Half-year Report - Part 3 of 4

RNS Number : 9880W
Standard Life Aberdeen plc
07 August 2018
 

Standard Life Aberdeen plc

Half year results 2018

Part 3 of 4

 

2. Statement of Directors' responsibilities

Each of the Directors, whose names and functions are listed on the Standard Life Aberdeen plc website, www.standardlifeaberdeen.com, confirms to the best of his or her knowledge and belief that:

·  The International Financial Reporting Standards (IFRS) condensed consolidated income statement, the IFRS condensed consolidated statement of comprehensive income, the IFRS condensed consolidated statement of financial position, the IFRS condensed consolidated statement of changes in equity and the IFRS condensed consolidated statement of cash flows and associated notes, have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU

·  The interim management report includes a fair review of the information required by:

DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the IFRS condensed consolidated financial information and a description of the principal risks and uncertainties for the remaining six months of the year

DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so

·  As per provision C1 of the UK Corporate Governance Code, the Half year results 2018 taken as a whole, present a fair, balanced and understandable position of the Company's prospects

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Changes to Directors during the period

As previously announced, Julie Chakraverty, Lynne Peacock and Akira Suzuki retired as non-executive Directors at the conclusion of the Company's Annual General Meeting on 29 May 2018. In addition, the Company announced Cathleen Raffaeli's appointment to the Board, as a non-executive Director, with effect from 1 August 2018.

 

By order of the Board


 

Sir Gerry Grimstone

Chairman

7 August 2018

Bill Rattray

Chief Financial Officer

7 August 2018

 

3. Independent review report to Standard Life Aberdeen plc

 

Conclusion 

We have been engaged by the Company to review the IFRS condensed consolidated financial information in the Half year results for the six months ended 30 June 2018 which comprises the:

·  IFRS condensed consolidated income statement

·  IFRS condensed consolidated statement of comprehensive income

·  Reconciliation of consolidated adjusted profit before tax to IFRS profit for the period

·  IFRS condensed consolidated statement of financial position

·  IFRS condensed statement of changes in equity

·  IFRS condensed consolidated statement of cash flows and the related explanatory notes  

Based on our review, nothing has come to our attention that causes us to believe that the IFRS condensed consolidated financial information in the Half year results for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules (the DTR) of the UK's Financial Conduct Authority (the UK FCA).   

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the Half year results and consider whether it contains any apparent misstatements or material inconsistencies with the information in the IFRS condensed consolidated financial information. 

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Directors' responsibilities 

The Half year results is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half year results in accordance with the DTR of the UK FCA. 

As disclosed in Note 4.1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The Directors are responsible for preparing the IFRS condensed consolidated financial information included in the Half year results in accordance with IAS 34 as adopted by the EU. 

Our responsibility 

Our responsibility is to express to the Company a conclusion on the IFRS condensed consolidated financial information in the Half year results based on our review. 

The purpose of our review work and to whom we owe our responsibilities

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 DTR of the UK FCA. 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. 

 

 

 

 

Jonathan Mills

for and on behalf of KPMG LLP 

Chartered Accountants 
Saltire Court
20 Castle Terrace
Edinburgh
EH1 2EG

7 August 2018

 

4. Financial information                      

IFRS condensed consolidated income statement

For the six months ended 30 June 2018

 

 

6 months
2018

6 months
2017

restated1

Full year
2017
restated1

 

Notes

£m

£m

£m

Income

 

 

 

 

Investment return

 

10

77

238

Revenue from contracts with customers

4.4

1,019

514

1,486

Insurance and participating investment contract premium income

 

36

47

89

Profit on disposal of interests in associates

 

6

-

319

Other income

 

13

17

33

Total income

 

1,084

655

2,165

 

 

 

 

 

Expenses

 

 

 

 

Insurance and participating investment contract claims and change in liabilities

 

27

99

201

Change in non-participating investment contract liabilities

 

2

8

74

Administrative expenses

 

 

 

 

Restructuring and corporate transaction expenses

4.5

59

57

162

Other administrative expenses

 

883

429

1,295

Total administrative expenses

4.5

942

486

1,457

Change in liability for third party interest in consolidated funds

 

4

-

6

Finance costs

 

21

14

34

Total expenses

 

996

607

1,772

 

 

 

 

 

Share of profit from associates and joint ventures

 

39

46

45

 

 

 

 

 

Profit before tax

 

127

94

438

Tax expense

4.6

13

10

28

Profit for the period from continuing operations

 

114

84

410

Profit for the period from discontinued operations

4.2

79

214

322

Profit for the period

 

193

298

732

 

 

 

 

 

Attributable to:

 

 

 

 

Equity holders of Standard Life Aberdeen plc

 

 

 

 

From continuing operations

 

111

84

402

From discontinued operations

 

74

208

297

Equity holders of Standard Life Aberdeen plc

 

185

292

699

Non-controlling interests

 

 

 

 

From continuing operations - preference shares and perpetual notes

 

3

-

8

From discontinued operations - ordinary shares

 

5

6

25

 

 

193

298

732

Earnings per share from continuing operations

 

 

 

 

Basic (pence per share)

4.7

3.8

4.3

17.1

Diluted (pence per share)

4.7

3.7

4.3

17.0

Earnings per share

 

 

 

 

Basic (pence per share)

4.7

6.3

14.8

29.8

Diluted (pence per share)

4.7

6.2

14.8

29.6

1    Comparatives for the six months ended 30 June 2017 and 12 months ended 31 December 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer to Note 4.2.

 

IFRS condensed consolidated statement of comprehensive income

For the six months ended 30 June 2018

 

 

6 months
2018

6 months
2017
restated1

Full year
2017
restated1

 

Notes

£m

£m

£m

Profit for the period

 

193

298

732

Less: profit from discontinued operations

 

(79)

(214)

(322)

Profit from continuing operations

 

114

84

410

Items that will not be reclassified subsequently to profit or loss:

 

 

 

 

Remeasurement losses on defined benefit pension plans

 

(84)

-

(18)

Equity holder tax effect of items that will not be reclassified subsequently to profit or loss

4.6

-

-

(10)

Total items that will not be reclassified subsequently to profit or loss

 

(84)

-

(28)

 

 

 

 

 

Items that may be reclassified subsequently to profit or loss:

 

 

 

 

Fair value gains/(losses) on cash flow hedges

 

15

-

(33)

Fair value losses on available-for-sale financial assets

 

(5)

-

-

Exchange differences on translating foreign operations

 

(9)

(5)

(31)

Share of other comprehensive (expense)/income of associates and joint ventures

 

(5)

2

4

Items transferred to the consolidated income statement

 

 

 

 

Realised (losses)/gains on cash flow hedges

 

(17)

-

13

Realised foreign exchange losses

 

-

-

(2)

Equity holder tax effect of items that may be reclassified subsequently to profit or loss 

4.6

1

-

3

Total items that may be reclassified subsequently to profit or loss

 

(20)

(3)

(46)

Other comprehensive income for the period from continuing operations

 

(104)

(3)

(74)

Total comprehensive income for the period from continuing operations

 

10

81

336

 

 

 

 

 

Profit from discontinued operations

4.2

79

214

322

Other comprehensive income from discontinued operations

4.2

(2)

9

12

Total comprehensive income for the period from discontinued operations

 

77

223

334

Total comprehensive income for the period

 

87

304

670

 

 

 

 

 

Attributable to:

 

 

 

 

Equity holders of Standard Life Aberdeen plc

 

 

 

 

From continuing operations

 

7

81

328

From discontinued operations

 

72

217

309

Non-controlling interests

 

 

 

 

From continuing operations -- preference shares and perpetual notes

 

3

-

8

From discontinued operations - ordinary shares

 

5

6

25

 

 

87

304

670

1    Comparatives for the six months ended 30 June 2017 and 12 months ended 31 December 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer to Note 4.2.

