

 

Financial liabilities

The Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability derecognised and consideration paid is recognised in profit or loss. Consideration paid includes non-financial assets transferred, if any, and the assumption of liabilities, including the new modified financial liability.

 

If the modification of a financial liability is not accounted for as derecognition, then the amortised cost of the liability is recalculated by discounting the modified cash flows at the original effective interest rate and the resulting gain or loss I s recognised in profit or loss. Any costs and fee incurred are recognised as an adjustment of the carrying amount of the liability and amortised over the remaining term of the modified financial liability by re-computing the effective interest rate on the instrument.

 

v. Offsetting

Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.

 

Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Group's trading activity.

 

vi. Fair value measurement

'Fair value' is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at the date. The fair value of a liability reflects its non-performance risk.

 

The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

 

The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements: -

 

n Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments;

 

n Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and

n Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

 

The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using other valuation techniques.

 

For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

 

vii. Impairment

A financial instrument that is not credit-impaired on initial recognition is classified in 'Stage 1' and has its credit risk continuously monitored by the Group. 

 

If a significant increase in credit risk ("SICR") since initial recognition is identified, the financial instrument is moved to 'Stage 2' but is not yet deemed to be credit-impaired.

n An SICR is always deemed to occur when the borrower is 30 days past due on its contractual payments.  If the Group becomes aware ahead of this time of non-compliance or financial difficulties of the borrower, such as loss of employment, avoiding contact with the Group then an SICR has also deemed to occur.

n A receivable is always deemed to be in default and credit-impaired when the borrower is 90 days past due on its contractual payments or earlier if the Group becomes aware of severe financial difficulties such as bankruptcy, IVA, abscond or disappearance, fraudulent activity and other similar events.

 

If the financial instrument is credit-impaired, the financial instrument is then moved to 'Stage 3'. Financial instruments in Stage 3 have their ECL measured based on expected credit losses on an undiscounted lifetime basis.

 

The Group measures loss allowances at an amount equal to lifetime ECL, except for debt investment securities that are determined to have low credit risk at the reporting date for which they are measured as a 12-month ECL. Loss allowances for lease receivables are always measured at an amount equal to lifetime ECL.

 

12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial instruments for which a 12-month ECL is recognised are referred to as 'Stage 1 financial instruments'.

 

Life-time ECL are the ECL that result from all possible default events over the expected life of a financial instrument. Financial instruments for which a lifetime ECL is recognised but which are not credit-impaired are referred to as 'Stage 2 financial instruments'.

 

Measurement of ECL

After a detailed review, the Group devised and implemented an impairment methodology in light of the IFRS 9 requirements outlined above noting the following:

n The ECL was derived by reviewing the Group's loss rate and loss given default over the past 8 years by product and geographical segment.

n The Group has assumed that the future economic conditions will broadly mirror the current environment and therefore the forecasted loss levels in the next 3 years will match the Group's experience in recent years.

n For portfolios where the Group has never had a default in its history or has robust credit enhancements such as credit insurance or default indemnities for the entire portfolio, then no IFRS 9 provision is made.  At year-end, 37.9% had such credit enhancements (2017: 41.7%).

n If the Group holds objective evidence through specifically assessing a credit-impaired receivable and believes it will go on to completely recover the debt due to the collateral held and cooperation with the borrower, then no IFRS 9 provision is made

 

ECL are probability-weighted estimate of credit losses. They are measured as follows:

n financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive);

n financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; and

n undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive.

 

Credit-impaired financial assets

At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI, and finance lease receivables are credit-impaired (referred to as 'Stage 3 financial assets'). A financial asset is 'credit-impaired' when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.

 

Evidence that a financial asset is credit-impaired includes the following observable date:

n significant financial difficulty of the borrower or issuer;

n a breach of contract such as a default or past due event;

n the restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise;

n it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or

n the disappearance of an active market for a security because of financial difficulties.

 

A loan that has been renegotiated due to a deterioration in the borrower's condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered credit-impaired even when the regulatory definition of default is different.

 

In making an assessment of whether an investment in sovereign debt is credit impaired, the Group considers the following factors:

n the market's assessment of creditworthiness as reflected in the bond yields;

n the rating agencies' assessments of creditworthiness;

n the country's ability to access the capital markets for new debt issuance;

n the probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness;

n The international support mechanisms in place to provide the necessary support as 'lender of last resort' to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria.

