Interim Results - Part 2

Prudential PLC 27 July 2005 Part 2 IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS A Basis of preparation and audit status EU law (IAS Regulation EC 1606 / 2002) requires that the next annual consolidated financial statements of the Group, for the year ending 31 December 2005, be prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the EU. This interim financial information has been prepared on the basis of the recognition and measurement requirements of those standards in issue that either are endorsed by the EU and effective (or available for early adoption) at 31 December 2005 or are expected to be endorsed and effective (or available for early adoption) at 31 December 2005, the Group's first IFRS annual reporting date. Compared to the UK GAAP basis of presentation, the statutory IFRS basis results reflect the application of: (i) Measurement and recognition changes arising from policies the Group expects to apply on the adoption of all IFRS standards, other than IAS32 ('Financial Instruments: Disclosure and Presentation'), IAS39 ('Financial Instruments: Recognition and Measurement'), and IFRS4 ('Insurance Contracts'), from 1 January 2004. The half year 2005 results include the expected effect of these three standards from 1 January 2005. (ii) Changes to the format of the results and other presentational changes that the Group expects to apply in its full year 2005 financial statements in so far as they affect the summary results included in this interim report. In addition, compared to the basis of preparing supplementary results and earnings per share basis information previously provided under UK GAAP, a discretionary change of policy for the basis of determining longer-term investment returns included in operating profit based on longer-term investment returns has been applied in respect of the policy for determining longer-term investment returns included in operating profits. Details of the change are described in note B. The statutory IFRS basis results for the 2005 and 2004 half years are unaudited. References to UK GAAP results throughout the statutory basis financial statements contained in this report reflect the Group's previously published results for the 2004 half year and full year. The UK GAAP basis results for the 2004 half year are unaudited. The 2004 full year UK GAAP results have been derived from the 2004 statutory accounts. The auditors have reported on the 2004 statutory accounts and they have been delivered to the Registrar of Companies. The auditors' report was not qualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. B Significant changes of basis of preparation and accounting policy The changes of accounting policy that arise on the conversion to IFRS basis reporting are numerous and extend to many items of income, expenditure, assets and liabilities. Comprehensive details of the changes were included with the announcement of restated 2004 comparative results on 2 June 2005 and are available at the Group's web-site at www.prudential.co.uk or on request. The policy changes from the 2004 UK GAAP audited financial statements which are of significance to reported results are as follows:- 2004 and 2005 results Basis of preparation Under UK GAAP, the Group's consolidated financial statements were previously prepared in accordance with applicable accounting standards under UK GAAP including being in accordance with the Statement of Recommended Practice issued in November 2003 by the Association of British Insurers. The statutory basis financial statements included in this report have been prepared on the basis of policies expected to be applied under IFRS for the year ending 31 December 2005. The 2004 full year results included in the IFRS financial information within this report establish the comparative financial information in summary format that the Group expects to be included in the Group's first set of IFRS financial statements for the year ending 31 December 2005. However, due to the continuing work of the IASB and possible amendments to the interpretative guidance, the Group's accounting policies and consequently the information presented may change for the Group's full year 2005 results. The date of adoption of IFRS is 1 January 2004. As at that date the Group has applied all IASB standards on a basis prescribed or permitted by those standards in the preparation of its consolidated financial statements. In general, a Group is required to determine its IFRS accounting policies and apply those retrospectively to determine its opening balance sheet under IFRS. However, in accordance with IFRS1 ('First-time Adoption of International Financial Reporting Standards'), the Group has applied the mandatory exceptions and certain optional exemptions from full retrospective application of IFRS. Significant exemptions from full retrospective application elected by the Group are as follows: Business combinations The Group has elected not to apply retrospectively the provisions of IFRS3 ('Business Combinations') to business combinations that occurred prior to 1 January 2004. At the date of adoption, therefore, no adjustment was made between UK GAAP and IFRS shareholders' funds for any historical business combination. Consistent with this approach, goodwill recognised in the opening balance sheet at 1 January 2004 for acquired businesses that have previously been consolidated is the same as previously shown under UK GAAP. Goodwill on newly consolidated entities, for example on venture fund investments, is determined by reference to net assets at transition date. Comparatives The Group has taken advantage of the exemption within IFRS that allows comparative information presented in the first year of adoption of IFRS not to comply with the standards IAS32, IAS39 and IFRS4. Consolidation principles Inter-company transactions Previously, under UK GAAP, all inter-company transactions were eliminated on consolidation except for investment management fees charged by M&G and the Group's US and Asia fund management operations to long-term business funds. Under IFRS, all inter-company transactions are eliminated on consolidation. Investment management fees charged by M&G, and the Group's US and Asia fund management operations to long-term business funds are recorded within inter-segment revenue and expenditure as set out in note D but eliminated on consolidation in the summary income statement. Entities subject to consolidation Previously, under UK GAAP, the assets and liabilities and results of entities were consolidated where Prudential had a controlling interest under the terms of Companies Act legislation, FRS2 ('Accounting for subsidiary undertakings') and other relevant UK GAAP interpretations. Entities are consolidated under IFRS if they fall within the scope of IAS27 ('Consolidated and Separate Financial Statements') and the IFRIC interpretation, SIC12 ('Consolidation - Special Purpose Entities'), of the IASB. Under IFRS, certain investment vehicles are newly consolidated due to the requirements differing from UK GAAP. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) B Significant changes of basis of preparation and accounting policy (continued) 2004 and 2005 results (continued) Basis of presentation of tax charges Under Companies Act requirements, previously, tax charges attributable to policyholders and unallocated surplus of with-profits funds and unit linked policies were charged, together with tax charges attributable to the long-term business result attributable to shareholders, as an expense in the long-term business technical account of the Company's Act format of the profit and loss account. In the non-technical section (i.e. the summary profit and loss section attributable to shareholders) the post-tax balance transferred from the long-term business technical account was grossed up by attributable shareholder tax to derive the pre-shareholder tax long-term business result. Tax charges in the non-technical account reflected the aggregate of the shareholder tax on the long-term business result and on the Group's other results. Under UK Listing Authority rules, profit before tax is required to be presented. This requirement, coupled with the fact that IFRS does not contemplate tax charges which are attributable to policyholders and unallocated surplus of with-profits funds and unit linked policies, necessitates the reporting of total tax charges within the presented results. The result before all taxes i.e. 