 

Reconciliation of consolidated adjusted profit before tax to IFRS profit for the period

For the six months ended 30 June 2018

 

 

6 months 2018

6 months 2017 restated1

 

 

Continuing operations

Discontinued operations

Total

Continuing operations

Discontinued operations

Total

 

Notes

£m

£m

£m

£m

£m

£m

Adjusted profit/(loss) before tax

 

 

 

 

 

 

 

Aberdeen Standard Investments

 

317

-

317

189

-

189

Pensions and Savings

 

1

167

168

-

167

167

India and China life

 

35

-

35

33

-

33

Other

 

(42)

-

(42)

(30)

(1)

(31)

Adjusted profit before tax

4.3

311

167

478

192

166

358

Adjusted for the following items

 

 

 

 

 

 

 

Restructuring and corporate transaction expenses

 

(59)

(51)

(110)

(57)

(4)

(61)

Amortisation and impairment of intangible assets acquired in business combinations

 

(108)

-

(108)

(10)

-

(10)

Profit on disposal of interests in associates

 

6

-

6

-

-

-

Short-term fluctuations in investment return and economic assumption changes

 

-

(61)

(61)

-

59

59

Other2

 

(5)

38

33

(24)

-

(24)

Total adjusting items

4.3

(166)

(74)

(240)

(91)

55

(36)

Share of associates' and joint ventures' tax expense

4.3

(18)

-

(18)

(7)

-

(7)

Profit attributable to non-controlling interests - ordinary shares

4.3

-

5

5

-

6

6

Profit before tax3

 

127

98

225

94

227

321

Tax (expense)/credit attributable to

 

 

 

 

 

 

 

Adjusted profit

4.3

(48)

(29)

(77)

(31)

1

(30)

Adjusting items

4.3

35

10

45

21

(14)

7

Total tax expense

 

(13)

(19)

(32)

(10)

(13)

(23)

Profit for the period

 

114

79

193

84

214

298

1    Following completion of the merger the Group has changed the calculation of adjusted profit (previously named operating profit). Short-term fluctuations in investment return and economic assumption changes are now only adjusted for insurance entities. Previously these adjustments also applied to non-insurance entities. This has resulted in a £3m reduction to the adjusted profit of the other segment, a £1m reduction to the Aberdeen Standard Investments segment and a corresponding £4m adjustment to short-term fluctuations in investment return and economic assumption changes within adjusting items, for the six months ended 30 June 2017.

2    Other adjusting items for the six months ended 30 June 2018 includes £nil (six months ended 30 June 2017: £24m; 12 months ended 31 December 2017: £24m) in relation to the impairment of a disposal group classified as held for sale. The Other adjusting item in 2018 relating to discontinued operations is a held for sale accounting adjustment relating to the amortisation of intangible assets (primarily deferred acquisition costs) and depreciation of tangible assets of £38m. Following the classification of the UK and European Insurance business as held for sale, no amortisation or depreciation is recognised in accordance with applicable financial reporting standards.

3    For discontinued operations profit before tax expense attributable to equity holders consists of profit before tax of £122m (six months ended 30 June 2017: £280m; 12 months ended 31 December 2017: £526m) less tax expense attributable to policyholders' returns of £24m (six months ended 30 June 2017: £53m; 12 months ended 31 December 2017: £166m).

 

 

 

Continuing operations

Discontinued operations

Total

Full year 2017

Notes

£m

£m

£m

Adjusted profit/(loss) before tax

 

 

 

 

Aberdeen Standard Investments

 

492

-

492

Pensions and Savings

 

1

380

381

India and China life

 

59

-

59

Other

 

(77)

(1)

(78)

Adjusted profit before tax

4.3

475

379

854

Adjusted for the following items

 

 

 

 

Restructuring and corporate transaction expenses

 

(162)

(11)

(173)

Amortisation and impairment of intangible assets acquired in business combinations

 

(138)

-

(138)

Provision for annuity sales practices

 

-

(100)

(100)

Coupons payable on perpetual notes classified as equity

 

10

-

10

Profit on disposal of interests in associates

 

319

-

319

Short-term fluctuations in investment return and economic assumption changes

 

-

67

67

Other

 

(25)

-

(25)

Total adjusting items

4.3

4

(44)

(40)

Share of associates' and joint ventures' tax expense

4.3

(41)

-

(41)

Profit attributable to non-controlling interests - ordinary shares

4.3

-

25

25

Profit before tax expense attributable to equity holders

 

438

360

798

Tax (expense)/credit attributable to

 

 

 

 

Adjusted profit

4.3

(77)

(31)

(108)

Adjusting items

4.3

49

(7)

42

Total tax expense attributable to equity holders

 

(28)

(38)

(66)

Profit for the period

 

410

322

732

The Group's key alternative performance measure is adjusted profit before tax. Refer to Note 4.8 for further details.

IFRS condensed consolidated statement of financial position

As at 30 June 2018

 

 

30 June
2018

30 June
2017

31 December
2017

 

Notes

£m

£m

£m

Assets

 

 

 

 

Intangible assets

4.10

4,401

566

4,514

Deferred acquisition costs

 

6

622

612

Investments in associates and joint ventures accounted for using the equity method1

 

514

603

503

Investment property

4.15

-

10,038

9,749

Property, plant and equipment

 

51

117

146

Pension and other post-retirement benefit assets

4.13

1,032

1,107

1,099

Deferred tax assets

 

43

57

65

Reinsurance assets

 

-

5,155

4,811

Loans

 

-

197

91

Derivative financial assets

4.15

7

2,844

3,053

Equity securities and interests in pooled investment funds1

4.15

3,196

94,538

99,020

Debt securities

4.15

469

63,887

61,565

Receivables and other financial assets

 

590

1,597

1,242

Current tax recoverable

 

30

226

192

Other assets

 

69

115

185

Assets held for sale

4.2

183,317

757

1,038

Cash and cash equivalents

 

935

8,025

10,226

Total assets

 

194,660

190,451

198,111

Equity

 

 

 

 

Share capital

4.11

364

242

364

Shares held by trusts

4.11

(76)

(14)

(61)

Share premium reserve

4.11

640

635

639

Retained earnings

 

2,857

2,909

3,162

Other reserves

 

4,472

611

4,500

Equity attributable to equity holders of Standard Life Aberdeen plc

 

8,257

4,383

8,604

Non-controlling interests

 

 

 

 

Ordinary shares

 

287

287

289

Preference shares

 

99

-

99

Total equity

 

8,643

4,670

8,992

Liabilities

 




Non-participating insurance contract liabilities


5

22,894

22,740

Non-participating investment contract liabilities

4.15

1,274

103,456

105,769

Participating contract liabilities

 

5

30,615

30,647

Deposits received from reinsurers

 

-

4,810

4,633

Third party interest in consolidated funds

4.15

227

16,080

16,457

Subordinated liabilities

 

1,909

1,327

2,253

Pension and other post-retirement benefit provisions

4.13

70

57

78

Deferred income

 

-

175

157

Deferred tax liabilities

 

109

254

367

Current tax liabilities

 

72

132

166

Derivative financial liabilities

4.15

32

894

813

Other financial liabilities

 

1,090

4,135

3,896

Provisions

 

30

217

316

Other liabilities

 

15

95

121

Liabilities of operations held for sale

4.2

181,179

640

706

Total liabilities

 

186,017

185,781

189,119

Total equity and liabilities

 

194,660

190,451

198,111

1    At 31 December 2017, the presentation of the consolidated statement of financial position was changed to include associates measured at FVTPL within 'Equity securities and interests in pooled investment funds'. Previously these were included within 'Investments in associated and joint ventures' which has been renamed 'Investments in associates and joint ventures accounted for using the equity method'. The 30 June 2017 comparative has been updated to reflect the change in presentation.

