IFRS Restatement
St. James's Place Capital PLC
26 July 2005
PRESS RELEASE
26 July 2005
RESTATEMENT OF 2004 FULL YEAR RESULTS UNDER
INTERNATIONAL FINANCIAL REPORTING STANDARDS
St. James's Place Capital plc, the wealth management group, today publishes the
restatement of its 2004 full year results under International Financial
Reporting Standards (IFRS).
Andrew Croft, Group Finance Director, commented 'As previously indicated, the
transition from UK GAAP to IFRS has a limited impact on the financial position
of the Group. Net assets at 31 December 2004 have increased by £7.2 million and
the 2004 retained profit after tax is £2.9 million higher. The underlying
economics of the Group remain unaffected by the transition and the adoption of
IFRS has no impact on dividend policy or solvency.'
The text of the transition restatement is attached.
Enquiries:
Andrew Croft, Group Finance Director Tel: 020 7514 1985
ST. JAMES'S PLACE CAPITAL PLC
RESTATEMENT TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
CONTENTS
Consolidated Income Statement for the Year Ended 31 December 2004 (under IFRS
and UK GAAP (MSSB))
Consolidated Balance Sheet at 31 December 2004 (under IFRS and UK GAAP (MSSB))
Consolidated Statement in Changes in Equity for the Year Ended 31 December 2004
(under IFRS and UK GAAP (MSSB))
Reconciliation of Income Statement for the Year Ended 31 December 2004
Reconciliation of Balance Sheet at 31 December 2004
Consolidated Balance Sheet at 1 January 2004 (under IFRS and UK GAAP (MSSB))
Reconciliation of Balance Sheet at 1 January 2004
Notes to IFRS Financial Information - Basis of Preparation
Notes to the IFRS Financial Information - Adjustments from UK GAAP (MSSB) to
IFRS
Notes to the IFRS Financial Information - Accounting Policies
Special Purpose Audit Report
CONSOLIDATED INCOME STATEMENT
YEAR ENDED 31 DECEMBER 2004
IFRS UK GAAP
(MSSB)*
-------- ---------
£' Million £' Million
Insurance premium revenue 255.1 1,134.8
Less premiums ceded to reinsurers (27.2) (27.2)
-------- ---------
Net insurance premium revenue 227.9 1,107.6
Fee & commission income 62.7 14.5
Profit on sale of investment in Life Assurance
Holding Corporation Limited 28.0 28.0
Other investment income 821.9 817.2
------ ------
Total investment income 849.9 845.2
-------- ---------
Total revenue (net of reinsurance payable) 1,140.5 1,967.3
Other operating income 1.5 1.5
-------- ---------
Net income 1,142.0 1,968.8
Policyholder claims & benefits incurred (105.4) (498.4)
Less reinsurance recoveries 21.7 21.7
-------- ---------
Net policyholder claims & benefits incurred (83.7) (476.7)
Change in insurance contract liabilities 54.6 (1,258.7)
Change in investment contract liabilities (840.7) -
Fees, commission and other acquisition costs (179.2) (159.8)
Administration expenses (49.8) (38.0)
Other operating expenses (3.0) (2.2)
Operating profit 40.2 33.4
Financing costs (1.2) (1.2)
-------- ---------
Profit before tax 39.0 32.2
Tax on policyholders' return (14.5) 8.0
Tax on shareholders' return 15.2 (3.4)
-------- ---------
Total tax expense 0.7 4.6
Profit for the period attributable to
shareholders 39.7 36.8
======== =========
Dividends 11.8 12.3
Earnings per share Pence Pence
Basic earnings per share 9.1 8.5
Diluted earnings per share 8.8 8.2
* Reanalysed under IFRS format
CONSOLIDATED BALANCE SHEET
31 DECEMBER 2004
IFRS UK GAAP
(MSSB)*
£' Million £' Million
Assets
Intangible assets
Deferred acquisition costs 294.4 44.5
Acquired value of in-force business 70.5 49.5
-------- --------
364.9 94.0
Property and equipment 6.9 7.1
Deferred tax assets 54.9 -
Investment property 129.8 -
Investments
Equities 5,637.9 -
Fixed income securities 656.3 57.6
Investment in Collective Investment Schemes 381.4 -
Currency forwards 0.2 -
Assets held to cover unit linked liabilities - 7,456.2
Reinsurers' share of insurance provisions 70.3 70.3
Insurance contract receivables 8.5 8.5
Income tax assets 7.8 7.8
Other receivables 89.9 52.3
Cash and cash equivalents 897.2 159.8
-------- --------
Total assets 8,306.0 7,913.6
-------- --------
Liabilities
Insurance contract liability provisions 307.3 124.2
Unit linked liabilities - 7,456.2
Other provisions 17.7 17.7
Financial liabilities
Investment contracts 7,236.2 -
Borrowings 22.4 22.4
Currency forwards 6.6 -
Deferred tax liabilities 124.8 4.7
Reinsurance payables 11.3 11.3
Payables related to direct insurance contracts 11.2 11.2
Deferred income 231.8 -
Income tax liabilities 5.1 5.1
Other payables 51.2 45.8
Net asset value attributable to unit holders 58.2 -
-------- --------
Total liabilities 8,083.8 7,698.6
-------- --------
Net assets 222.2 215.0
======== ========
Shareholders' equity
Share capital 65.9 65.9
Share premium 15.9 15.9
Other reserves (8.4) (8.4)
Retained earnings 148.8 141.6
-------- --------
Total shareholders'equity 222.2 215.0
======== ========