'profit before tax' is shown in the income statement as 'IFRS basis income (representing income, net of post-tax transfers to unallocated surplus of with-profits funds, before tax attributable to policyholders and unallocated surplus of with-profits funds, unit linked policies and shareholders)'. Separately, within the income statement 'Profit from continuing operations (including actual investment returns) before tax attributable to shareholders' is shown after deduction of taxes attributable to policyholders and unallocated surplus of with-profits funds and unit linked policies. Tax charges on this measure of profit reflect the tax charges attributable to shareholders. In determining the tax charges attributable to shareholders, the Group has applied a methodology consistent with that previously applied under UK GAAP reflecting the broad principles underlying the tax legislation on life assurance companies. Pension costs Under UK GAAP, the Group applied the provisions of SSAP24 ('Pension Costs'). Consistent with the surplus financial position of the Prudential Staff Pension Scheme (PSPS) (which accounts for 90 per cent of the liabilities of the Group's defined benefit pension schemes) at 5 April 2002, when the scheme was last subject to a full triennial actuarial valuation, and the scheme rules over minimum levels of funding, no SSAP24 basis prepayment or provision has been reported in the Group's UK GAAP balance sheet. Additional disclosures were made in the notes to the Group's financial statements concerning the Group's UK defined benefit schemes, applying the methodology prescribed by FRS17 ('Retirement Benefits'). Under IAS19 ('Employee Benefits') the impact of the surplus or deficit of defined benefit pension schemes on the consolidated net assets of the Group is determined by the difference between the market value of assets held within the schemes and the net present value of projected future cash flows based on accrued liabilities. The net present value is determined by applying a discount rate based on the yield at the balance sheet date on high quality corporate bonds. The deficits on the Group's defined benefit pension schemes are apportioned between shareholders' equity and unallocated surplus of the PAC with-profits fund based on the weighted cumulative activity attaching to the contributions paid into the schemes in the past. For the PSPS scheme it is currently estimated that 80 per cent of the deficit is attributable to the PAC with-profits fund and 20 per cent to shareholder backed operations. The IAS income statement charge for pension costs comprises two items, namely (a) The aggregate of the actuarially determined service cost of the currently employed personnel, the unwind of discount on liabilities at the start of the period, less the expected investment return on the scheme assets at the start of the reporting period, and (b) Actuarial gains and losses. These gains and losses arise from changes in assumptions, the difference between actual and expected investment return on the scheme assets, and experience gains and losses on liabilities. Goodwill Under UK GAAP, with effect from 1 January 1998, goodwill arising from acquisitions was reflected as an asset on the balance sheet and amortised through the consolidated profit and loss account on a straight line basis over its estimated useful life, not exceeding 20 years. Prior to 1 January 1998, goodwill relating to acquisitions was charged directly to shareholders' funds. As permitted under the transitional arrangements of FRS10, ('Goodwill and Intangible Assets'), amounts previously charged to shareholders' funds were not reinstated as assets in the UK GAAP balance sheet. Under IFRS, the goodwill balance at 1 January 2004 reflects the carrying value of UK GAAP goodwill for previously consolidated entities at that date on the basis described above, as well as goodwill on certain newly consolidated entities. Under IFRS, goodwill is no longer amortised. However, impairment testing is required annually and on adoption. In addition, as prescribed by IFRS1 ('First-time Adoption of International Financial Reporting Standards'), goodwill previously charged to shareholders' funds on transition is not transferred to the income statement upon disposal of the relevant entity. For half year 2005 an impairment charge in respect of goodwill attaching to the Japan Life Insurance business was appropriate. Share based payments The Group offers share awards and option plans for certain key employees and a Save As You Earn (SAYE) plan for all UK and certain overseas employees. The arrangements for distribution to employees of shares held in trusts relating to share award plans and for entitlement to dividends depend upon the particular terms of each plan. Shares held in trusts relating to non-SAYE plans are conditionally gifted to employees. Previously, under UK GAAP, compensation for non-SAYE plans was recorded over the periods to which share awards or options were earned based on intrinsic value. No costs were required to be recorded for SAYE plans. Under IFRS, share based payments are accounted for on a fair value basis. The fair value is recognised in the income statement over the relevant vesting period and adjusted for lapses and forfeitures with the number of shares expected to lapse or be forfeited estimated at each balance sheet date prior to the vesting date. The only exception is where the share based payment depends upon vesting outcomes attaching to market based performance conditions such as in the case of the Restricted Share Plan. Under these circumstances additional modelling is required to take into account these market based performance conditions which effectively estimate the number of shares expected to vest. No subsequent adjustment is then made to the fair value charge for shares that do not vest on account of these performance conditions not being met. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) B Significant changes of basis of preparation and accounting policy (continued) 2004 and 2005 results (continued) Shareholders' dividends Previously, under UK GAAP, shareholders' dividends were accrued in the period to which they related regardless of when they were declared. Under IFRS, dividends declared after the balance sheet date in respect of the prior reporting period are treated as a non-adjusting event. The appropriation reflected in the movement on capital and reserves for a half year period therefore reflects the final dividend in respect of the prior year. Additional significant changes for the 2005 results Adoption of IAS32, IAS39 and IFRS4 The Group has chosen to apply the exemption within IFRS that allows comparative information presented in the first year of adoption of IFRS not to comply with IAS32 ('Financial Instruments: Disclosure and Presentation'), IAS39 ('Financial Instruments: Recognition and Measurement') and IFRS4 ('Insurance Contracts'). These standards have been formally adopted on 1 January 2005. The principal effects of adopting these standards arises in the Group' UK and Europe long-term business contracts, JNL's fixed income securities and derivative instruments, and Egg's banking assets, liabilities and derivatives positions. Long-term business On adoption of these standards, the measurement basis of assets and liabilities of long-term business contracts is dependent upon the classification of the contracts under IFRS4 as either 'insurance' contracts, if the level of insurance risk in the contracts is significant, or 'investment' contracts, if the risk is insignificant. Insurance contracts are permitted to be accounted for under previously applied GAAP. The Group has chosen to apply this approach. However, as an improvement to accounting policy, permitted by IFRS, the Group has applied the requirements of the UK standard FRS27 ('Life Assurance') to its UK with-profits funds as explained in note I. For those 'investment' contracts with discretionary participating features, IFRS4 also permits the continued application of previously applied GAAP. The Group has chosen to apply this approach. For those 'investment' contracts that do not contain discretionary participating features, IAS39 and, where the contract includes an investment management element, IAS18 ('Revenue') apply measurement principles to the assets and liabilities attaching to the contract that may diverge from those previously applied under UK GAAP. The changes primarily arise in respect of deferred acquisition costs, deferred income reserves and provisions for future expenses commonly called 'sterling reserves'. Under UK GAAP, acquisition expenses are deferred with amortisation on a basis commensurate with the anticipated emergence of margins under the contract. Under IFRS, acquisition costs for investment contracts are deferred to the extent that is appropriate to recognise an asset that represents the entity's contractual right to benefit from providing investment management services and is amortised as the entity recognises the related revenue. IAS18 further reduces the costs potentially capable of deferral to incremental costs only. Deferred acquisition costs are amortised to the income statement in line with service provision. Deferred income provisions for front end fees and similar arrangements are required to be established for investment management contracts under IAS18 with amortisation over the expected life of the contract in line with service provision. In contrast to UK GAAP, sterling reserves are not permitted to be recognised under IFRS. An additional feature is that investment contracts are closer in nature to a deposit style arrangement between the policyholder and the company. Under IFRS premiums and withdrawals for these contracts are recorded within the balance