IFRS condensed consolidated statement of changes in equity

For the six months ended 30 June 2018

 

 

 

 

 

 

 

 

Non-controlling interests

 

 

 

Share capital

Shares held by trusts

Share premium reserve

Retained earnings

Other reserves

Total equity attributable to equity holders of Standard Life Aberdeen plc

Ordinary shares

Preference shares

Total equity

2018

Notes

£m

£m

£m

£m

£m

£m

£m

£m

£m

1 January

 

364

(61)

639

3,162

4,500

8,604

289

99

8,992

Profit for the period from continuing operations

 

-

-

-

111

-

111

-

3

114

Profit for the period from discontinued operations

4.2

-

-

-

74

-

74

5

-

79

Other comprehensive income for the period from continuing operations

 

-

-

-

(89)

(15)

(104)

-

-

(104)

Other comprehensive income for the period from discontinued operations

4.2

-

-

-

-

(2)

(2)

-

-

(2)

Total comprehensive income for the period

 

-

-

-

96

(17)

79

5

3

87

Issue of share capital

4.11

-

-

1

-

-

1

-

-

1

Dividends paid on ordinary shares

4.9

-

-

-

(420)

-

(420)

-

-

(420)

Dividends paid on preference shares

 

-

-

-

-

-

-

-

(3)

(3)

Other movements in non-controlling interests in the period

 

-

-

-

-

-

-

(7)

-

(7)

Reserves credit for employee share-based payments

 

-

-

-

-

30

30

-

-

30

Transfer to retained earnings for vested employee share-based payments

 

-

-

-

41

(41)

-

-

-

-

Shares acquired by employee trusts

 

-

(35)

-

-

-

(35)

-

-

(35)

Shares distributed by employee and other trusts and related dividend equivalents

 

-

20

-

(21)

-

(1)

-

-

(1)

Sale of shares held by trusts

 

-

-

-

-

-

-

-

-

-

Aggregate tax effect of items recognised directly in equity

4.6

-

-

-

(1)

-

(1)

-

-

(1)

30 June

 

364

(76)

640

2,857

4,472

8,257

287

99

8,643

                                                  

 

 

 

Share capital

Shares held by trusts

Share premium reserve

Retained earnings

Other reserves

Total equity attributable to equity holders of Standard Life Aberdeen plc

Non-controlling interests

Total equity

2017

Notes

£m

£m

£m

£m

£m

£m

£m

£m

1 January

 

242

(2)

634

2,855

618

4,347

297

4,644

Profit for the period from continuing operations

 

-

-

-

84

-

84

-

84

Profit for the period from discontinued operations

4.2

-

-

-

208

-

208

6

214

Other comprehensive income for the period from continuing operations

 

-

-

-

2

(5)

(3)

-

(3)

Other comprehensive income for the period from discontinued operations

4.2

-

-

-

-

9

9

-

9

Total comprehensive income for the period

 

-

-

-

294

4

298

6

304

Issue of share capital

4.11

-

-

1

-

-

1

-

1

Dividends paid on ordinary shares

4.9

-

-

-

(263)

-

(263)

-

(263)

Reserves credit for employee share-based payments

 

-

-

-

-

10

10

-

10

Transfer to retained earnings for vested employee share-based payments

 

-

-

-

21

(21)

-

-

-

Shares acquired by employee trusts

 

-

(14)

-

-

-

(14)

-

(14)

Shares distributed by employee and other trusts

 

-

2

-

(2)

-

-

-

-

Sale of shares held by trusts

 

-

-

-

4

-

4

-

4

Other movements in non-controlling interests in the period

 

-

-

-

-

-

-

(16)

(16)

Aggregate tax effect of items recognised directly in equity

4.6

-

-

-

-

-

-

-

-

30 June

 

242

(14)

635

2,909

611

4,383

287

4,670

 

 

 

 

 

 

 

 

 

Non-controlling interests

 

 

 

Share capital

Shares held by trusts

Share premium reserve

Retained earnings

Other reserves

Total equity attributable to equity holders of Standard Life Aberdeen plc

Ordinary shares

Preference shares and perpetual notes

Total equity

2017

Notes

£m

£m

£m

£m

£m

£m

£m

£m

£m

1 January

 

242

(2)

634

2,855

618

4,347

297

-

4,644

Profit for the period from continuing operations

 

-

-

-

402

-

402

-

8

410

Profit for the period from discontinued operations

4.2

-

-

-

297

-

297

25

-

322

Other comprehensive income for the period from continuing operations

 

-

-

-


(24)

(50)

(74)

-

-

(74)

Other comprehensive income for the period from discontinued operations

4.2

-

-

-

-

12

12

-

-

12

Total comprehensive income for the year

 

-

-

-

675

(38)

637

25

8

670

Issue of share capital

4.11

122

(3)

5

-

3,877

4,001

-

-

4,001

Dividends paid on ordinary shares

4.9

-

-

-

(469)

-

(469)

-

-

(469)

Coupons paid on perpetual notes

 

-

-

-

-

-

-

-

(13)

(13)

Non-controlling interests acquired through business combinations

 

-

-

-

-

-

-

-

501

501

Reclassification of perpetual notes to liability

 

-

-

-

19

-

19

-

(399)

(380)

Other movements in non-controlling interests in the year

 

-

-

-

-

-

-

(33)

-

(33)

Reserves credit for employee share-based payments

 

-

-

-

-

96

96

-

-

96

Transfer to retained earnings for vested employee share-based payments

 

-

-

-

86

(54)

32

-

-

32

Shares acquired by employee trusts

 

-

(61)

-

-

-

(61)

-

-

(61)

Shares distributed by employee and other trusts and related dividend equivalents

 

-

5

-

(8)

-

(3)

-

-

(3)

Sale of shares held by trusts

 

-

-

-

4

-

4

-

-

4

Aggregate tax effect of items recognised directly in equity

4.6

-

-

-

-

1

1

-

2

3

31 December

 

364

(61)

639

3,162

4,500

8,604

289

99

8,992

 

IFRS condensed consolidated statement of cash flows

For the six months ended 30 June 2018

 

 

6 months
2018

6 months
2017

Full year
2017

 

Notes

£m

£m

£m

Cash flows from operating activities

 

 

 

 

Profit before tax from continuing operations

 

127

94

438

Profit before tax from discontinued operations

4.2

122

280

526

 

 

249

374

964

Change in operating assets

 

3,262

665

1,351

Change in operating liabilities

 

(2,262)

415

(84)

Adjustment for non-cash movements in investment income

 

(37)

(17)

40

Change in unallocated divisible surplus

 

(49)

(2)

140

Other non-cash and non-operating items

 

139

39

3

Taxation paid

 

(155)

(135)

(220)

Net cash flows from operating activities

 

1,147

1,339

2,194

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Purchase of property, plant and equipment

 

(12)

(15)

(37)

Proceeds from sale of property, plant and equipment

 

1

-

-

Proceeds from sale of seeding investments

 

8

-

19

Acquisition of subsidiaries and unincorporated businesses net of cash acquired

 

(33)

-

495

Disposal of investments in associates and joint ventures

 

-

-

359

Purchase of intangible assets

 

(105)

(32)

(69)

Net cash flows from investing activities

 

(141)

(47)

767

Cash flows from financing activities

 

 

 

 

Repayment of subordinated liabilities

4.12

(363)

-

-

Repayment of other borrowings

 

(2)

(1)

(1)

Proceeds from issue of subordinated liabilities

 

-

-

565

Capital flows to third party interest in consolidated funds and non-controlling interests - ordinary shares

 

(358)

(848)

(1,011)

Distributions paid to third party interest in consolidated funds and non-controlling interests - ordinary shares

 

(55)

(56)

(109)

Shares acquired by trusts

 

(35)

(14)

(61)

Sale of shares held by trusts

 

-

4

4

Proceeds from issue of shares

 

1

1

5

Interest paid

 

(38)

(34)

(97)

Preference dividends paid

 

(3)

-

-

Ordinary dividends paid

4.9

(420)

(263)

(469)

Net cash flows from financing activities

 

(1,273)

(1,211)

(1,174)

Net (decrease)/increase in cash and cash equivalents

 

(267)

81

1,787

Cash and cash equivalents at the beginning of the period

 

9,715

7,900

7,900

Effects of exchange rate changes on cash and cash equivalents

 

2

33

28

Cash and cash equivalents at the end of the period1

 

9,450

8,014

9,715

Supplemental disclosures on cash flows from operating activities

 

 

 

 

Interest paid

 

3

2

4

Interest received

 

848

841

1,710

Dividends received

 

1,321

1,141

2,086

Rental income received on investment property

 

251

257

503

1    Comprises £9,790m (30 June 2017: £8,052m; 31 December 2017: £10,257m) of cash and cash equivalents, including cash and cash equivalents held for sale and (£340m) (30 June 2017: (£38m); 31 December 2017: (£542m)) of overdrafts which are reported in other financial liabilities and liabilities of operations held for sale in the IFRS condensed consolidated statement of financial position.