 

Presentation of allowance for ECL in the statement of financial position

Loss allowances for ECL are presented in the statement of financial position as follows:

n financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets

n loan commitments: generally, as a provision;

n debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve.

 

Write-off

Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level.

 

Recoveries of amounts previously written off are included in 'impairment losses on financial instruments' in the statement of profit or loss and OCI.

 

Financial assets that are written off could still be subject to enforcement activities in order to comply with the Group's procedures for recovery of amounts due.

J. Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise cash and deposit balances with an original maturity date of three months or less.

 

K. Loans and advances

Loans and advances' captions in the statement of financial position include:

n loans and advances measured at amortised cost (see 38 (I)): They are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method; and

n finance lease receivable (see 38 (G)).

 

L. Property, plant and equipment

Items of property, plant and equipment are stated at historical cost less accumulated depreciation (see below). Historical cost includes expenditure that is directly attributable to the acquisition of the items.

 

The assets' residual values and useful economic lives are reviewed, and adjusted if appropriate, at each reporting 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.

 

When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate items of property, plant and equipment.

 

Depreciation and amortisation

Assets are depreciated or amortised on a straight-line basis, so as to write off the book value over their estimated useful lives.  The useful lives of property, plant and equipment and intangibles are as follows: -

 

Property, plant and equipment

Leasehold improvements                                                      to expiration of the lease

IT equipment                                                                             4-5 years

Motor vehicles                                                                          2.5 years

Furniture and equipment                                                        4 -10 years

                                                               

M. Intangible assets and goodwill

i. Goodwill

 

Goodwill that arises on the acquisition of subsidiaries is measured at cost less accumulated impairment losses.

 

ii. Software

Software acquired by the Group is measured at cost less accumulated amortisation and any accumulated impairment losses.

 

Expenditure on internally developed software is recognised as an asset when the Group is able to demonstrate: that the product is technically feasible, its intention and ability to complete the development and use the software in a manner that will generate future economic benefits, and that it can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software and capitalised borrowing costs, and are amortised over its useful life. Internally developed software is stated at capitalised cost less accumulated amortisation and any accumulated impairment losses.

 

Software is amortised on a straight-line basis in profit or loss over its estimated useful life, from the date on which it is available for use.  Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.

 

iii. Other

Intangible assets that are acquired by an entity and having finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses.


Intangible assets acquired as part of a business combination, with an indefinite useful live are measured at fair value. Intangible assets with indefinite useful lives are not amortised but instead are subject to impairment testing at least annually.

 

 

The useful lives of intangibles are as follows: -

 

Customer contracts and lists                                                  to expiration of the agreement

Business intellectual property rights                                     4 years - indefinite

Website development costs                                                   indefinite

Software                                                                                     5 years

 

N. Impairment of non-financial assets

 

At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. Goodwill is tested annually for impairment.

 

For impairment testing, assets are group together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or Cash Generating Units ("CGUs"). Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.

 

The 'recoverable amount' of an asset or CGU is the greater of its value in use and its fair value less cost to sell. 'Value in use' is based on the estimated future cash flows, discounted to their present value using a pre=tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.

 

An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.

 

The Group's corporate assets do not generate separate cash inflows and are used by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGUs to which the corporate assets are located.

 

Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis.

 

An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

 

O. Deposits, debt securities issued and subordinated liabilities

 

Deposits, debt securities issued and subordinated liabilities are the Group's sources of debt funding.

 

The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments.

 

Deposits, debt securities issued and subordinated liabilities are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method.

 

Fiduciary deposits received on behalf of clients by way of a fiduciary agreement are placed with external parties and are not recognised in the statement of financial position.

 

The Group could receive funds for its prepaid card activities. These funds would be held in a fiduciary capacity for the sole purpose of making payments as and when card-holders utilise the credit on their cards and therefore would not be recognised in the statement of financial position.

 

P. Employee benefits

 

i. Long term employee benefits

Pension obligations

The Group has pension obligations arising from both defined benefit and defined contribution pension plans.