* Reanalysed under IFRS format
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
YEAR ENDED 31 DECEMBER 2004
IFRS UK GAAP
(MSSB)*
£' Million £' Million
Opening equity shareholders' funds 181.6 179.6
-------- --------
Profit for the financial period 39.7 36.8
-------- --------
Total recognised income for the financial
period 39.7 36.8
Dividends (11.8) (12.3)
Issue of share capital
Scrip dividend 8.0 8.0
Exercise of share options 3.8 3.8
Consideration paid for own shares (1.4) (1.4)
P & L reserve credit in respect of share
option charges 2.3 0.5
-------- --------
Net increase to shareholders' funds 40.6 35.4
-------- --------
Closing equity shareholders' funds 222.2 215.0
======== ========
* Reanalysed under IFRS format
RECONCILIATION OF INCOME STATEMENT
YEAR ENDED 31 DECEMBER 2004
UK GAAP ADJUSTMENTS IFRS
(MSSB)*
Investment DAC / Unit Linked Unit Trusts Other - Other - No
Contracts DIR Assets Equity Impact Equity Impact
Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7
£' m £' m £' m £' m £' m £' m £' m £' m
Net insurance
premium revenue 1,107.6 (879.7) 227.9
Fee & commission
income 14.5 (8.2) 56.4 62.7
Investment income 845.2 4.9 (0.2) 849.9
Other operating
income 1.5 1.5
---------------------------------------------------------------------------------------------------
Net income 1,968.8 (879.7) (8.2) - 4.9 (0.2) 56.4 1,142.0
Net policyholder
claims &
benefits incurred (476.7) 393.0 (83.7)
Change in insurance
contract
liabilities (1,258.7) 1,313.3 54.6
Change in investment
contract liabilities - (835.8) (4.9) (840.7)
Expenses (200.0) 27.3 (2.1) (57.2) (232.0)
Financing costs (1.2) (1.2)
---------------------------------------------------------------------------------------------------
Profit before tax 32.2 (9.2) 19.1 - - (2.3) (0.8) 39.0
Tax on policyholders'
return 8.0 (0.5) (22.0) (14.5)
Tax on shareholders'
return (3.4) 1.5 (6.7) 1.0 22.8 15.2
--------------------------------------------------------------------------------------------------
Profit for the
period attributable
to shareholders 36.8 (7.7) 12.4 (0.5) - (1.3) - 39.7
==================================================================================================
Dividends 12.3 (0.5) 11.8
* Reanalysed under IFRS format
RECONCILIATION OF BALANCE SHEET
31 DECEMBER 2004
UK GAAP ADJUSTMENTS IFRS
(MSSB)*
Investment DAC / Unit Linked Unit Other - Other - No
Contracts DIR Assets Trusts Equity Impact Equity Impact
Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7
£' m £' m £' m £' m £' m £' m £' m £' m
Assets
Intangible assets
Deferred
acquisition costs 44.5 249.9 294.4
Acquired value
of in-force
business 49.5 21.0 70.5
----------------------------------------------------------------------------------------------------
94.0 249.9 21.0 364.9
Property & equipment 7.1 (0.2) 6.9
Deferred tax assets 0.5 45.4 1.7 7.3 54.9
Investment property - 129.8 129.8
Investments
Equities - 5,582.1 55.8 5,637.9
Fixed income
securities 57.6 598.7 656.3
Investment in
Collective
Investment Schemes - 305.3 76.1 381.4
Currency forwards - 0.2 0.2
Assets held to
cover linked
liabilities 7,456.2 (7,456.2) -
Reinsurers'share of
insurance provisions 70.3 70.3
Insurance contract
receivables 8.5 8.5
Income tax assets 7.8 7.8
Other receivables 52.3 37.3 0.3 89.9
Cash & cash
equivalents 159.8 811.3 2.2 (76.1) 897.2
-------------------------------------------------------------------------------------------------
Total assets 7,913.6 0.5 295.3 8.5 58.3 1.5 28.3 8,306.0
Liabilities
Insurance contract
liability provisions 124.2 183.1 307.3
Unit linked
liabilities 7,456.2 (7,456.2) -
Other provisions 17.7 17.7
Financial liabilities
Investment contracts - 7,267.8 (31.6) 7,236.2
Borrowings 22.4 22.4
Currency forwards - 6.6 6.6
Deferred tax
liabilities 4.7 3.2 66.9 21.7 28.3 124.8
Reinsurance payables 11.3 11.3
Payables related to
direct insurance
contracts 11.2 11.2
Deferred income - 231.8 231.8
Income tax liabilities 5.1 5.1
Other payables 45.8 12.3 0.1 (7.0) 51.2
Net asset value
attributable to
unit holders - 58.2 58.2
------------------------------------------------------------------------------------------------
Total liabilities 7,698.6 (2.1) 298.7 9.0 58.3 (7.0) 28.3 8,083.8
Net assets 215.0 2.6 (3.4) (0.5) - 8.5 - 222.2
Shareholders'equity
Share capital 65.9 65.9
Share premium 15.9 15.9
premium
Other reserves (8.4) (8.4)
Retained earnings 141.6 2.6 (3.4) (0.5) 8.5 148.8
------------------------------------------------------------------------------------------------
Total shareholders'
equity 215.0 2.6 (3.4) (0.5) - 8.5 - 222.2
* Reanalysed under IFRS format
CONSOLIDATED BALANCE SHEET
1 JANUARY 2004
IFRS UK GAAP
(MSSB)*
£' Million £' Million
Assets
Intangible assets
Deferred acquisition costs 276.1 53.5
Acquired value of in-force business 73.4 51.6
-------- --------
349.5 105.1
Property and equipment 7.1 7.1