Notes to the IFRS condensed consolidated financial information

4.1   Accounting policies

(a)     Basis of preparation

The IFRS condensed consolidated half year financial information has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and IAS 34 Interim Financial Reporting issued by the International Accounting Standards Board as endorsed by the European Union (EU).

The accounting policies for recognition, measurement, consolidation and presentation as set out in the Group's Annual report and accounts for the year ended 31 December 2017 have been applied in the preparation of the IFRS condensed consolidated half year financial information except as noted below.

(a)(i) New standards, interpretations and amendments to existing standards that have been adopted by the Group

The Group has adopted the following new International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs), interpretations and amendments to existing standards, which are effective by EU endorsement for annual periods beginning on or after 1 January 2018:

IFRS 15 Revenue from Contracts with Customers and amendments to IAS 34 Interim Financial Reporting

IFRS 15 replaces IAS 18 Revenue and provides a new five-step revenue recognition model for determining recognition and measurement of revenue from contracts with customers. The Group's revenue generated from the following contracts is exempt from this standard:

·  Lease contracts within the scope of IAS 17 Leases

·  Insurance contracts within the scope of IFRS 4 Insurance Contracts

·  Financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments

The adoption of this standard has had no significant impact on the timing of revenue recognition of the Group. The Group's accounting policy for revenue within the scope of IFRS 15 has been updated to state that revenue is recognised as performance obligations are satisfied.

The standard introduces a number of new disclosure requirements which will be presented in the Group's Annual report and accounts for the year ended 31 December 2018.

Revenue from contracts with customers from continuing operations for the six months ended 30 June 2017 and 12 months ended 31 December 2017 consists of £511m and £1,479m respectively which was previously presented as fee income, and £3m and £7m respectively that was previously presented as other income on the face of the consolidated income statement.

The standard requires the incremental cost of obtaining contracts with customers to be recognised as an asset where it is expected that these costs will be recovered. These costs have been included as an intangible asset and are shown in Note 4.10.

The standard amends IAS 34 to require additional disclosures in interim accounts around disaggregated revenue and its relationship with revenue reported for each reportable segment. These disclosures are provided in Note 4.4.

IFRS 4 Insurance Contracts and IFRS 9 Financial Instruments

The Group has opted to defer implementation of IFRS 9 Financial Instruments, which is effective for annual periods beginning on or after 1 January 2018, as permitted under amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts. Qualifying insurers are permitted to defer implementation of IFRS 9 until periods beginning on or after 1 January 2021.

Interpretations and amendments to other standards

·  IFRIC 22 Foreign Currency Transactions and Advanced Consideration

·  Amendments to IFRS 2 Share-based payment: Classification and Measurement of Share-based payment transactions

·  Amendments to IAS 40 Investment Property: Transfers of Investment Property

·  Annual Improvements 2014-2016 cycle

The Group's accounting policies have been updated to reflect these. Management considers the implementation of the above interpretations and amendments to existing standards has had no significant impact on the Group's financial statements.

(b)     IFRS condensed consolidated half year financial information

This IFRS condensed consolidated half year financial information does not comprise statutory accounts within the meaning of Section 434 of the Companies Act. Additionally, the comparative figures for the financial year ended 31 December 2017 are not the Company's statutory accounts for that financial year. The statutory accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The IFRS condensed consolidated half year financial information has been reviewed, not audited.

(c)     Exchange rates

The income statements and cash flows, and statements of financial position of Group entities that have a different functional currency from the Group's presentation currency have been translated using the following principal exchange rates:

 

6 months 2018

6 months 2017

Full year 2017

 

Income statement and cash flows (average rate)

Statement of financial position (closing rate)

Income statement and cash flows (average rate)

Statement of financial position (closing rate)

Income statement and cash flows (average rate)

Statement of financial position (closing rate)

Euro

1.136

1.131

1.164

1.139

1.145

1.126

US Dollar

1.369

1.320

1.267

1.299

1.297

1.353

Indian Rupee

90.033

90.457

83.417

83.963

84.474

86.341

Chinese Renminbi

8.759

8.747

8.705

8.806

8.753

8.809

Hong Kong Dollar

10.727

10.358

9.854

10.140

10.104

10.575

Singapore Dollar

1.819

1.800

1.775

1.788

1.787

1.808

4.2   Acquisitions and disposals

(a)     Acquisitions

(a)(i) Subsidiaries

On 27 April 2018, Aberdeen Asset Management Inc. purchased the US business of specialist commodity exchange traded product provider ETF Securities by purchasing the entire members' interests of ETF Securities USA LLC, ETF Securities (US) LLC and ETF Securities Advisers LLC. The acquisition broadens Aberdeen Standard Investments' suite of investment capabilities with the addition of a range of commodity-based Exchange Traded Funds. It also provides the platform and expertise to enable Aberdeen Standard Investments to grow its existing Smart Beta capability by launching strategies within an Exchange Traded Fund vehicle structure.

At the acquisition date the consideration, net assets acquired and resulting goodwill from the ETF Securities acquisition were as follows:

27 April 2018

 

£m1

Cash

 

27

Fair value of earn-out payment

 

8

Consideration

 

35

Fair value of net assets acquired

 

 

Customer-related intangible assets

 

28

Receivables and other financial assets

 

1

Cash and cash equivalents

 

1

Total assets

 

30

Other financial liabilities

 

2

Total liabilities

 

2

Goodwill

 

7

1    The fair values of assets and liabilities recognised, including intangibles, are provisional and are subject to the finalisation of completion accounts. The fair value of the earn-out payment of £8m has been calculated by reference to revenue retention and increases in assets under management and could range from £nil to £10m.

Customer-related intangible assets relate to the existing customer relationships in place at the acquisition date. The full amount of the goodwill is expected to be deductible for tax purposes.

The amounts of revenue and profit contributed to the Group's consolidated income statement for the period ended 30 June 2018 from the acquired ETF Securities business were £1m and £nil respectively. If the acquisition had occurred on 1 January 2018, the Group's total revenue for the period would have increased by £3m to £1,022m and the profit would have remained unchanged.

During the period, the Group's UK wide financial advice business, 1825, completed the purchase of the entire share capital of Fraser Heath Financial Management Ltd and Cumberland Place Financial Management Ltd on 1 March 2018 and 6 April 2018 respectively. The combined assets under advice totalled £750m at the respective acquisition dates. Additionally during the period, Aberdeen Standard Investments completed the acquisition of specialist financing company Hark Capital which provides loans to mid-life and end of life private equity and venture capital funds.

(a)(ii)   Prior year acquisition

On 6 March 2017, the boards of Standard Life plc and Aberdeen Asset Management PLC (Aberdeen) announced that they had reached agreement on the terms of a recommended merger of Standard Life and Aberdeen, through the acquisition by Standard Life of the entire issued ordinary share capital of Aberdeen, to be effected by means of a court-sanctioned scheme of arrangement between Aberdeen and Aberdeen shareholders under Part 26 of the Companies Act 2006. The merger completed on 14 August 2017 and Standard Life plc was renamed Standard Life Aberdeen plc.