sheet directly as a movement on the policyholder liability. After making these and other consequential changes, the IFRS income statement reflects fee income on the contracts, expenses and taxation rather than the UK GAAP basis revenue account. The investment contract classification applies primarily to certain unit linked and similar contracts in the UK Insurance Operations and Guaranteed Investment Contracts of Jackson National Life (JNL). However, significant differences between the timing of recognising profitability under UK GAAP and IFRS bases are confined to the UK contracts only. JNL fixed income securities and derivative instruments Under IAS39, except for loans and receivables, and unless designated under the very restrictive held to maturity classification on an asset by asset basis, most financial assets, including derivatives, are carried in the balance sheet at fair value. To this extent IAS39 is consistent with the basis of valuation applied under UK GAAP for most financial assets of the Group's UK and Asian insurance operations. On application of IAS39, movements in the fair value of investments are recorded either in the income statement or directly to shareholders' reserves in the balance sheet, depending upon the designation and the impact of hedge accounting rules. Derivative instruments are carried at fair value with value movements being recorded in the income statement. Hedge accounting, whereby value movements on derivatives and hedged items are recorded together in the performance statements, is permissible only if certain criteria are met regarding the establishment of documentation and continued measurement of hedge effectiveness. The changes from UK GAAP to the basis applied from 1 January 2005 arising from these valuation requirements are concentrated on the accounting for the investments and derivatives of JNL. Previously the fixed income securities of JNL, unless impaired, were accounted for at amortised cost with derivatives similarly treated. On adoption of IAS39, the Group has decided to account for JNL's fixed income securities on an 'available-for-sale' (AFS) basis whereby the fixed income securities are accounted for at fair value with movements in fair value being recorded in the Statement of Recognised Income and Expense i.e. directly to shareholders' reserves rather than the income statement. Value movements for JNL's derivatives are however booked in the income statement as required by IAS39. The Group has decided not to seek to hedge account for the majority of JNL's derivatives under IAS39. To do so would require a wholesale re-configuration of JNL's derivative book into much smaller components than currently applied by JNL through its economic hedge programme, and accompanied by an extra layer of hedging instruments, beyond what is economically rational. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) B Significant changes of basis of preparation and accounting policy (continued) Additional significant changes for the 2005 results (continued) Egg The changes of policy for Egg arising from the adoption of IAS39 arise primarily in respect of determination of effective interest rates, impairment losses on loans and advances to customers, carrying values of wholesale financial instruments and equity savings products. For credit card receivables, under UK GAAP, the carrying amount of credit card receivables with low or zero rate interest on balance transfers are carried at cost with interest being accrued at 0% during the incentive period and then at the standard rate thereafter. Under IAS39, these receivables are measured on an amortised cost basis. For loans and advances to customers, specific and formulated provisions are raised against non-performing loans and a general provision against the balance. Under IAS39, an impairment loss is only recognised when there is objective evidence that a debt is impaired. Wholesale instruments, under UK GAAP, were previously accounted for on an accruals cost basis. Under IAS39, certain wholesale financial instruments are required to be measured at fair value, and depending on whether they have been classified as fair value through the profit and loss or available-for-sale, the changes in fair value are recognised in the income statement or in equity respectively. The adjustments for wholesale financial instruments also include the impact of designating some of Egg's derivatives as cash flow hedges. Certain equity savings products contain embedded derivatives. Previously these derivatives have been accounted for on an amortised cost basis. Under IAS39, they are required to be fair valued. Supplemental earnings information and discretionary non-IFRS change of policy for longer-term investment returns Previously, under UK GAAP, the Group used operating profit based on longer-term investment returns before amortisation of goodwill as a supplemental measure of its results. For the purposes of measuring operating profit, investment returns on shareholder financed business were based on the expected longer-term rates of return. For fixed income securities, the longer-term returns (including losses arising on the recognition of permanent diminutions in value) were averaged over five years for inclusion in operating profit. Under IFRS, the Group continues to use operating profit based on longer-term investment returns as a supplemental measure of its results, as disclosed in note E. For the purposes of measuring operating profit, investment returns on shareholder financed business continue to be based on the expected longer-term rate of return. However, for fixed income securities, the five year averaging approach described above has been replaced with a basis that more closely reflects longer-term experience. The amount included in operating results for longer-term capital returns comprises two components. These are a risk margin reserve based charge for expected defaults, which is determined by reference to the credit quality of the portfolio, and amortisation of interest related realised gains and losses to operating results to the date when sold bonds would have otherwise matured. This change has been applied following a comprehensive review of the Group's accounting policies and is unrelated to the requirements of IFRS. Items excluded from operating profit, but included in total pre-tax profit of continuing operations, include goodwill impairment charges, short-term fluctuations in investment returns (i.e. actual less longer-term returns) and actuarial gains and losses on defined benefit pension schemes. For the purposes of distinguishing actuarial gains and losses on defined benefit pension schemes, the component for short-term fluctuations in investment returns is determined by reference to plan assets plus any Prudential policies held by the scheme. Total profits are unaffected by the change of basis of determining longer-term investment returns. The supplemental earnings information in the statutory basis financial statements is presented for 2005 but not for 2004 comparative results. This is because the comparative 2004 results do not incorporate the effects of adoption of IAS32, IAS39 and IFRS4 and are thus inconsistent with the basis of preparation for the 2005 results. A comparison of supplemental earnings information based on the statutory IFRS basis results for 2005 and proforma IFRS results for 2004, which reflect the estimated effects of adoption of these three standards on the 2004 results of the Group's insurance operations is included in the supplementary IFRS results within this report. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) C Reconciliations of summary income statements Half Year 2004 Full Year 2004 IFRS adjustments IFRS adjustments ----------------------------------------- --------------------------------------------- UK Presentation Recognition, Statutory UK GAAP Presentation Recognition, Statutory GAAP of measurement IFRS (note C of measurement IFRS (note C UK GAAP and basis (i)) UK GAAP and basis (i)) in IFRS other in IFRS other format changes format changes (note C (i))(note C (ii)) (note C (i))(note C (ii)) Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m --------------------------------------------------------------------------------------------------------- Insurance contract 7,397 0 0 7,397 16,099 0 0 16,099 revenues Investment 2,380 987 (122) 3,245 13,917 2,074 (249) 15,742 income UK fund management 79 (79) 0 0 136 (136) 0 0 result US broker dealer (2) 2 0 0 (14) 14 0 0 and fund management result Asia fund 10 (10) 0 0 19 (19) 0 0 management result UK banking result 30 (30) 0 0 63 (63) 0 0 (continuing operations) Other 0 350 536 886 0 760 1,266 2,026 income --------------------------------------------------------------------------------------------------------- Total revenue 9,894 1,220 414 11,528 30,220 2,630 1,017 33,867 --------------------------------------------------------------------------------------------------------- Benefits and (8,410) (7) (165) (8,582) (26,598) (37) 51 (26,584) claims for insurance contracts, and movement in unallocated surplus of with-profits funds determined