Deferred tax assets 45.1 -
Investment property - -
Investments
Equities 4,653.0 31.6
Fixed income securities 542.1 52.8
Investment in Collective Investment Schemes 261.2 -
Currency forwards 8.6 -
Assets held to
cover unit linked liabilities - 6,195.8
Reinsurers' shareisions 79.1 79.1
Insurance contract receivables 4.5 4.5
Income tax assets 5.9 5.9
Other receivables 73.4 51.7
Cash and cash equivalents 956.2 118.1
-------- --------
Total assets 6,985.7 6,651.7
-------- --------
Liabilities
Insurance contract liability provisions 369.3 133.3
Unit linked liabilities - 6,195.8
Other provisions 1.3 1.3
Financial liabilities
Investment contracts 5,934.0 -
Borrowings 53.6 53.6
Currency forwards 0.7 -
Deferred tax liabilities 103.5 14.8
Reinsurance payables 11.6 11.6
Payables related to direct insurance contracts 9.4 9.4
Deferred income 223.6 -
Income tax liabilities 5.1 5.1
Other payables 49.9 47.2
Net asset value attributable to unit holders 42.1 -
--------- --------
Total liabilities 6,804.1 6,472.1
-------- --------
Net assets 181.6 179.6
======== ========
Shareholders' equity
Share capital 64.8 64.8
Share premium 5.1 5.1
Other reserves (7.7) (7.7)
Retained earnings 119.4 117.4
-------- -------
Total shareholders'equity 181.6 179.6
======== ========
* Reanalysed under IFRS format
RECONCILIATION OF BALANCE SHEET
1 JANUARY 2004
UK GAAP ADJUSTMENTS IFRS
(MSSB)*
Investment DAC / Unit Linked Unit Trusts Other - Other - No
Contracts DIR Assets Equity Impact Equity Impact
Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7
£' m £' m £' m £' m £' m £' m £' m £' m
Assets
Intangible assets
Deferred
acquisition costs 53.5 222.6 276.1
Acquired value of
in-force business 51.6 21.8 73.4
--------------------------------------------------------------------------------------------------
105.1 222.6 21.8 349.5
Property & equipment 7.1 7.1
Deferred tax assets - 44.5 0.6 45.1
Investment property - -
Investments
Equities 31.6 4,581.5 39.9 4,653.0
Fixed income
securities 52.8 489.3 542.1
Investment in
Collective
Investment Schemes - 235.8 25.4 261.2
Currency forwards - 8.6 8.6
Assets held to cover
linked liabilities 6,195.8 (6,195.8) -
Reinsurers'share of
insurance provisions 79.1 79.1
Insurance contract
receivables 4.5 4.5
Income tax assets 5.9 5.9
Other receivables 51.7 21.5 0.2 73.4
Cash & cash equivalents 118.1 861.4 2.1 (25.4) 956.2
----------------------------------------------------------------------------------------------
Total assets 6,651.7 - 267.1 2.3 42.2 0.6 21.8 6,985.7
Liabilities
Insurance contract
liability provisions 133.3 236.0 369.3
Unit linked
liabilities 6,195.8 (6,195.8) -
Other provisions 1.3 1.3
Financial liabilities
Investment contracts - 5,945.4 (11.4) 5,934.0
Borrowings 53.6 53.6
Currency forwards - 0.7 0.7
Deferred tax liabilities 14.8 4.1 59.3 3.5 21.8 103.5
Reinsurance payables 11.6 11.6
Payables related to
direct insurance
contracts 9.4 9.4
Deferred income - 223.6 223.6
Income tax liabilities 5.1 5.1
Other payables 47.2 9.5 0.1 (6.9) 49.9
Net asset value
attributable to
unit holders - 42.1 42.1
-------------------------------------------------------------------------------------------------
Total liabilities 6,472.1 (10.3) 282.9 2.3 42.2 (6.9) 21.8 6,804.1
Net assets 179.6 10.3 (15.8) - - 7.5 - 181.6
Shareholders'equity
Share capital 64.8 64.8
Share premium 5.1 5.1
Other reserves (7.7) (7.7)
Retained earnings 117.4 10.3 (15.8) 7.5 119.4
------------------------------------------------------------------------------------------------
Total shareholders'
equity 179.6 10.3 (15.8) - - 7.5 - 181.6
* Reanalysed under IFRS format
NOTES TO THE IFRS FINANCIAL INFORMATION
Basis of Preparation
EU law requires St. James's Place Capital plc to prepare its next annual
consolidated financial statements, for the year ending 31 December 2005, in
accordance with International Financial Reporting Standards (IFRSs) as adopted
for use in the European Union ('EU adopted IFRSs'). The Group has restated the
consolidated balance sheet at 31 December 2004, the related consolidated income
statement and the consolidated statement of changes in equity for the year ended
31 December 2004 in accordance with EU adopted IFRSs (the 'IFRS Financial
Information') in order to establish the comparative financial information
expected to be included in the Group's first set of IFRS financial statements
for the year ended 31 December 2005. The IFRS Financial Information is based on
the statutory accounts previously prepared under UK Generally Accepted
Accounting Principles ('UK GAAP') adjusted for EU adopted IFRSs. As required by
IFRS 1, the IFRS Financial Information does not take account of any changes in
estimates since the sign-off of the UK GAAP accounts. In addition, the IFRS
Financial Information does not include comparative figures for the prior period.