(b)     Disposals

(b)(i) Prior year disposal

HDFC Standard Life Insurance Company Limited

On 17 November 2017, HDFC Standard Life Insurance Company Limited (HDFC Life) listed on the National Stock Exchange of India Limited and The Bombay Stock Exchange Limited following completion of an IPO. On opening, the equity shares in HDFC Life were listed at a price of Rs 290 per share. Through the IPO, Standard Life (Mauritius Holdings) 2006 Limited (MH06) sold 108m equity shares in HDFC Life for a total consideration of Rs 31,489m (£359m). MH06's shareholding in HDFC Life now stands at 590m equity shares or 29.3% of the issued equity share capital of HDFC Life. The gain on sale of £302m was calculated using the weighted-average cost method. On disposal £2m was recycled from the translation reserve and was included in determining the gain on sale.

(c)     Assets and liabilities of operations held for sale

(c)(i)  Pension and savings discontinued operations

On 23 February 2018, the Group announced the proposed sale of the UK and European insurance business to Phoenix Group Holdings (Phoenix) (the Sale), conditional on shareholder and relevant regulatory approvals. The Sale will be implemented by selling the entire issued share capital of Standard Life Assurance Limited (SLAL).

On 30 May 2018, the Group published a circular related to the proposed Sale and gave notice of a general meeting to take place on 25 June 2018. The proposed Sale was approved by shareholders on 25 June 2018 with the shareholders of Phoenix also approving the transaction on the same date. Completion of the Sale is subject to regulatory and other necessary approvals and, if approved, is expected to complete in the third quarter of 2018.

Under the transaction the following businesses will be retained by the Group:

·  UK retail platforms, including Wrap and Elevate

·  1825, our financial advice business

In addition, the assets and liabilities of both the UK and Ireland Standard Life staff defined benefit pension plans will be retained by the Group.

The total consideration payable to the Group by Phoenix in respect of the Sale comprises cash payable on closing of approximately £2.0bn, a dividend paid by SLAL to the Company of £312m in March 2018 and new shares issued at completion representing approximately 19.99% of the then issued share capital of Phoenix following the completion of the rights issue by Phoenix on 10 July 2018 to part finance the acquisition. The shareholding in Phoenix is subject to a lock-up of 12 months from completion.

The Group and Phoenix have also agreed to significantly expand their existing long-term strategic partnership whereby the Group continues as Phoenix's primary long-term asset management partner.

Under the terms of the Sale, the Group will provide indemnities in a number of areas. The Group estimates that the one off costs relating to the separation of the business being sold will be in the region of £250m.

Following the announcement, the disposal group was classified as held for sale and measured at its carrying amount. The results of the held for sale disposal group have been classified as discontinued operations.

(c)(ii) Standard Life (Asia) Limited

On 29 March 2017, the Group announced the proposed sale of its wholly owned Hong Kong insurance business, Standard Life (Asia) Limited (SL Asia) to the Group's Chinese joint venture business, Heng An Standard Life Insurance Company Limited, both of which are reported within the India and China life segment. The transaction is subject to obtaining local regulatory and other approvals in mainland China and Hong Kong.

Following the announcement, the disposal group was classified as held for sale and measured at fair value less costs to sell. Following the remeasurement of the disposal group to the lower of its carrying amount and its fair value less costs to sell, an impairment loss of £nil (30 June 2017: £24m; 31 December 2017: £24m) has been included in Other administrative expenses in the IFRS condensed consolidated income statement. Fair value has been determined by reference to the expected sale price.

(c)(iii)  Analysis of assets and liabilities of operations held for sale

At 30 June 2018, the assets and liabilities of operations held for sale comprised the following. Comparatives for 30 June 2017 and 31 December 2017 consist solely of SL Asia.

 

Pensions and savings discontinued operations

SL Asia

Total
30 Jun
2018

30 Jun
2017

31 Dec

2017

 

£m

£m

£m

£m

£m

Assets of operations held for sale

 

 

 

 

 

Intangible assets

151

-

151

-

-

Deferred acquisition costs

611

-

611

-

-

Investment property

9,895

-

9,895

-

-

Property, plant and equipment

101

-

101

-

-

Deferred tax assets

14

3

17

3

3

Reinsurance assets

4,523

12

4,535

7

13

Loans

102

-

102

-

-

Derivative financial assets

2,588

-

2,588

-

-

Equity securities and interests in pooled investment funds

94,778

639

95,417

590

638

Debt securities

58,428

12

58,440

11

12

Receivables and other financial assets

2,167

4

2,171

13

6

Current tax recoverable

180

-

180

-

-

Other assets

59

-

59

-

-

Cash and cash equivalents

8,821

34

8,855

27

31

Total assets of operations held for sale

182,418

704

183,122

651

703

Liabilities of operations held for sale

 

 

 

 

 

Non-participating insurance contract liabilities

22,174

605

22,779

553

603

Non-participating investment contract liabilities

102,189

59

102,248

65

62

Participating contract liabilities

30,207

-

30,207

-

-

Deposits received from reinsurers

4,313

-

4,313

-

-

Third party interest in consolidated funds

15,691

-

15,691

-

-

Pension and other post-retirement benefit provisions

7

-

7

-

-

Deferred income

143

2

145

2

2

Deferred tax liabilities

213

3

216

3

3

Current tax liabilities

51

-

51

-

-

Derivative financial liabilities

897

-

897

-

-

Other financial liabilities

4,177

6

4,183

7

8

Provisions

270

-

270

-

-

Other liabilities

81

-

81

-

-

Total liabilities of operations held for sale

180,413

675

181,088

630

678

Net assets of operations held for sale

2,005

29

2,034

21

25

Net assets of operations held for sale are net of intercompany balances between the disposal group and the rest of the Group. The net assets of the pensions and savings discontinued operations on a gross basis are £1,403m at 30 June 2018.

In addition to the above, Assets held for sale of £183,317m (30 June 2017: £757m; 31 December 2017: £1,038m) includes £169m (30 June 2017: £72m; 31 December 2017: £91m) of investment vehicles; £26m (30 June 2017: £nil; 31 December 2017: £33m) being the portion of the paid-up equity share capital of HDFC AMC subject to IPO; and £nil (30 June 2017: £34m; 31 December 2017: £211m) of investment and owner occupied property. Total liabilities of operations held for sale of £181,179m (30 June 2017: £640m; 31 December 2017: £706m) also includes third party interests in investment vehicles of £91m (30 June 2017: £10m; 31 December 2017: £28m).

Insurance contracts, participating investment contracts and reinsurance contracts

The breakdown of participating contract liabilities included in operations held for sale is set out below:


Pensions and savings discontinued operations

30 Jun
2018

 

£m

£m

Participating insurance contract liabilities

14,568

14,568

Participating investment contract liabilities

15,012

15,012

Unallocated divisible surplus

627

627

Participating contract liabilities

30,207

30,207

The movement in insurance contract liabilities, participating investment contract liabilities and reinsurance contracts during the six months ended 30 June 2018 and the six months ended 30 June 2017 arising from changes in estimates are set out below:


Participating insurance
contract

liabilities

Non-
participating insurance contract
liabilities

Participating investment contract liabilities

Total
 insurance and participating contracts

Reinsurance contracts

Net

6 months 2018

£m

£m

£m

£m

£m

£m

Changes in







Methodology/modelling

(5)

-

5

-

-

-

Economic assumptions

56

(242)

(60)

(246)

93

(153)

Non-economic assumptions

-

-

-

-

-

-

Due to changes in economic and non-economic factors, certain assumptions used in estimating insurance and investment contract liabilities have been revised. Therefore, the change in liabilities reflects actual performance over the period, changes in assumptions and, to a limited extent, improvements in modelling techniques.

Economic assumptions reflect changes in fixed income yields, leading to small changes in valuation interest rates for non-participating business, and other market movements.