 

A defined contribution pension plan is one under which the Group pays fixed contributions into a separate fund and has no legal or constructive obligations to pay further contributions. Defined benefit pension plans define an 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 remuneration.

 

Under the defined benefit pension plan, in accordance with IAS 19 Employee benefits, the full service cost for the period, adjusted for any changes to the plan, is charged to the income statement. A charge equal to the expected increase in the present value of the plan liabilities, as a result of the plan liabilities being one year closer to settlement, and a credit reflecting the long-term expected return on assets based on the market value of the scheme assets at the beginning of the period, is included in the income statement.

 

The statement of financial position records as an asset or liability as appropriate, the difference between the market value of the plan assets and the present value of the accrued plan liabilities. The difference between the expected return on assets and that achieved in the period, is recognised in the income statement in the year in which they arise. The defined benefit pension plan obligation is calculated by independent actuaries using the projected unit credit method and a discount rate based on the yield on high quality rated corporate bonds. 

 

The Group's defined contribution pension obligations arise from contributions paid to a Group personal pension plan, an ex gratia pension plan, employee personal pension plans and employee co-operative insurance plans. For these pension plans, the amounts charged to the income statement represent the contributions payable during the year.

 

ii. Share-based compensation

The Group maintains a share option programme which allows certain Group employees to acquire shares of the Group. The change in the fair value of options granted is recognised as an employee expense with a corresponding change in equity. The fair value of the options is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options.

 

At each reporting date, the Group revises its estimate of the number of options that are expected to vest and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

 

The share option programme was originally set up for Group employees to subscribe for shares in Conister Trust Limited (now Conister Bank Limited). Since the Scheme of Arrangement, the shareholders of the Bank became shareholders of the Company. The share option programme is now operated by the Company. The fair value is estimated using a proprietary binomial probability model. 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.

 

Q. Share capital and reserves

 

Share issue costs

Incremental costs that are directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments.

 

R. Earnings per share

 

The Group presents basic and diluted EPS data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss that is attributable to ordinary shareholders of the Bank by the weighted-average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting profit or loss that is attributable to ordinary shareholders and the weighted-average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted employees.

 

S. Segmental reporting

 

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Group's primary format for segmental reporting is based on business segments. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with any of the Group's other components, whose operating results are regularly reviewed by the Group's chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

 

Segment results are reported to the Group's CEO (being the CODM) include items that are directly attributable to a segment as well as those that can be allocated on a reasonable basis.

 

39. Standards issued but not yet effective

A number of new standards are effective for annual periods beginning after 1 January 2018 and earlier application is permitted; however, the Group has not early adopted the new or amended standards in preparing these consolidated financial statements.

 

Standards

Effective date

(accounting periods

commencing on or after)

IFRIC 23 Uncertainty over Income Tax Treatments (issued on 7 June 2017)

1 January 2019

Amendments to IFRS 9: Prepayment Features with Negative Compensation (issued on 12 October 2017)

1 January 2019

IFRS 16 Leases (issued on 13 January 2016)

1 January 2019

 

Of those standards that are not yet effective, IFRS 16 is expected to have a material impact on the Group's financial statements in the period of initial application.

 

 

IFRS 16 Leases

The Group is required to adopt IFRS 16 Leases from 1 January 2019. The Group has assessed the estimated impact that initial application of IFRS 16 will have on its consolidated financial statements, as described below. The actual impacts of adopting the standard on 1 January 2019 may change because:

 

n the Group has not finalised the testing and assessment of controls over its new IT systems; and

n the new accounting policies are subject to change until the Group presents its first financial statements that include the date of initial application.

 

IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. These are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard - i.e. lessors continue to classify leases as finance or operating leases.

 

IFRS 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases - Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

 

Leases in which the Group is a lessor

No significant impact is expected for leases in which the Group is a lessor.

 

Leases in which the Group is a lessee

The group will recognise new assets and liabilities for its office premises and car parking sub-leases. As at 31 December 2018, the Group's future minimum lease payments under non-cancellable operating leases amounted to £1,166,000 (2017: 1,192,000) on an undiscounted basis. (see note 34)

 

Transition

The Group plans to apply IFRS 16 initially on 1 January 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information.

 

The Group plans to apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and IFRIC 4.

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
END
 
 
FR SEWFAAFUSEED
UK 100