The IFRS Financial Information does not constitute the Group's statutory
accounts for the year ended 31 December 2004. Those accounts, prepared under UK
GAAP, have been reported on by the Company's auditors and delivered to the
registrar of companies. The report of the auditors was unqualified and did not
contain statements under section 237(2) or (3) of the Companies Act 1985.
The Board acknowledges its responsibility for the preparation of the IFRS
Financial Information which has been prepared in accordance with EU adopted
IFRSs and policies expected to be adopted when the Board prepares the Group's
first set of IFRS financial statements for the year to 31 December 2005. The EU
adopted IFRSs that will be effective in the annual financial statements for the
year ending 31 December 2005 are still subject to change and to additional
interpretations and therefore cannot be determined with certainty. Accordingly
the accounting policies for that annual period will be determined finally only
when the annual financial statements are prepared for the year ending 31
December 2005.
The Board approved the IFRS Financial Information at its meeting on 25 July
2005.
The date of transition for IFRS for the Group is 1 January 2004, as required by
IFRS. The Group's opening balance sheet at 1 January 2004 has been restated to
reflect all existing IFRSs expected to be applicable at 31 December 2005. IFRS 1
(First-time Adoption of International Financial Reporting Standards) does allow
a number of exemptions or elections on adoption of IFRS for the first time. The
Group has not taken advantage of the exemption from the requirement to restate
comparative information in the first year of adoption of IFRS for IAS 32
(Financial Instruments: Disclosure and Presentation), IAS 39 (Financial
Instruments: Recognition and Measurement) and IFRS 4 (Insurance Contracts)
Advantage has, however, been taken of the following provisions under IFRS 1:
• The Group has elected not to apply the provisions of IFRS 2 (Share-based
Payment) to options and equity instruments granted on or before
7 November 2002 or to equity instruments that were granted after
7 November 2002 that had vested before 1 January 2005.
• The Group has also elected not to apply the provisions of IFRS 3 (Business
Combinations) prior to the date of transition, and no adjustments have
therefore been made for business combinations prior to 1 January 2004.
• The Group has elected to restate owner occupied property at fair value at
1 January 2004 and to treat this fair value as the deemed cost at that
date.
The accounting policies adopted in the preparation of the IFRS Financial
Information are set out later in these notes.
Adjustments from UK GAAP (MSSB) to IFRS
1. MSSB Mapping to IFRS Format
The UK GAAP (MSSB) balance sheet has been presented in a format consistent with
International Financial Reporting Standards (IFRS). No changes, other than the
reanalysis under IFRS format, have been made to the numbers previously reported
for UK GAAP.
2. Accounting for Investment Contracts
Under UK GAAP all long term contracts written by an insurance company are
accounted for on a similar basis. Under IFRS 4 products are classified for
accounting purposes between insurance and investment contracts, depending on the
level of insurance risk assumed, and the liabilities for insurance and
investment contracts are disclosed separately within the balance sheet. Amounts
receivable under investment contracts are no longer shown as premiums in the
income statement but are treated as deposits and added to investment contract
liabilities. Similarly amounts payable under investment contracts are not
recorded as claims in the income statement but as deductions from investment
contract liabilities. None of these reclassification adjustments has any impact
on profit after tax or shareholders' equity.
In addition, however, under UK GAAP the Group held certain reserves on products
that are now classified as investment contracts. These reserves are released
under IFRS. The impact is to decrease profit after tax by £7.7 million for the
year ended 31 December 2004, with a £2.6 million increase in shareholders'
equity (£10.3 million at 1 January 2004).
3. Deferred Acquisition Costs and Deferred Income (DAC/DIR)
Revenue and expense for investment contracts are recognised in accordance with
IAS 18 (Revenue). Under IAS 18, revenue arising from investment contracts must
be recognised over the life of the contract and an explicit deferred income
liability is recognised for any front end fees which relate to services to be
provided in future periods. Under UK GAAP no such liability is recognised and
front end fees are recognised when received. The recognition of deferred income
(net of the associated deferred tax asset) decreases shareholders' equity by
£186.4m at 31 December 2004 (£179.1 million at 1 January 2004) and decreases
profit after tax by £7.3 million for the year ended 31 December 2004.
In addition under IAS18 only directly attributable incremental acquisition costs
are deferred. However the introduction of IFRS significantly extends the range
of investment contracts where costs may be deferred. This deferral of additional
acquisition costs (net of the associated deferred tax liability) has increased
shareholders' equity by £183.0 million at 31 December 2004 (£163.3 million at 1
January 2004) and increased profit after tax by £19.7 million for the year ended
31 December 2004.
Consequently the aggregate deferred income and deferred acquisition cost
adjustments have decreased shareholders' equity by £3.4 million as at 31
December 2004 (£15.8 million at 1 January 2004), and increased profit after tax
by £12.4 million for the year ended 31 December 2004.
4. Unit Linked Asset Analysis and Valuation
Under UK GAAP assets held to cover unit-linked liabilities were disclosed as a
single line item, but under IFRS they are disclosed under the relevant
investment and other balance sheet categories. This reclassification has no
impact on profit after tax or shareholders' equity.