Participating insurance
contract

liabilities

Non-
participating insurance contract
liabilities

Participating investment contract liabilities

Total
 insurance and participating contracts

Reinsurance contracts

Net

6 months 2017

£m

£m

£m

£m

£m

£m

Changes in







Methodology/modelling

(11)

-

11

-

-

-

Economic assumptions

(2)

(86)

47

(41)

7

(34)

Non-economic assumptions

1

-

(4)

(3)

-

(3)

The movement in insurance contract liabilities, participating investment contract liabilities and reinsurance contracts during the year ended 31 December 2017 was as follows:

 

Participating insurance
contract

liabilities

Non-
participating insurance contract
liabilities

Participating investment contract liabilities

Total
 insurance and participating contracts

Reinsurance contracts

Net

2017

£m

£m

£m

£m

£m

£m

1 January

15,151

23,422

15,537

54,110

(5,386)

48,724

Reclassified as held for sale during the year

-

(550)

-

(550)

7

(543)

Change in contract liabilities

 

 

 

 

 

 

Expected change

(896)

(898)

(1,034)

(2,828)

397

(2,431)

Methodology/modelling changes

(58)

10

51

3

-

3

Effect of changes in

 

 

 

 

 

 

Economic assumptions

(37)

(81)

79

(39)

8

(31)

Non-economic assumptions

(66)

(235)

6

(295)

154

(141)

Effect of

 

 

 

 

 

 

Economic experience

126

532

573

1,231

3

1,234

Non-economic experience

15

(381)

39

(327)

6

(321)

New business

-

878

33

911

-

911

Total change in contract liabilities

(916)

(175)

(253)

(1,344)

568

(776)

Foreign exchange adjustment

424

43

29

496

-

496

31 December

14,659

22,740

15,313

52,712

(4,811)

47,901

Provision for annuity sales practices relating to enhanced annuities

Included in provisions held for sale is a provision of £215m (30 June 2017: £164m; 31 December 2017: £229m) for annuity sales practices relating to enhanced annuities. There were no additional amounts charged to the income statement in respect of provisions for annuity sales practices relating to enhanced annuities during the six months ended 30 June 2018.

On 14 October 2016, the Financial Conduct Authority (FCA) published the findings of its thematic review of non-advised annuity sales practices. Standard Life Assurance Limited has been a participant in that review. The FCA looked at whether firms provided sufficient information to their customers about their potential eligibility for enhanced annuities.

At the request of the FCA, Standard Life Assurance Limited is conducting a review of non-advised annuity sales (with a purchase price above a minimum threshold) to customers eligible to receive an enhanced annuity from 1 July 2008 until 31 May 2016. The purpose of this review is to identify whether these customers received sufficient information about enhanced annuities to make the right decisions about their purchase, and, where appropriate, provide redress to customers who have suffered loss as a result of not having received sufficient information. Standard Life Assurance Limited worked with the FCA regarding the process for conducting this past business review and commenced customer contact during 2018.

The Group has provided for an estimate of the redress payable to customers, which may comprise both lump sum payments and enhancements to future annuity payments, the costs of conducting the review and other related expenses.

The Group has in place liability insurance and is seeking for up to £100m of the financial impact of the provision to be mitigated by this insurance. Discussions are ongoing with our insurers and, as a result, no insurance recovery has been recognised as an asset in these financial statements.

The Group expects the majority of the outflows associated with this provision, including outflows relating to establishing any reserves for future annuity payments, to have occurred by mid 2019.

The Group has not provided for any possible FCA-levied financial penalty relating to the review.

Contingent liabilities and contingent assets

At the request of the FCA, Standard Life Assurance Limited is conducting a past business review of non-advised annuity sales as described above. In relation to this review, the FCA is carrying out an investigation and it is possible that the FCA may impose a financial penalty on Standard Life Assurance Limited. At this stage it is not possible to determine an estimate of the financial effect, if any, of this contingent liability.

Disclosure of potential insurance recoveries relating to redress payable to customers, the costs of conducting the review and other related expenses is provided above. Any FCA levied financial penalties cannot be covered by such liability insurance.

(d)     Discontinued operations

Discontinued operations relate solely to the UK and European insurance business held for sale. The consolidated income statement, other comprehensive income and cash flows from discontinued operations are shown below:

 

 

6 months
2018

6 months

2017

Full year
2017

Consolidated income statement

Notes

£m

£m

£m

Income

 

 

 

 

Investment return

 

554

5,626

12,536

Revenue from contracts with customers

 

96

88

185

Insurance and participating investment contract premium income

 

952

1,009

2,054

Other income

 

7

10

18

Total income from discontinued operations

 

1,609

6,733

14,793

 

 

 

 

 

Expenses

 

 

 

 

Insurance and participating investment contract claims and change in liabilities

 

1,078

1,328

3,427

Change in non-participating investment contract liabilities

 

216

4,321

8,889

Administrative expenses

 

 

 

 

Restructuring and corporate transaction expenses

4.5

51

4

14

Other administrative expenses

 

258

303

665

Total administrative expenses

 

309

307

679

Provision for annuity sales practices

 

-

-

100

Change in liability for third party interest in consolidated funds

 

(143)

470

1,118

Finance costs

 

27

27

54

Total expenses from discontinued operations

 

1,487

6,453

14,267

 

 

 

 

 

Profit before tax from discontinued operations

 

122

280

526

 

 

 

 

 

Tax expense attributable to policyholders' returns

 

24

53

166

 

 

 

 

 

Profit before tax expense attributable to equity holders

 

98

227

360

 

 

 

 

 

Total tax expense

 

43

66

204

Less: Tax attributable to policyholders' returns

 

(24)

(53)

(166)

Tax expense attributable to equity holders

 

19

13

38

Profit for the period from discontinued operations

 

79

214

322

Intercompany income and expenses that will continue post completion are eliminated in discontinued operations, those that will not continue post completion are eliminated in continuing operations. Revenue from contracts with customers is shown net of elimination of intra-group revenue which will continue post completion.

The Group provides additional disclosure in relation to the total tax expense for discontinued operations. Certain products are subject to tax on policyholders' investment returns. This tax, 'policyholder tax', is accounted for as an element of income tax. To make the tax expense disclosure more meaningful, we disclose policyholder tax and tax payable on equity holders' profits separately. The policyholder tax expense is the amount payable in the period plus the movement of amounts expected to be payable in future periods by policyholders on their investment return. The remainder of the tax expense is attributed to equity holders as tax payable on equity holders' profit.

 

 

 

6 months
2018

6 months
2017

Full year
2017

Other comprehensive income

 

£m

£m

£m

Items that will not be reclassified subsequently to profit or loss:

 

 

 

 

Revaluation of owner occupied property

 

2

1

1

Total items that will not be reclassified subsequently to profit or loss

 

2

1

1

 

 

 

 

 

Items that may be reclassified subsequently to profit or loss:

 

 

 

 

Exchange differences on translating foreign operations

 

(1)

2

(1)

Change in unallocated divisible surplus

 

(3)

6

12

Total items that may be reclassified subsequently to profit or loss

 

(4)

8

11

Other comprehensive income for the period from discontinued operations

 

(2)

9

12

 

 

6 months
2018

6 months
2017

Full year
2017

Cash flows

£m

£m

£m

Net cash flows from operating activities

538

1,061

2,247

Net cash flows from financing activities

(451)

(1,032)

(1,309)

Net cash flows from investing activities

(13)

(24)

(38)

Total net cash flows

74

5

900

4.3   Segmental analysis

The Group's reportable segments have been identified in accordance with the way in which the Group is structured and managed. IFRS 8 Operating Segments requires that the information presented in the financial statements is based on information provided to the 'Chief Operating Decision Maker'. The Chief Operating Decision Maker for the Group is the executive committee.

(a)     Basis of segmentation

The Group's reportable segments are as follows:

Continuing operations:

Aberdeen Standard Investments

Following the merger with Aberdeen, Standard Life Investments and Aberdeen Asset Management combined under the Aberdeen Standard Investments brand. The combined business is managed and reported as one operating segment. Aberdeen Standard Investments provides a range of investment products and services for individuals and institutional customers through a number of different investment vehicles. Investment management services are also provided by Aberdeen Standard Investments to the Group's other reportable segments. This segment includes the Group's share of the results of HDFC Asset Management Company Limited.