after charging taxes borne by policyholders and unallocated surplus of with-profits funds and unit linked policies Acquisition costs (901) (1,119) (188) (2,208) (2,069) (2,397) (1,060) (5,526) and other operating expenditure Interest on (94) (94) (196) (196) structural borrowings Amortisation of (48) 0 48 0 (94) 0 94 0 goodwill (continuing operations) --------------------------------------------------------------------------------------------------------- Total charges (9,359) (1,220) (305) (10,884) (28,761) (2,630) (915) (32,306) --------------------------------------------------------------------------------------------------------- IFRS basis income, 535 109 644 1,459 102 1,561 net of post-tax transfers to unallocated surplus of with-profits funds, before tax attributable to policyholders and unallocated surplus of with-profits funds, unit linked policies and shareholders Income tax (226) (23) (249) (701) (10) (711) attributable to policyholders and unallocated surplus of with-profits funds and unit linked policies --------------------------------------------------------------------------------------------------------- Profit from 309 86 395 758 92 850 continuing operations (including actual investment returns) before tax attributable to shareholders --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- Income tax (expense) benefit attributable to shareholders: Total tax (354) (33) (387) (947) (4) (951) attributable to policyholders and unallocated surplus of with-profits funds, unit linked policies and shareholders Less: Income 226 23 249 701 10 711 tax attributable to policyholders and unallocated surplus of with-profits funds and unit linked policies --------------------------------------------------------------------------------------------------------- Income tax (128) (10) (138) (246) 6 (240) attributable to shareholders --------------------------------------------------------------------------------------------------------- Profit from 181 76 257 512 98 610 continuing operations after tax Discontinued (18) 1 (17) (94) (94) operations (net of tax) --------------------------------------------------------------------------------------------------------- Profit for the 163 77 240 418 98 516 period --------------------------------------------------------------------------------------------------------- Attributable to: Equity holders 156 77 233 428 89 517 of the parent company Minority 7 0 7 (10) 9 (1) interest --------------------------------------------------------------------------------------------------------- Profit for the 163 77 240 418 98 516 period --------------------------------------------------------------------------------------------------------- Notes C (i) UK GAAP results The UK GAAP basis results shown above reflect those previously recorded in the technical accounts and non-technical account of the Group's profit and loss account under Companies Act requirements. These results are then reconfigured to be consistent with the format expected to be applied for reporting in the Group's 2005 full year financial statements under IFRS. C (ii) Recognition, measurement and other changes Changes to profit from continuing operations (including actual investment returns) before and after tax attributable to shareholders, for Half Year 2004 and Full Year 2004 reflect the expected effects of IFRS adoption. In summary the effects are for: Half Year 2004 Full Year 2004 Â£m Â£m Egg - primarily relates to charges for 1 (2) share based payments in respect of Egg shares Additional pension costs and share based (2) (4) payments costs in respect of Prudential plc shares not allocated by business unit Amortisation of goodwill not permitted 48 94 under IFRS Actuarial gains and losses of defined 48 (7) benefit schemes recognised under IFRS Value movements of US investment funds (9) 2 newly consolidated under IFRS Share of profits of venture investment 0 9 companies and property partnerships of the PAC with-profits fund, newly consolidated under IFRS, that is attributable to external investors. -------- -------- Total changes before tax 86 92 Related tax (10) 6 -------- -------- Total changes after tax 76 98 -------- -------- Changes to revenue, charges, and related tax of the Group's with-profits funds principally relate to measurement differences on investments, consolidation criteria for venture and subsidiaries, and pension cost accounting. The total change to IFRS basis income for these changes for Half Year 2004 and Full Year 2004 after related tax adjustments was Â£160m and Â£(22)m respectively. These amounts have been reflected by changes of an equal and opposite amount to transfers to unallocated surplus with no net effect on shareholder results. For Half Year 2004, Â£126m of that Â£160m change relates to pension costs due to actuarial gains on the Group's UK defined benefit pension schemes. A summarised explanation of the changes of accounting policies that give rise to these adjustments is contained in note B. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) Half Year Half Year D Segment disclosure 2005 Â£m 2004 Â£m -------------------------------------- ------- -------- Revenue --------- Long-term business, including revenue of PAC venture fund and other 17,679 10,661 investment subsidiaries Banking 682 591 Broker dealer and fund management 420 384 Unallocated corporate 67 35 Intragroup revenue eliminated on consolidation (147) (143) -------------------------------------- ------- -------- 18,701 11,528 Total revenue per income statement -------------------------------------- ------- -------- Charges (before income tax attributable to policyholders and unallocated surplus of long-term insurance funds) ------------------------------------------------------------------------- Long-term business, including expenditure of PAC venture fund and other (16,964) (10,082) investment subsidiaries and post-tax transfers to unallocated surplus of with-profits funds Banking (669) (558) Broker dealer and fund management (329) (291) Unallocated corporate (244) (96) Intragroup charges eliminated on consolidation 147 143 -------------------------------------- ------- -------- (18,059) (10,884) Total charges per income statement -------------------------------------- ------- -------- Segment results - Revenue less charges Long-term business 715 579 Banking 13 33 Broker dealer and fund management 91 93 Unallocated corporate (177) (61) -------------------------------------- ------- -------- IFRS basis income, net of post-tax transfers to unallocated surplus of 642 644 with-profits funds, before tax attributable to policyholders and unallocated surplus of with-profits funds, unit linked policies, and shareholders Income tax attributable to policyholders and unallocated surplus of (182) (249) with-profits funds and unit linked policies -------------------------------------- ------- -------- Profit from continuing operations (including actual investment returns) 460 395 before tax attributable to shareholders ------- -------- -------------------------------------- E Supplementary analysis of profit from continuing operations (including actual investment returns) before tax attributable to shareholders and related earnings per share Profit from continuing operations Half Year Half Year Full year before tax 2005 Â£m 2004 Â£m 2004 Â£m --------------------------------- ------- ------- ------- Operating profit from continuing 469 operations based on longer-term investment returns before exceptional items Goodwill impairment charge (95) Not Not Short-term fluctuations in investment 94 applicable applicable returns on shareholder backed business Shareholders' share of actuarial gains (8) (see note E (see note E and losses on defined benefit pension (i)) (i)) schemes --------------------------------- ------- ------- ------- Profit from continuing operations 460 (including actual investment returns) before tax attributable to shareholders --------------------------------- ------- ------- ------- Earnings per share from continuing operations From operating profit based on 14.0p longer-term investment returns after tax and related minority interest of Â£331m Adjustment for goodwill impairment (4.0)p Not Not charge Adjustment from post-tax longer-term 3.0p applicable applicable investment returns to post-tax actual investment returns (after related minority interest) Adjustment for post-tax shareholders' (0.3)p (see note E(i)) (see note E share of actuarial gains and losses on (i)) defined benefit pension schemes --------------------------------- ------- ------- ------- Based on profit from continuing 12.7p operations after minority interest of Â£299m --------------------------------- ------- ------- ------- Note E (i) The supplementary analysis of statutory IFRS basis results shown above has been presented only for half year 2005. Details have not been provided for 2004 as the results would not be comparable. This is due to IAS32, IAS39 and IFRS4 being only adopted from 1 January 2005. Additional analysis of the 2005 result, and proforma basis comparative results for 2004 as if these standards had been applied by the Group's insurance operations from 1 January 2004, is provided as supplementary information to these financial statements. The analysis on those pages does not form part of the financial statements. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) F Reconciliations of equity and balance sheets At 1 January 2004 Shareholders' Minority Total equity interest equity Â£m Â£m Â£m ----------------------------------------------------------------------------------- Changes on adoption of statutory IFRS basis ---------------------------------------------- Treasury shares adjustment for Prudential plc (40) (40) shares held by unit trusts newly consolidated under IFRS (note F(i)) Minority share of equity of consolidated 32 32 venture investments companies and property partnerships of the PAC with-profits fund (note F(i)) Shareholders' share of deficits (net of tax) (110) (110) of UK defined benefit pension schemes (note F (ii)) Timing difference on recognition of dividend 214 214 declared after balance sheet date (note F (iii)) Other items (8) (2) (10) ----------------------------------------------------------------------------------- Total 56 30 86 Equity at 1 January 2004 ---------------------------- As previously published under UK GAAP 3,240 107 3,347 ----------------------------------------------------------------------------------- As restated under statutory IFRS 3,296 137 3,433 ----------------------------------------------------------------------------------- IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) F Reconciliations of equity and balance sheets (continued) At 30 June 2004 Effect of changes on implementation of IFRS Recognition and measurement changes ------------------------------------------------------------------- UK Newly Defined Other Grossing- Total Statutory GAAP consoli- benefit recognition up IFRS IFRS dated pension and and changes basis entities schemes measurement other (note F accounting changes format (i)) (note F (note F changes (ii)) (iii)) Â£m Â£m Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- Assets Goodwill: Attributable to 565 565 565 PAC with-profits fund Attributable to 1,456 48 48 1,504 shareholders Investments: per IFRS 2,124 (21) 153,046 155,149 155,149 balance sheet Investments: per UK 120,061 (120,061) (120,061) 0 GAAP analysis (non-linked, linked and banking business assets) Other items 42,717 1,366 56 122 (32,163) (30,619) 12,098 ---------------------------------------------------------------------------------------------- Total assets 164,234 4,055 56 149 822 5,082 169,316 ---------------------------------------------------------------------------------------------- Equity and liabilities Equity Attributable to 3,320 (51) (78) 161 32 3,352 shareholders of the parent company Minority interest 103 70 (2) 68 171 ---------------------------------------------------------------------------------------------- Total equity 3,423 19 (78) 159 100 3,523 ---------------------------------------------------------------------------------------------- Liabilities Banking customer 6,699 6,699 6,699 accounts: per IFRS balance sheet Banking business 12,245 (12,245) (12,245) 0 liabilities: per UK GAAP balance sheet Insurance liabilities: Contract 123,091 (115) 5 (110) 122,981 liabilities (non-linked and linked business) Unallocated 12,110 28 (312) (8) (292) 11,818 surplus of with-profits funds Borrowings: per IFRS balance sheet Core structural 2,596 2,596 2,596 borrowings of shareholder financed operations (excluding Egg) Other borrowings 1,086 9 6,156 7,251 7,251 attributable to shareholder financed operations Borrowings 1,642 98 109 1,849 1,849 attributable to with-profits funds Borrowings: per UK 4,589 (4,589) (4,589) 0 GAAP balance sheet (subordinated liabilities, debenture loans and other borrowings) Dividend payable 109 (109) (109) 0 Other non-insurance 8,667 1,280 561 (5) 2,096 3,932 12,599 liabilities ---------------------------------------------------------------------------------------------- Total liabilities 160,811 4,036 134 (10) 822 4,982 165,793 ---------------------------------------------------------------------------------------------- Total equity and 164,234 4,055 56 149 822 5,082 169,316 liabilities ---------------------------------------------------------------------------------------------- At 31 December 2004 Effect of changes on implementation of IFRS Recognition and measurement changes ------------------------------------------------------------------- UK Newly Defined Other Grossing Total Statutory GAAP consoli- benefit recognition -up IFRS IFRS dated pension and and changes basis entities schemes measurement other (note F accounting changes format (i)) (note F (note F changes (ii)) (iii)) Â£m Â£m Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- Assets Goodwill: Attributable to 754 754 754 PAC with-profits fund Attributable to 1,367 94 94 1,461 shareholders Investments: per IFRS 1,978 35 162,459 164,472 164,472 balance sheet Investments: per UK 129,468 (129,468) (129,468) 0 GAAP analysis (non-linked, linked and banking business assets) Other items 43,741 1,477 102 50 (32,155) (30,526) 13,215 ---------------------------------------------------------------------------------------------- Total assets 174,576 4,209 102 179 836 5,326 179,902 ---------------------------------------------------------------------------------------------- Equity and liabilities Equity Attributable to 4,281 (30) (117) 356 209 4,490 shareholders of the parent company Minority interest 71 76 (2) 74 145 ---------------------------------------------------------------------------------------------- Total equity 4,352 46 (117) 354 283 4,635 ---------------------------------------------------------------------------------------------- Liabilities Banking customer 6,607 6,607 6,607 accounts: per IFRS balance sheet Banking business 11,216 (11,216) (11,216) 0 liabilities: per UK GAAP balance sheet Insurance liabilities: Contract 129,101 (125) 4 1 (120) 128,981 liabilities (non-linked and linked business) Unallocated 16,686 6 (472) (34) (500) 16,186 surplus of with-profits funds Borrowings: per IFRS balance sheet Core structural 2,797 2,797 2,797 borrowings of shareholder financed operations (excluding Egg) Other borrowings 972 9 5,891 6,872 6,872 attributable to shareholder financed operations Borrowings 1,828 105 144 2,077 2,077 attributable to with-profits funds Borrowings: per UK 4,673 (4,673) (4,673) 0 GAAP balance sheet (subordinated liabilities, debenture loans and other borrowings) Dividend payable 253 (253) (253) 0 Other non-insurance 8,295 1,357 816 (6) 1,285 3,452 11,747 liabilities ---------------------------------------------------------------------------------------------- Total liabilities 170,224 4,163 219 (175) 836 5,043 175,267 ---------------------------------------------------------------------------------------------- Total equity and 174,576 4,209 102 179 836 5,326 179,902 liabilities ---------------------------------------------------------------------------------------------- IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) F Reconciliations of equity and balance sheets (continued) Notes F(i) Newly consolidated entities Under IAS27 and SIC12, the Group is required to consolidate the assets and liabilities of certain entities which have previously not been consolidated. The principal change to shareholders' equity arises from an adjustment in respect of Prudential plc shares held by unit trusts that are newly consolidated. These shares are accounted for as treasury stock and the cost of purchase of Â£44m, Â£44m and Â£29m is deducted from shareholders' equity at 1 January 2004, 30 June 2004 and 31 December 2004 respectively. The change to the minority share of equity reflects external parties' interest in consolidated venture investment companies and property partnerships of the PAC with-profits fund. Measurement changes to the carrying value of these companies that are attributable to the PAC with-profits fund share are reflected in unallocated surplus. F(ii) Defined benefit pension schemes accounting Provisions for deficits on the Group's defined benefit pension schemes are absorbed by the unallocated surplus of the PAC with-profits fund and shareholders' funds on a basis that reflects the weighted cumulative activity attaching to the contributions paid in the past, and after deduction of deferred tax. The M&G scheme held Prudential Group's Insurance policies as scheme assets of Â£115m at 30 June 2004 and Â£125m at 31 December 2004. The asset and liability are eliminated on consolidation. F(iii) Other recognition and measurement changes Under IFRS, dividends declared after the balance sheet date are not recognised as a liability. In addition, goodwill under IFRS represents the balance sheet carrying value at adoption date as discussed in note B. Adjustments in the table are to write-back amortisation previously charged under UK GAAP from 1 January 2004. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) G Effect of adoption of IAS32, IAS39, and IFRS4 at 1 January 2005 Effect of adoption of IAS32, IAS39 and IFRS4 Recognition and measurement changes ----------------------------------------------------------------------- Statutory UK Jackson Banking Grossing- Total Statutory IFRS and National and up effect IFRS basis Europe Life non- and basis at insurance (note insurance other at 1 Jan 31 operations G(ii)) operations format 2005 Dec (note G (note changes 2004 (i)) G(iii)) (note F) Â£m Â£m Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- Assets Goodwill: Attributable to PAC 754 754 with-profits fund Attributable to 1,461 1,461 shareholders Deferred acquisition costs: PAC with-profits 798 (798) (798) 0 fund (note I) Other operations 2,122 43 (456) (413) 1,709 Investments 164,472 (145) 1,262 145 55 1,317 165,789 Other assets (excluding 10,295 26 66 (118) (26) 10,269 deferred acquisition costs and goodwill) ---------------------------------------------------------------------------------------------- Total assets 179,902 (874) 872 27 55 80 179,982 ---------------------------------------------------------------------------------------------- Equity and liabilities Equity Attributable to 4,490 (12) 273 (25) 236 4,726 shareholders of the parent company Minority interest 145 (3) (3) 142 ---------------------------------------------------------------------------------------------- Total equity 4,635 (12) 273 (28) 233 4,868 ---------------------------------------------------------------------------------------------- Liabilities Banking customer 6,607 84 84 6,691 accounts Insurance liabilities: Contract 128,981 7,020 (51) 6,969 135,950 liabilities (non-linked and linked business) Unallocated surplus 16,186 (7,840) (7,840) 8,346 of with-profits funds Borrowings: Core structural 2,797 2,797 borrowings of shareholder financed operations (excluding Egg) Other borrowings 6,872 207 62 269 7,141 attributable to shareholder financed operations Borrowings 2,077 2,077 attributable to with-profits funds Other non-insurance liabilities: Deferred tax 2,244 (91) 218 (6) 121 2,365 liabilities Other 9,503 49 225 (85) 55 244 9,747 ---------------------------------------------------------------------------------------------- Total liabilities 175,267 (862) 599 55 55 (153) 175,114 ---------------------------------------------------------------------------------------------- Total equity and 179,902 (874) 872 27 55 80 179,982 liabilities ---------------------------------------------------------------------------------------------- Notes A summary explanation of the requirements of IAS32, IAS39 and IFRS4 and basis of application by the Group is contained in note B. The changes shown above reflect the impact of re-measurement for : G (i) UK and Europe Insurance Operations (a) Certain unit linked and similar contracts that do not contain significant insurance risk and are thus categorised as investment contracts under IFRS4. The net of tax shareholder impact is to reduce shareholders' equity at 1 January 2005 by Â£8m (b) Changes to insurance assets and liabilities of the PAC with-profits fund following the improvement of accounting policy applied on adoption of IFRS4. The changes correspond to those applicable if the Group had adopted FRS27 under UK GAAP. As a result of the policy improvement, liabilities, deferred acquisition costs, deferred tax and unallocated surplus of UK regulated with-profits fund are remeasured as described in Note I. At 1 January 2005, the unallocated surplus is subject to a transition adjustement of Â£(7.8)bn. Shareholders' equity is not affected by this change. The unallocated surplus of Â£8.3bn at 1 January 2005 post IAS39 and IFRS4 adoption, comprises Â£8.0bn for the PAC with-profits fund and Â£0.3bn for Asian subsidiaries. The Â£8.0bn for the PAC with-profits fund represents: Â£bn Regulatory basis realistic surplus of with-profits sub fund and SAIF 6.0 Add back: Regulatory basis provision for future shareholder 2.9 transfers -------- 8.9 Value of non-participating business not explicitly allocated to asset (0.9) shares -------- Accounts Basis 8.0 ======== Other reconciling items for the differences between regulatory and accounts basis carrying values of assets and liabilities net to less than Â£0.05 billion G (ii) Jackson National Life Under IAS39, JNL's fixed income securities and derivative financial instruments are re-measured to fair value from the lower of amortised cost and, if relevant, impairment value. Fair value movements on fixed income securities, net of 'shadow' changes to deferred acquisition costs and related deferred tax are recorded directly to equity. Fair value movements on derivatives are recorded in the income statement. G (iii) Banking and non-insurance operations Under IAS39, for Egg, changes to opening equity at 1 January 2005 arise from altered policies for effective interest rate on credit card receivables, impairment losses on loans and advances, fair value adjustments on wholesale financial instruments and embedded derivatives in equity savings products. The net effect on shareholders' equity of these changes, after tax, is a deduction of Â£15m. A further Â£10m reduction in equity arises on certain centrally held financial instruments and derivatives. IFRS BASIS RESULTS STATUTORY BASIS RESULTS NOTES ON THE UNAUDITED STATUTORY BASIS RESULTS (CONTINUED) H Jackson National Life - Fixed income securities Statement of Recognised Income and Expense IAS32 and IAS39 have been adopted from 1 January 2005. Accordingly, for 2004 under IFRS, financial instruments continue to be accounted for under previous GAAP. For Jackson National Life fixed income securities have been accounted for at amortised cost, unless impaired. From 1 January 2005, these assets have been classified as available-for-sale under IAS39 with valuation at fair value. Unrealised gains and losses and reclassification adjustments for gains and losses included in net income are recorded from 1 January 2005 within the Statement of Recognised Income and Expense. Balance sheet Due to the change in the valuation basis referred to above, the carrying values of the fixed income securities of Jackson National Life in the Group balance sheet that have been included are not comparable. The fair value of the fixed income securities at 31 December 2004 was Â£22.5bn. After deduction of related changes to deferred acquisition costs and deferred tax, there was a consequential impact on shareholders' equity at 1 January 2005, on adoption of IAS32 and IAS39, of Â£397m for the changed basis of valuation of Jackson's securities, as shown in note G. I Unallocated surplus of with-profits funds The unallocated surplus of with-profits funds reflects the excess of assets over technical provisions and other liabilities and represents amounts that have yet to be allocated to policyholders and shareholders. For the Group's 2004 financial statements, and as applied for IFRS purposes for 2004 in these financial statements, the technical provisions in respect of insurance and investment contracts of UK regulated with-profits funds have been determined in accordance with the modified statutory basis of accounting that applied under UK GAAP. With the exception of minor accounting adjustments, the technical provisions reflect the UK regulatory basis of reporting which effectively constitutes the Peak 1 basis under the new FSA regime. On this basis the unallocated surplus of the PAC with-profits fund for 30 June 2004 and 31 December 2004 was Â£11,858m and Â£16,301m respectively. After inclusion of the unallocated surplus of with-profits funds of Asian subsidiaries the unallocated surplus in the consolidated Group balance sheet at 30 June 2004 and 31 December 2004 was Â£12,110m and Â£16,686m. Following changes arising from the application of IFRS requirements applicable for 2004, the IFRS basis unallocated surplus for the Group is altered as described in Note F. The FSA's Peak 2 calculation under the new realistic regime which came fully into effect for the first time for 2004 regulatory reporting requires the value of liabilities for UK regulated with-profits funds to be calculated as: - a with-profits benefits reserve (WPBR); plus - future policy related liabilities (FPRL); plus - the realistic current liabilities of the fund. The WPBR is primarily based on the retrospective calculation of accumulated asset shares but is adjusted to reflect future expected policyholder benefits and other outgoings. By contrast, the Peak 1 basis addresses, at least explicitly, only declared bonuses. The FPRL must include a market consistent valuation of costs of guarantees, options and smoothing, less any related charge, and this amount must be determined using either a stochastic approach, hedging costs or a series of deterministic projections with attributed probabilities. Under the Peak 1 basis there is an allowance on a deterministic basis for the intrinsic value of these costs. The cost of guarantees, options and smoothing is very sensitive to the bonus, Market Value Reduction and investment policy the Company employs and therefore the stochastic modelling incorporates a range of management actions that would help to protect the fund in adverse investment scenarios. The management actions assumed are consistent with the management