Under IFRS the Group's investments are classified as fair value through profit
or loss and IAS 39 requires that the fair value for listed investment be
determined at a bid value, rather than at mid value as under UK GAAP. This
revaluation from mid to bid for the assets held within the unit-linked funds is
offset by a change in investment contract liability provisions and thus has no
impact on profit after tax or shareholders' equity.
The Group discounts the deferred tax on unrealised capital gains within the
unit-linked funds to reflect the expected time period over which the gains are
expected to be realised. While this discounting is required in determining the
unit-linked liability, IFRS does not permit the discounting of deferred tax in
the computation of unit linked assets (resulting in an asset liability
mismatch). Adjustments have therefore been made to account for the unprovided
tax liability within the unit linked assets. This has reduced profit after tax
by £0.5 million for the year ended 31 December 2004 and shareholders' equity by
£0.5 million at 31 December 2004 (£ nil at 1 January 2004). Any tax liability
will be settled by the unit linked funds rather than the Group.
5. Consolidation of Unit Trusts
IFRS requires the consolidation of certain St. James's Place Unit Trusts in
which the Group, via its unit linked funds, owns more than 50% of the units.
These did not previously require consolidation under UK GAAP, but a different
definition of the circumstances in which an entity is deemed to be under the
control of an investor applies under IFRS. The consolidation of these unit
trusts has no impact on profit after tax or shareholders' equity.
6. Other Adjustments - Impact on Shareholders' Equity
There are a number of other adjustments which affect profit after tax and
shareholders' equity, as set out below:
(i) Dividend Recognition
Under UK GAAP dividends were recognised in the period to which they related
regardless of whether they had been declared or approved. Under IAS 10 (Events
After the Balance Sheet Date) dividends may only be recognised when they have
been declared and approved. The IFRS dividend for the year ended 31 December
2004 therefore represents the final 2003 dividend and the interim 2004 dividend.
The reversal of the final 2004 dividend has resulted in an increase in
shareholders' equity of £7.0 million at 31 December 2004 (1 January 2004 £6.5
million).
(ii) Share Based Payment
Under UK GAAP the costs of awards to employees and members of the St. James's
Place Partnership under share based payment plans, other than Save as You Earn
Plans, were recognised immediately if no performance criteria applied.
Where performance criteria applied, the cost was recognised over the period to
which the performance criteria related. In both circumstances the cost of awards
was based on the underlying share price at the date of grant of the awards, less
any expected contribution. The cost was based on a reasonable expectation of the
extent to which performance criteria would be met and any subsequent changes in
that expectation were reflected in the income statement.
Under IFRS 2 equity instruments granted after 7 November 2002 which remain
unvested at 1 January 2005 are measured at fair value. The fair value of the
equity instrument is determined at grant date and recognised over the vesting
period, with a corresponding adjustment in equity. In addition, a deferred tax
asset, representing the expected future tax deduction in respect of instruments
granted and based on intrinsic value, is also recognised.
The effect of this change in accounting treatment is to decrease profit after
tax by £1.1 million in the year ended 31 December 2004, offset by an increase in
equity of £1.8 million (as illustrated by the Consolidated Statement of Changes
in Equity). In addition, shareholders' equity increased by £1.7 million at 31
December 2004 (£1.0 million at 1 January 2004).
(iii) Revaluation of Owner Occupied Property
The Group has elected to value owner occupied property at the date of transition
to IFRS (1 January 2004) and apply this fair value as the deemed cost at that
date. Revaluation adjustments made in the year ended 31 December 2004 have
therefore been reversed, decreasing profit after tax for the year by £0.2
million. Similarly, shareholders' equity has decreased by £0.2 million at 31
December 2004 (£ nil at 1 January 2004).
7. Other Adjustments - Nil Impact on Shareholders' Equity
IFRS also require a number of gross up adjustments and balance sheet
reclassifications, none of which affect profit after tax or shareholders'
equity. Further details are shown below:
(i) Policyholder and Shareholder Tax
The Group discloses policyholders' and shareholders' tax separately within the
income statement. For the purposes of mapping the UK GAAP accounts under the
IFRS format the tax on the long-term business fund was treated as policyholder
tax. Under IFRS, however, the Group is treating the tax borne by the unit-linked
funds as policyholder tax with all other tax being treated as shareholder tax.
This has resulted in the reclassification of certain non unit-linked tax items
out of policyholder tax into shareholder tax, together with the gross up of
taxes borne by the UK unit linked funds which are offset against tax payable by
the UK life company. The overall impact of the adjustment is to increase
policyholder tax by £22.0 million and decrease shareholder tax by £22.0 million
in the year ended 31 December 2004. There is no impact on the balance sheet as a
result of these adjustments.
(ii) Acquired value of in force business
Under UK GAAP the acquired value of in-force business was disclosed net of tax.
The asset has been grossed up for deferred tax under IFRS, both increasing the
acquired value of in-force business and the deferred tax liability by £21.0
million at 31 December 2004 (£21.8 million at 1 January 2004).
This adjustment has also given rise to an increase of £0.8 million in the cost
of amortisation and a similar decrease in the tax expense in the income
statement for the year ended 31 December 2004.
(iii) Income Expense Gross Up
Within the primary statements of the UK GAAP accounts the expenses of the unit
trust business and other operations were netted off again their respective
income streams. These expenses, which totalled £56.4 million in the year ended
31 December 2004, have been grossed up under IFRS. There is no balance sheet
impact as a result of this adjustment.
(iv) Deferred Tax Gross Up
The £7.3 million deferred tax asset (£ nil at 1 January 2004) in respect of
unrelieved expenses, which had previously been netted off against deferred tax
liability under UK GAAP, has been grossed up under IFRS for presentational
purposes. There is no impact on the income statement.