Pensions and Savings

The Pensions and Savings segment includes our UK retail platforms Wrap and Elevate, as well as our financial planning and advice business 1825, and our distribution and marketing capabilities. The segment also includes the UK and Ireland Standard Life staff defined benefit pension plans.

India and China life

The businesses included in India and China life offer a range of insurance and savings products and comprise our life insurance associate in India, our life insurance joint venture in China and wholly owned operations in Hong Kong, the assets and liabilities of which are classified as held for sale.

Discontinued operations:   

Pensions and Savings

On 23 February 2018, the Group announced the proposed sale of the UK and European insurance business. Refer to Note 4.2 (c) for further details. As a consequence, the results of this business have been presented as discontinued operations. Comparative amounts for the six months ended 30 June 2017 and the 12 months ended 31 December 2017 have been prepared on the same basis as 30 June 2018 to allow more meaningful comparison.

 

(b)     Reportable segments - Group adjusted profit before tax and revenue information

(b)(i) Analysis of Group adjusted profit before tax

Adjusted profit before tax is the key alternative performance measure utilised by the Group's management in their evaluation of segmental performance and is therefore also presented by reportable segment.

 

 

Aberdeen Standard
Investments

Pensions and Savings

India and China life

Other1

Total continuing operations

Discontinued operations

Eliminations

Total

6 months 2018

Notes

£m

£m

£m

£m

£m

£m

£m

£m

Fee based revenue


871

89

6

-

966

395

(69)

1,292

Spread/risk margin


-

-

-

-

-

55

-

55

Total adjusted operating income


871

89

6

-

966

450

(69)

1,347

Total adjusted operating expenses


(580)

(102)

(5)

(25)

(712)

(280)

69

(923)

Adjusted operating profit


291

(13)

1

(25)

254

170

-

424

Capital management


-

14

-

(17)

(3)

(3)

-

(6)

Share of associates' and joint ventures' profit before tax2


26

-

34

-

60

-

-

60

Adjusted profit/(loss) before tax


317

1

35

(42)

311

167

-

478

Tax on adjusted profit


(56)

3

-

5

(48)

(29)

-

(77)

Share of associates' and joint ventures' tax expense

4.6

(11)

-

(7)

-

(18)

-

-

(18)

Adjusted profit/(loss) after tax

 

250

4

28

(37)

245

138

-

383

Adjusted for the following items

 

 

 

 

 

 

 

 

 

Restructuring and corporate transaction expenses

4.5

(53)

(3)

-

(3)

(59)

(51)

-

(110)

Amortisation and impairment of intangible assets acquired in business combinations3

 

(92)

(13)

(3)

-

(108)

-

-

(108)

Profit on disposal of interests in associates

 

5

-

1

-

6

-

-

6

Short-term fluctuations in investment return and economic assumption changes

4.8

-

-

-

-

-

(61)

-

(61)

Other


(2)

-

-

(3)

(5)

38

-

33

Total adjusting items


(142)

(16)

(2)

(6)

(166)

(74)

-

(240)

Tax on adjusting items


33

2

-

-

35

10

-

45

Profit attributable to non-controlling interests (preference shares)


(3)

-

-

-

(3)

-

-

(3)

Profit/(loss) for the period attributable to equity holders of Standard Life Aberdeen plc


138

(10)

26

(43)

111

74

-

185

Profit attributable to non-controlling interests


 

 

 

 

 

 

 

 

Ordinary shares


 

 

 

 

-

5

 

5

Preference shares


 

 

 

 

3

-

 

3

Profit for the period


 

 

 

 

114

79

 

193

1    Other primarily includes the corporate centre and related activities.

2    Share of associates' and joint ventures' profit before tax comprises the Group's share of results of HDFC Standard Life Insurance Company Limited, Heng An Standard Life Insurance Company Limited and HDFC Asset Management Company Limited.

3    Amortisation and impairment of intangible assets acquired in business combinations includes £105m (six months ended 30 June 2017: £10m; 12 months ended 31 December 2017: £125m) included in Other administrative expenses, and £3m (six months ended 30 June 2017: £nil; 12 months ended 31 December 2017: £13m) relating to intangibles recognised on the part acquisition of associates and included in Share of profit from associates and joint ventures in the condensed consolidated income statement.       

Each reportable segment reports total adjusted operating income as its measure of revenue in its analysis of adjusted profit before tax. Fee based revenue consists of income generated primarily from asset management charges, premium based charges and transactional charges. Spread/risk margin reflects the margin earned on spread/risk business and includes net earned premiums, claims and benefits paid, net investment return using long-term assumptions and actuarial reserving changes.

Adjusted operating income relates to revenues generated from external customers with the exception of £69m (30 June 2017: £66m; 31 December 2017: £136m) which primarily relates to investment management fees arising from intra-group transactions between Aberdeen Standard Investments and the Pensions and Savings business included in discontinued operations. At a Group level an elimination adjustment is required to remove intra-group impacts.

There are no customers whose revenue represents greater than 10% of fee based revenue.

 

 

Aberdeen Standard Investments

Pensions and Savings

India and China life

Other

Total continuing operations

Discontinued operations

Eliminations

Total

restated1

6 months 2017

Notes

£m

£m

£m

£m

£m

£m

£m

£m

Fee based revenue


429

84

7

-

520

382

(66)

836

Spread/risk margin


-

-

-

-

-

49

-

49

Total adjusted operating income


429

84

7

-

520

431

(66)

885

Total adjusted operating expenses


(260)

(97)

(7)

(26)

(390)

(258)

66

(582)

Adjusted operating profit


169

(13)

-

(26)

130

173

-

303

Capital management


-

13

-

(4)

9

(7)

-

2

Share of associates' and joint ventures' profit before tax2


20

-

33

-

53

-

-

53

Adjusted profit/(loss) before tax


189

 -

33

(30)

192

166

-

358

Tax on adjusted profit


(33)

(3)

-

5

(31)

1

-

(30)

Share of associates' and joint ventures' tax expense

4.6

(5)

-

(2)

-

(7)

-

-

(7)

Adjusted profit/(loss) after tax

 

151

(3)

31

(25)

154

167

-

321

Adjusted for the following items

 

 

 

 

 

 

 

 

 

Restructuring and corporate transaction expenses

4.5

(10)

(5)

-

(42)

(57)

(4)

-

(61)

Amortisation and impairment of intangible assets acquired in business combinations

 

(8)

(2)

-

-

(10)

-

-

(10)

Short-term fluctuations in investment return and economic assumption changes

4.8

-

-

-

-

-

59

-

59

Other


-

(1)

(24)

1

(24)

-

-

(24)

Total adjusting items


(18)

(8)

(24)

(41)

(91)

55

 

(36)

Tax on adjusting items


3

2

-

16

21

(14)

-

7

Profit/(loss) for the period attributable to equity holders of Standard Life Aberdeen plc


136

(9)

7

(50)

84

208

-

292

Profit attributable to non-controlling interests


 

 

 

 

-

6

 

6

Profit for the period


 

 

 

 

84

214

 

298

1    Following completion of the merger the Group has changed the calculation of adjusted profit (previously named operating profit). Short-term fluctuations in investment return and economic assumption changes are now only adjusted for insurance entities. Previously these adjustments also applied to non-insurance entities. This has resulted in a £3m reduction to the adjusted profit of the other segment, a £1m reduction to the Aberdeen Standard Investments segment and a corresponding £4m adjustment to short-term fluctuations in investment return and economic assumption changes within adjusting items, for the six months ended 30 June 2017.

2    Share of associates' and joint ventures' profit before tax comprises the Group's share of results of HDFC Standard Life Insurance Company Limited, Heng An Standard Life Insurance Company Limited and HDFC Asset Management Company Limited.