policy for with-profits funds and the disclosures in the publicly available Principles and Practices of Financial Management. On adoption of IFRS 4 at 1 January 2005, the Group has chosen to improve its accounting policy in respect of the insurance assets and liabilities of UK regulated with-profits funds. The improvement is consistent with the requirements of FRS27 that apply for life assurers reporting under UK GAAP in 2005. The Peak 2 approach underpins the requirements of FRS27. The main changes that are required for UK regulated with-profits funds are: - De-recognition of deferred acquisition costs and related deferred tax - Inclusion of the FSA Peak 2 basis of the value of in-force non-participating business written by the PAC with profits sub-fund, and the Scottish Amicable Insurance Fund; and - Replacement of modified statutory basis liabilities for with-profits business with adjusted realistic basis liabilities. Adjusted realistic liabilities represent the Peak 2 realistic liabilities for with-profits business included in Form 19 of the FSA regulatory returns, but after excluding the element for shareholders' share of future bonuses. This latter item is recognised as a liability for the purposes of regulatory returns but for accounting purposes shareholder transfers are recognised only on declaration. For accounting purposes, to the extent that the value of non-participating business has been taken into account in determining projected policyholder benefits, deduction is made from the gross regulatory value of realistic liabilities. The balance is deducted from the accounting balance of unallocated surplus. In determining accounting basis liabilities and unallocated surplus an adjustment is also required where the regulatory and accounting carrying values of assets and liabilities differ for altered measurement or recognition criteria. For the Group's UK with-profits funds the main additional item for which adjustment is necessary is the attributable share of deficit of the Group's UK defined benefit pension schemes, net of related tax. The impact of the changes at 1 January 2005, on adoption of IFRS4, are shown in note G. At 30 June 2005, the unallocated surplus of Â£8.9 bn comprises Â£8.8 bn for the PAC with-profits funds and Â£0.1 bn for Asian subsidiaries. The Â£8.8 bn for the PAC with-profits fund represents: Â£bn Estimated regulatory basis realistic surplus of the PAC with-profits 7.1 sub-fund and SAIF Add back: Provision for future shareholder transfers 3.0 --------- 10.1 Estimated value of non-participating business not explicitly (0.8) allocated to asset shares Provision for share of deficit of UK defined benefit pension (0.5) schemes --------- 8.8 ========= The Â£0.1bn of unallocated surplus for Asia subsidiaries almost wholly relates to the Malaysian life business. Following local regulatory changes which affect the presentation of the balance sheet, unallocated surplus of the Singapore with-profits business is now amalgamated with policyholder liabilities. J Dividend The interim dividend of 5.3p per share will be paid on 28 October 2005 to shareholders on the register at the close of business on 19 August 2005. A scrip dividend alternative will be offered to Shareholders. K Shareholders' equity 30 June 30 June 31 December 2005 Â£m 2004 Â£m 2004 Â£m ------------------------------------------------------------------------------ Share capital 119 101 119 Share premium 1,561 553 1,558 Other reserves 3,309 2,698 2,813 ------------------------------------------------------------------------------ Total 4,989 3,352 4,490 ------------------------------------------------------------------------------ L Other borrowings 30 June 30 June 31 December 2005 Â£m 2004 Â£m 2004 Â£m ------------------------------------------------------------------------------ Operational borrowings attributable to shareholder financed operations: Borrowings in respect of short-term 1,131 1,203 1,079 fixed income securities programmes Non-recourse borrowings of investment 1,195 1,602 1,155 subsidiaries managed by PPM America Borrowings in respect of banking 3,888 3,967 4,159 operations Other borrowings 30 28 28 ------------------------------------------------------------------------------ Total 6,244 6,800 6,421 ------------------------------------------------------------------------------ Borrowings attributable to with-profits funds Non-recourse borrowings of venture fund 695 950 1,107 investment subsidiaries of the with-profits sub-fund of the PAC long-term fund Structural borrowings (subordinated debt of 100 100 100 the Scottish Amicable Insurance Fund) Other borrowings (predominantly external 870 799 870 funding of consolidated investment vehicles) ------------------------------------------------------------------------------ Total 1,665 1,849 2,077 ------------------------------------------------------------------------------ M Tax charge The total tax charge of Â£338m for the 2005 half year (2004 half year Â£387m) comprises Â£217m (Â£308m) UK tax and Â£121m (Â£79m) overseas tax. This tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit linked policies and shareholders. The tax charge attributable to shareholders of Â£156m for the 2005 half year (2004 half year Â£138m) comprises Â£52m (Â£63m) UK tax and Â£104m (Â£75m) overseas tax. N Acquisitions In May 2005, Jackson National Life completed the purchase of Life Insurance Company of Georgia from ING Groep NV for Â£142m, subject to post-completion adjustments. There was no goodwill arising on the transaction. SUPPLEMENTARY IFRS BASIS RESULTS Additional IFRS basis information to enable consistent comparison of results for Prudential's insurance operations This information does not form part of the interim statutory IFRS basis financial statements. The information shown for Half Year 2005 is based on the statutory IFRS basis results as shown in the Group's interim financial statements, and the basis of preparation and significant changes of accounting policies from those previously applied under UK GAAP, described therein. In particular, the Half Year 2005 results include the effects of adoption of the standards IAS32, IAS39 and IFRS4 for the Group's insurance and other operations from 1 January 2005. The 2004 comparative results in those statements are therefore prepared on an inconsistent basis. The 'Proforma IFRS basis' comparative results shown below for 2004, reflect the estimated effect on the Group's 2004 results if IAS32, IAS39, and IFRS4 had been applied from 1 January 2004 to the Group's insurance operations. The main purpose of providing this proforma information is to present the operating results for the UK and Europe insurance business and short-term fluctuations in investment returns for Jackson National Life on a consistent basis. Under IAS39 and IFRS4, the assets and liabilities of certain unit linked and similar contracts of the UK and Europe insurance business are subject to re-measurement. For Jackson National Life (JNL) derivatives held for economic hedging purposes are fair valued under IAS39 with value movements recorded in the income statement giving rise to significant levels of volatility. In addition fixed income securities of JNL are fair valued with value movements taken directly to shareholder reserves through the Statement of Recognised Income and Expense. Based on Proforma IFRS Proforma IFRS statutory IFRS basis results basis results basis results Half Year Half Year Full Year Summary results 2005 Â£m 2004 Â£m 2004 Â£m ------------------------------------------------------------------------------ Operating profit from 469 375 699 continuing operations based on longer-term investment returns before exceptional items (note 1) Goodwill impairment charge (95) - - Short-term fluctuations in 94 65 293 investment returns (note 2) Shareholders' share of (8) 48 (7) actuarial gains and losses on defined benefit pension schemes ------------------------------------------------------------------------------ Profit from continuing 460 488 985 operations before tax attributable to shareholders (including actual investment returns) Tax attributable to (156) (170) (290) shareholders ------------------------------------------------------------------------------ Net income from continuing 304 318 695 operations Discontinued operations (net of 1 (17) (94) tax) ------------------------------------------------------------------------------ Profit for the period 305 301 601 ------------------------------------------------------------------------------ Attributable to: Equity holders of the parent 300 294 602 company Minority interest 5 7 (1) ------------------------------------------------------------------------------ Profit for the period 305 301 601 ------------------------------------------------------------------------------ Earnings per share Continuing operations ----------------------- From operating profit, based on longer-term investment returns after tax and related minority interest of Â£331m (Â£254m, Â£481m) 14.0p 12.2p 22.7p Adjustment for goodwill (4.0)p - - impairment charge Adjustment from post-tax longer-term investment returns to post-tax actual