(v) Reclassification Adjustment
Monies held for the longer term in unitised money market funds (£76.1 million at
31 December 2004, £25.4 million at 1 January 2004) have been reclassified as
investment in collective investment schemes. This adjustment has no impact on
the income statement.
8. Cash Flow Statement
Under IFRS the Group's consolidated cash flow statement includes all cash flows
of the Group, including those relating to the long-term fund. Under UK GAAP the
cash flows of the long term fund are explicitly excluded, except to the extent
that funds are transferred to or from the shareholder.
Accounting Policies
(a) Basis of consolidation
The consolidated financial information incorporates the assets, liabilities and
the results of the Company and of its subsidiary undertakings. Subsidiaries are
those entities in which the Group directly or indirectly has the power to govern
the financial and operating policies in order to gain benefits from its
activities (including unit trusts in which the Group holds more than 50% of the
units). The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control commences until the
date that control ceases.
Intragroup balances, and any income and expenses or unrealised gains and losses
arising from intragroup transactions, are eliminated in preparing the
consolidated financial statements.
(b) Product classification
The Group's products are classified for accounting purposes as either insurance
contracts or investment contracts. Insurance contracts are contracts which
transfer significant insurance risk. Contracts that do not transfer significant
insurance risk are treated as investment contracts. Where contracts contain both
insurance and investment components and the investment components can be
measured reliably, the contracts are unbundled and the components are separately
accounted for as insurance contracts and investment contracts respectively.
(c) Long term business
(i) Premium income
For unit-linked insurance contracts, premiums are recognised as revenue when the
liabilities arising from them are created. All other premiums are accounted for
when due for payment.
Investment contract premiums are not included in the income statement but are
reported as deposits to investment contract liabilities in the balance sheet.
(ii) Revenue from investment contracts
Fees charged for services related to the management of investment contracts are
recognised as revenue as the services are provided. Initial fees which exceed
the level of recurring fees and relate to the future provision of services, are
deferred and amortised over the anticipated period in which services will be
provided.
(iii) Claims
For insurance contracts, death claims are accounted for on notification of
death. Surrenders for non-linked policies are accounted for when payment is
made. Critical illness claims are accounted for when admitted. All other claims
and surrenders are accounted for when payment is due.
For investment contracts, benefits paid are not included in the income statement
but are instead deducted from investment contract liabilities. The movement in
investment contract liabilities consists of benefits paid in the period less the
corresponding elimination of the policyholder liability originally recognised in
the balance sheet and the investment return credited to policyholders.
(iv) Acquisition costs
For insurance contracts, acquisition costs comprise direct costs such as initial
commission and the indirect costs of obtaining and processing new business.
Acquisition costs which are incurred during a financial year are deferred by use
of an explicit asset which is amortised over the period during which the costs
are expected to be recoverable and in accordance with the incidence of future
related margins.
For investment contracts only directly related acquisition costs, which vary
with and are related to securing new contracts and renewing existing contracts,
are deferred to the extent that they are recoverable out of future revenue.
Deferred acquisition costs are amortised on a straight line basis over the
average lifetime of the Group's investment contracts. All other costs are
recognised as expenses when incurred.
(v) Insurance contract liabilities
Under current IFRS requirements, insurance contract liabilities are measured
using accounting policies consistent with those adopted previously under
existing accounting practices.
In the UK, the insurance contract provision is determined following an annual
actuarial investigation of the long-term fund in accordance with regulatory
requirements. The provisions are calculated on the basis of current information
and using the gross premium valuation method. The Group's accounting policies
for insurance contracts meet the minimum specified requirements for liability
adequacy testing under IFRS 4, as they consider current estimates of all
contractual cash flows, and of related cash flow such as claims handling costs.
Long-term business provisions can never be definitive as to their timing nor the
amount of claims and are therefore subject to subsequent reassessment on a
regular basis.
(vi) Investment contracts
Investment contracts consist of unit linked contracts. Unit linked liabilities
are measured by reference to the value of the underlying net asset value of the
Group's unitised investment funds, determined on a bid value, at the balance
sheet date. Deferred tax on unrealised capital gains, discounted to reflect the
time period over which such gains are expected to be realised, is also reflected
in the measurement of unit linked liabilities.
(d) Reinsurance
The Group's insurance subsidiaries cede insurance premiums and risk in the
normal course of business. Outwards reinsurance premiums are accounted for in
the same accounting period as the related premiums for the direct reinsurance
business being reinsured. Reinsurance assets include balances due from
reinsurance companies for paid and unpaid losses, ceded unearned premiums and
ceded future life policy benefits. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy.
(e) Fee & commission income
Fee and commission income primarily consists of management fees on investment
contracts (see accounting policy note c (ii)) and commission due in respect of
products sold on behalf of third parties. Commission is accounted for when
earned.
(f) Investment return
Investment return comprises investment income and investment gains and losses.
Investment income includes dividends, interest and rent. Dividends are accrued
on an ex-dividend basis. Interest and rent are accounted for on an accruals
basis.
(g) Expenses
(i) Operating lease payments
Leases where a significant proportion of the risks and rewards of ownership is
retained by the lessor are classified as operating leases. Payments made under
operating leases are recognised in the income statement on a straight-line basis
over the term of the lease. Lease incentives received are recognised in the
income statement as an integral part of the total lease expense.