investment returns (after related minority 3.0p 1.0p 9.0p interest) Adjustment for post-tax (0.3)p 1.6p (0.2)p shareholders' share of actuarial gains and losses on defined benefit pension schemes ------------------------------------------------------------------------------ Based on profit from continuing 12.7p 14.8p 31.5p operations after minority interest of Â£299m (Â£307m, Â£669m) ------------------------------------------------------------------------------ Discontinued operations ------------------------- Based on post-tax profit (loss) 0.0p (0.6)p (3.1)p from discontinued operations (after minority interest) ------------------------------------------------------------------------------ Based on profit for the period 12.7p 14.2p 28.4p after minority interest ------------------------------------------------------------------------------ SUPPLEMENTARY IFRS BASIS RESULTS Additional IFRS basis information to enable consistent comparison of results for Prudential's insurance operations This information does not form part of the interim statutory IFRS basis financial statements Based on Proforma IFRS Proforma IFRS statutory IFRS basis results basis results basis results Half Year Half Year Full Year Statement of Recognised Income and Expense 2005 Â£m 2004 Â£m 2004 Â£m ---------------------------------------------------------------------------------------------------- Net income for the period after minority interest 300 294 602 Items taken directly to equity: Exchange movements 183 (37) (191) Movement on cash flow hedges (7) - - Unrealised valuation movements on securities classified as available for sale: Gross change (63) (562) (106) Related change to amortisation of deferred 14 265 74 acquisition costs Related tax 48 113 23 ---------------------------------------------------------------------------------------------------- Total recognised income for the period 475 73 402 ---------------------------------------------------------------------------------------------------- Cumulative effect of change in accounting principles on adoption of IAS32, IAS39 and IFRS4, net of applicable taxes, at 1 January 2005 Statutory IFRS basis 236 - - less: Proforma adjustment reflected in (261) - - adjusted shareholders' equity at 1 January 2005 (as reflected in statement of movement on shareholders' equity - see below) for impact of adoption of IAS32, IAS39 and IFRS4 for insurance operations ---------------------------------------------------------------------------------------------------- Proforma IFRS basis (i.e. transitional (25) - - adjustment in respect of banking and other non-insurance operations) ---------------------------------------------------------------------------------------------------- 450 73 402 Total recognised income and expenses ---------------------------------------------------------------------------------------------------- Reconciliation of movement on consolidated shareholders' equity (excluding minority interest) --------------------------------------------------- Total recognised income for the period (as above) 450 73 402 Proceeds from rights issue, net of expenses - - 1,021 Other new share capital subscribed 40 61 119 Dividends (253) (214) (323) Reserve movements in respect of share based 6 3 10 payments Consideration paid for own shares: Consideration paid for own shares purchased in 0 0 (4) respect of share based payment plans Prudential plc shares purchased by unit trusts (5) 0 14 newly consolidated under IFRS ---------------------------------------------------------------------------------------------------- Net increase in shareholders' equity 238 (77) 1,239 ---------------------------------------------------------------------------------------------------- Shareholders' equity at beginning of period --------------------------------------------- UK GAAP - as previously published 4,281 3,240 3,240 Changes arising from adoption of statutory IFRS 209 56 56 ---------------------------------------------------------------------------------------------------- Statutory IFRS basis 4,490 3,296 3,296 Proforma basis adjustments for estimated impact if 261 216 216 IAS32, IAS39, and IFRS4 had been adopted from 1 January 2004 for insurance operations ---------------------------------------------------------------------------------------------------- Proforma IFRS basis 4,751 3,512 3,512 ---------------------------------------------------------------------------------------------------- Shareholders' equity at end of period 4,989 3,435 4,751 ---------------------------------------------------------------------------------------------------- SUPPLEMENTARY IFRS BASIS RESULTS Additional IFRS basis information to enable consistent comparison of results for Prudential's insurance operations This information does not form part of the interim statutory IFRS basis financial statements NOTES ON THE SUPPLEMENTARY IFRS BASIS RESULTS 1 Operating profit from continuing operations based on longer-term investment returns before exceptional items Based on Proforma IFRS Proforma IFRS statutory IFRS basis results basis results basis results Half Year Half Year Full Year Results analysis by business 2005 Â£m 2004 Â£m 2004 Â£m area --------------------------------------------------------------------------------- UK and Europe Operations UK and Europe Insurance 187 153 296 Operations M&G 83 79 136 Egg 13 33 61 --------------------------------------------------------------------------------- Total 283 265 493 --------------------------------------------------------------------------------- US Operations Jackson National Life 157 157 296 Broker dealer and fund 18 9 15 management Curian (6) (11) (29) --------------------------------------------------------------------------------- Total 169 155 282 --------------------------------------------------------------------------------- Asian Operations Long-term business 116 58 117 Fund management 2 10 19 Development expenses (8) (10) (15) --------------------------------------------------------------------------------- Total 110 58 121 --------------------------------------------------------------------------------- Other income and expenditure Investment return and other 45 16 44 income Interest payable on core (84) (74) (154) structural borrowings Corporate expenditure: Group Head Office (36) (23) (51) Asia Regional Head Office (14) (18) (29) Charge for share based payments (4) (4) (7) for Prudential schemes --------------------------------------------------------------------------------- Total (93) (103) (197) --------------------------------------------------------------------------------- Operating profit from 469 375 699 continuing operations based on longer-term investment returns before exceptional items --------------------------------------------------------------------------------- 2 Short-term fluctuations in investment returns Based on Proforma IFRS Proforma IFRS statutory IFRS basis results basis results basis results Half Year Half Year Full Year 2005 Â£m 2004 Â£m 2004 Â£m --------------------------------------------------------------------------------- US Operations: Movement in market value 36 92 144 of derivatives used for economic hedging purposes Actual less longer-term 24 13 61 investment returns for other items Asian Operations 17 (42) 37 Other Operations 17 2 51 --------------------------------------------------------------------------------- 94 65 293 --------------------------------------------------------------------------------- INDEPENDENT REVIEW REPORT BY KPMG AUDIT PLC TO PRUDENTIAL PLC, extracted from the Interim Report 2005 'Introduction We have been engaged by the Company to review the financial information set out on page 16 and pages 21 to 34 prepared on an IFRS basis and the financial information set out on page 15 and pages 17 to 20 prepared on an achieved profits basis and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Listing Rules of the Financial Services Authority. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual financial statements except where any changes, and the reasons for them, are disclosed. As disclosed in note A to the financial information, the next annual financial statements of the Group will be prepared in accordance with IFRS adopted for use in the European Union. The accounting policies that have been adopted in preparing the financial information are consistent with those that the directors currently intend to use in the next annual financial statements. There is, however, a possibility that the directors may determine that some changes to these policies are necessary when preparing the full annual financial statements for the first time in accordance with those IFRSs adopted for use by the European Union. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 Review of interim financial information issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of Group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2005. KPMG Audit Plc Chartered Accountants London 26 July 2005' This information is provided by RNS The company news service from the London Stock Exchange

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