(ii) Financing costs
Financing costs comprise interest payable on borrowings calculated using the
effective interest rate method.
(h) Income taxes
Income tax on the profit or loss for the year comprises current and deferred
tax. Income tax is recognised in the income statement except to the extent that
it relates to items recognised directly in equity, in which case it is
recognised in equity.
(i) Current tax
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantially enacted at the balance sheet date, and
any adjustment to tax payable in respect of previous years.
The total income tax expense for a period includes tax which is not related to
profits earned by shareholders for the period, being the income tax paid by the
Group in respect of UK life policy holder returns. The tax charge in the income
statement is therefore analysed between tax that is payable in respect of
policyholders' returns and tax that is payable on shareholders' returns, with
the policyholder tax reflecting tax charged within the unit linked funds.
(ii) Deferred tax
Deferred tax is provided using the balance sheet liability method, providing for
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes, except
where otherwise required by IAS12 (Income Taxes). The amount of deferred tax
provided is based on the expected manner of realisation or settlement of the
carrying amount of assets and liabilities, using tax rates enacted or
substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset can be
utilised. Deferred tax assets are reduced to the extent that it is no longer
probable that the related tax benefit will be realised.
(i) Dividends
Dividend distributions to the Company's shareholders are recognised as
liabilities in the period in which the dividends are declared, and, for the
final dividend, when approved by the Company's shareholders at the annual
general meeting.
(j) Intangible assets
(i) Deferred acquisition costs
See accounting policy note c (iv).
(ii) Acquired value of in-force business
Investment and insurance contracts acquired in business combinations are
measured at fair value at the time of acquisition. The acquired value of in-
force contracts is amortised over the estimated life of the contracts.
(iii) Goodwill
Goodwill on the acquisition of subsidiaries prior to 1998 has been charged
directly to reserves. Prospectively the Group's policy is to recognise goodwill
on the balance sheet as an intangible asset, measured at cost less any
accumulated impairment losses.
(k) Property & equipment
Items of property and equipment are stated at cost less accumulated depreciation
and impairment losses (see accounting policy note p). The deemed cost of owner
occupied property is the fair value as at 1 January 2004, the date of transition
to IFRS.
Depreciation is charged to the income statement on a straight-line basis over
the estimated useful lives of the property and equipment as follows:
• Computers: 3 years
• Fixtures and fittings: 5 years
• Office equipment: 5 years
• Motor vehicles: 4 years
• Buildings 50 years
(l) Investment property
Investment properties, which are all held within the unit linked funds, are
properties which are held to earn rental income and / or for capital
appreciation. They are stated at fair value. An external, independent valuation
company, having an appropriate recognised professional qualification and recent
experience in the location and category of property being valued, values the
portfolio every month. The fair values are based on market values, being the
estimated amount for which a property could be exchanged on the date of
valuation between a willing buyer and a willing seller in an arm's length
transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion.
Any gain or loss arising from a change in fair value is recognised in the income
statement. Rental income from investment property is accounted for as described
in accounting policy note f.
(m) Investments
The Group's investments are all classified as fair value through profit and
loss, with all gains and losses recognised through the income statement. The
fair values of quoted financial investments are based on current bid prices.
If the market for a financial investment is not active, the Group establishes
fair value by using valuation techniques such as recent arm's length
transactions, reference to similar listed investments, discounted cash flow
models or option pricing models.
(n) Currency forwards
The Group uses currency forwards within its unit-linked funds to hedge its
exposure to foreign currency. Each contract is recognised initially at cost and
is subsequently stated at fair value, with all changes in value recognised in
the income statement.
(o) Other receivables
Other receivables are stated at cost less impairment losses.
(p) Impairment policy
The carrying amounts of the Group's assets which are not carried at fair value
are reviewed at each balance sheet date to determine whether there is any
indication of impairment. If any such indication exists, the asset's recoverable
amount is estimated. An impairment loss is recognised whenever the carrying
amount of an asset exceeds its recoverable amount. Impairment losses are
recognised in the income statement.
Impairment losses are reversed - through the income statement - if there is a
change in the estimates used to determine the recoverable amount. Such losses
are reversed only to the extent that the assets' carrying amount do not exceed
the carrying amount that would have been determined, net of depreciation or
amortisation where applicable, if no impairment loss have been recognised.
(q) Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with
banks, other short-term highly liquid investments and bank overdrafts.
(q) Provisions
Provisions are recognised when the Group has a present legal or constructive
obligation as a result of past events such that it is probable that an outflow
of economic benefits will be required to settle the obligation and a reliable
estimate of the amount of the obligation can be made. The Group recognises
provisions for onerous contracts when the expected benefits to be derived from a
contract are less than the unavoidable costs of meeting the obligations under
the contract.
(r) Borrowings
Borrowings are recognised initially at fair value, net of transaction costs, and
subsequently stated at amortised cost. The difference between the proceeds and
the redemption value is recognised in the income statement over the borrowing
period on an effective interest rate basis.
(s) Other payables
Other payables are stated at cost.
(t) Employee benefits
(i) Pension obligations
The Group operates a defined contribution personal pension plan for its
employees. Contributions to this plan are recognised as an expense in the income
statement as incurred.
The Group also has an occupational pension scheme with both a defined
contribution and a defined benefit section, both of which are closed to new
members.
Contributions to the defined contribution section, in respect of existing
members, are recognised as an expense in the income statement as incurred.
The defined benefit section has no active members and there are thus no employer
contributions. The residual liabilities to the current and deferred pensioners
have been matched by purchased annuities (both immediate and deferred) from
insurance companies and therefore no surplus or deficit will arise.
(ii) Share-based payments
The Group operates a number of share-based payment plans. The fair value of
equity instruments granted is recognised as an expense spread over the vesting
period of the instrument with a corresponding increase in equity in the case of
equity settled plans. The total amount to be expensed is determined by reference
to the fair value of the awards at the grant date, measured using standard
option pricing models, excluding the impact of any market vesting conditions.
At each balance sheet date, the Group revises its estimate of the number of
equity instruments that are expected to vest and it recognises the impact of the
revision of original estimates, if any, in the income statement, such that the
amount recognised for employee services are based on the number of shares that
actually vest. The charge to the income statement is not revised for any changes
in market vesting conditions.
(u) Treasury shares
Where any Group company purchases the Company's equity share capital, the
consideration paid is deducted from equity attributable to shareholders, as
disclosed in the Treasury Shares reserve. Where such shares are subsequently
sold, reissued or otherwise disposed of, any consideration received is included
in equity attributable to shareholders, net of any directly attributable
incremental transaction costs and the related income tax effects.
(v) Foreign currency translation
The Group's presentational currency is pounds sterling. The functional currency
of the Group's foreign operations is the currency of the primary economic
environment in which these entities operate.
Foreign currency transactions are translated into sterling using the exchange
rate prevailing at the date of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange
ruling at the balance sheet date and the gain or losses on translation are
recognised in the income statement.
(x) Segment reporting
The Group segments its operations by lines of business: life, unit trust and
other business. The Group does not segment its business geographically and will
therefore present segment information in respect of primary segments only.
Special Purpose Audit Report of KPMG Audit Plc to St James's Place Capital plc
('the Company') on its Preliminary International Financial Reporting Standards
('IFRS') Financial Information
In accordance with the terms of our engagement letter dated 7 June 2005, we have
audited the accompanying consolidated preliminary IFRS balance sheet of St
James's Place Capital plc('the Company') as at 31 December 2004, and the related
consolidated statements of income and changes in equity for the year then ended
and the related accounting policy notes ('the preliminary IFRS Financial
Information').
Respective responsibilities of directors and KPMG Audit Plc
The directors of the Company have accepted responsibility for the preparation of
the preliminary IFRS Financial Information which has been prepared as part of
the Company's conversion to IFRS. Our responsibilities, as independent auditors,
are established in the United Kingdom by the Auditing Practices Board, our
profession's ethical guidance and the terms of our engagement.
Under the terms of engagement we are required to report to you our opinion as to
whether the preliminary IFRS Financial Information has been properly prepared,
in all material respects, in accordance with the basis of preparation to the
preliminary IFRS Financial Information. We also report to you if, in our
opinion, we have not received all the information and explanations we require
for our audit.
Our report has been prepared for the Company solely in connection with the
Company's conversion to IFRS.
Our report was designed to meet the agreed requirements of the Company
determined by the Company's needs at the time. Our report should not therefore
be regarded as suitable to be used or relied on by any party wishing to acquire
rights against us other than the Company for any purpose or in any context. Any
party other than the Company who chooses to rely on our report (or any part of
it) will do so at its own risk. To the fullest extent permitted by law, KPMG
Audit Plc will accept no responsibility or liability in respect of our report to
any other party.
Basis of audit opinion
We conducted our audit having regard to Auditing Standards issued by the UK
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the preliminary IFRS
Financial Information. It also includes an assessment of the significant
estimates and judgments made by the directors in the preparation of the
preliminary IFRS Financial Information, and of whether the accounting policies
are appropriate to the Group's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the preliminary IFRS
Financial Information is free from material misstatement, whether caused by
fraud or other irregularity or error. In forming our opinion we also evaluated
the overall adequacy of the presentation of information in the preliminary IFRS
Financial Information.
Emphasis of matters
Without qualifying our opinion, we draw your attention to the following matters:
•The basis of preparation to the preliminary IFRS Financial Information
explains why the accompanying preliminary IFRS Financial Information may
require adjustment before its inclusion as comparative information in the
IFRS financial statements for the year ending 31 December 2005 when the
Company prepares its first IFRS financial statements.
•As described in the basis of preparation to the preliminary IFRS
Financial Information, as part of its conversion to IFRS, the Company has
prepared the preliminary IFRS Financial Information for the year ended 31
December 2004 to establish the financial position, results of operations and
cash flows of the Company necessary to provide the comparative financial
information expected to be included in the Company's first complete set of
IFRS financial statements for the year ending 31 December 2005. The
preliminary IFRS Financial Information does not itself include comparative
financial information for the prior period.
•As explained in the basis of preparation, in accordance with IFRS 1
First-time Adoption of International Financial Reporting Standards, no
adjustments have been made for any changes in estimates made at the time of
approval of the UK Generally Accepted Accounting Practices financial
statements on which the preliminary IFRS Financial Information is based.
Opinion
In our opinion, the accompanying preliminary IFRS Financial Information for the
year-ended 31 December 2004 has been prepared, in all material respects, in
accordance with the basis set out in the basis of preparation, which describes
how IFRS have been applied under IFRS 1, including the assumptions made by the
directors of the Company about the standards and interpretations expected to be
effective, and the policies expected to be adopted, when they prepare the first
complete set of consolidated IFRS financial statements of the Company for the
year ending 31 December 2005.
KPMG Audit Plc
Chartered Accountants
London
25 July 2005
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