 

 

 

Aberdeen Standard
Investments

Pensions and Savings

India and China life

Other

Total continuing operations

Discontinued operations

Eliminations

Total

Full year 2017

Notes

£m

£m

£m

£m

£m

£m

£m

£m

Fee based revenue


1,260

175

12

-

1,447

800

(136)

2,111

Spread/risk margin


-

-

-

-

-

165

-

165

Total adjusted operating income


1,260

175

12

-

1,447

965

(136)

2,276

Total adjusted operating expenses


(811)

(201)

(11)

(61)

(1,084)

(579)

136

(1,527)

Adjusted operating profit


449

(26)

1

(61)

363

386

-

749

Capital management


2

27

-

(16)

13

(7)

-

6

Share of associates' and joint ventures' profit before tax1


41

-

58

-

99

-

-

99

Adjusted profit/(loss) before tax


492

1

59

(77)

475

379

-

854

Tax on adjusted profit


(86)

(1)

-

10

(77)

(31)

-

(108)

Share of associates' and joint ventures' tax expense

4.6

(29)

-

(12)

-

(41)

-

-

(41)

Adjusted profit/(loss) after tax

 

377

-

47

(67)

357

348

-

705

Adjusted for the following items

 

 

 

 

 

 

 

 

 

Restructuring and corporate transaction expenses

4.5

(58)

(27)

-

(77)

(162)

(11)

-

(173)

Amortisation and impairment of intangible assets acquired in business combinations

 

(117)

(8)

(13)

-

(138)

-

-

(138)

Provision for annuity sales practices

 

-

-

-

-

-

(100)

-

(100)

Coupons payable on perpetual notes classified as equity2

 

10

-

-

-

10

-

-

10

Profit on disposal of interests in associates

 

14

-

305

-

319

-

-

319

Short-term fluctuations in investment return and economic assumption changes

4.8

-

-

-

-

-

67

-

67

Other


-

(1)

(24)

-

(25)

-

-

(25)

Total adjusting items


(151)

(36)

268

(77)

4

(44)

-

(40)

Tax on adjusting items


25

5

-

19

49

(7)

-

42

Profit attributable to non-controlling interests (preference shares and perpetual notes)


(8)

-

-

-

(8)

-

-

(8)

Profit/(loss) for the year attributable to equity holders of Standard Life Aberdeen plc


243

(31)

315

(125)

402

297

-

699

Profit attributable to non-controlling interests


 

 

 

 

 

 

 

 

Ordinary shares


 

 

 

 

-

25

 

25

Preference shares and perpetual notes


 

 

 

 

8

-

 

8

Profit for the year


 

 

 

 

410

322

 

732

1    Share of associates' and joint ventures' profit before tax comprises the Group's share of results of HDFC Standard Life Insurance Company Limited, Heng An Standard Life Insurance Company Limited and HDFC Asset Management Company Limited.

2    On 18 December 2017, perpetual capital notes issued by Aberdeen Asset Management PLC were reclassified as a subordinated liability. On merger these were classified as an equity instrument.

 

(b)(ii)   Total income and expenses

The following table provides a reconciliation of total adjusted operating income and total adjusted operating expenses from continuing operations, as presented in the analysis of Group adjusted profit by segment, to total revenue and total expenses from continuing operations respectively, as presented in the IFRS condensed consolidated income statement:

     

6 months 2018

6 months 2017

Full year 2017

 

Income

Expenses

Income

Expenses

Income

Expenses

 

£m

£m

£m

£m

£m

£m

Total adjusted operating income and adjusted operating expenses as presented in the analysis of Group adjusted profit by segment from continuing operations

966

(712)

520

(390)

1,447

(1,084)

Insurance and participating investment contract claims and change in liabilities

27

(27)

99

(99)

201

(201)

Change in non-participating investment contract liabilities

2

(2)

8

(8)

74

(74)

Change in liability for third party interest in consolidated funds

4

(4)

-

-

6

(6)

Other presentation differences

79

(79)

19

(19)

79

(79)

Adjusting items included in revenue and expenses

9

(172)

-

(91)

345

(328)

Capital management

(3)

-

9

-

13

-

Total income and expenses as presented in the IFRS condensed consolidated income statement from continuing operations

1,084

(996)

655

(607)

2,165

(1,772)

This reconciliation includes a number of reconciling items which arise due to presentation differences between IFRS reporting requirements and the determination of adjusted operating income and adjusted operating expenses. Adjusted operating income and expenses exclude items which have an equal and opposite effect on IFRS income and IFRS expenses in the consolidated income statement, such as investment returns which are for the account of policyholders. Other presentation differences include Aberdeen Standard Investments commission expenses which are presented in expenses in the consolidated income statement but are netted against adjusted operating income in the analysis of Group adjusted profit by segment.

4.4 Revenue from contracts with customers

The following table provides a breakdown of total revenue from contracts with customers:

 

6 months
2018

6 months
2017

Full year
2017

 

£m

£m

£m

Asset management

 

 

 

Management fee income - growth

764

329

1,023

Management fee income - mature

162

106

274

Performance fees

3

1

20

Revenue from contracts with customers for asset management

929

436

1,317

Fund platforms

 

 

 

Fee income

81

64

137

Other revenue from contracts with customers

9

14

32

Total revenue from contracts with customers from continuing operations

1,019

514

1,486

The majority of the revenue from contracts with customers for asset management is reported within the Aberdeen Standard Investments reportable segment. The following table provides a reconciliation of Revenue from contracts with customers for asset management as presented in the condensed consolidated income statement to fee based revenue, as presented in the analysis of adjusted profit before tax for the Aberdeen Standard Investments segment.

 

6 months
2018

6 months
2017

Full year
2017

 

£m

£m

£m

Revenue from contracts with customers for asset management as presented in the condensed consolidated income statement

929

436

1,317

Revenue from contracts with customers for asset management recognised in Pensions and Savings continuing segment

(3)

(2)

(4)

Fee income from fund platforms recognised in Aberdeen Standard Investments segment

10

-

6

Presentation differences

 

 

 

Commission expenses

(52)

-

(45)

Other differences

(13)

(5)

(14)

Fee based revenue as presented in the Aberdeen Standard Investments segment

871

429

1,260

Commission expenses are netted against fee based revenue but are included within expenses in the condensed consolidated income statement. Other presentation differences relates to amounts presented in a different income line item of the condensed consolidated income statement and intra-group revenue which is eliminated in the consolidated income statement but grossed up for the purposes of segmental reporting. 

The Pension and Savings continuing segment's fee based revenue is primarily made up of Pension and Savings' fund platform fee income and the other revenue from contracts with customers as grossed up for intra-group revenue which is eliminated in the consolidated income statement.

4.5   Administrative expenses


6 months
2018

6 months
2017
1

Full year
2017
1


£m

£m

£m

Restructuring and corporate transaction expenses

59

57

162

Commission expenses

54

4

49

Staff costs and other employee-related costs

365

214

616

Impairment of disposal group classified as held for sale

-

24

24

Other administrative expenses

464

186

607


942

485

1,458

Acquisition costs deferred during the period

(1)

(1)

(4)

Amortisation of deferred acquisition costs

1

2

3

Total administrative expenses from continuing operations

942

486

1,457

1    Comparatives for the six months ended 30 June 2017 and 12 months ended 31 December 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer to Note 4.2.

Total restructuring and corporate transaction expenses incurred from continuing operations during the period were £59m (six months ended 30 June 2017: £57m; 12 months ended 31 December 2017: £162m). The 2018 expenses mainly relate to Aberdeen integration and a number of other business unit restructuring programmes.

Restructuring and corporate transaction expenses of £51m (six months ended 30 June 2017: £4m; 12 months ended 31 December 2017: £11m) are used to determine adjusted profit before tax from discontinued operations. In 2018 these expenses mainly relate to the sale of the UK and European insurance business discussed in Note 4.2. An additional £nil (six months ended 30 June 20 2017: £nil; 12 months ended 31 December 2017: £3m) of restructuring and corporate transaction expenses were incurred by the Heritage With Profits Fund.

4.6   Tax expense


6 months
2018

6 months
2017
1

Full year
2017
1


£m

£m

£m

Current tax:




UK

13

(4)

12

Double tax relief

-

(1)

(2)

Overseas

18

4

19

Adjustment to tax expense in respect of prior years

(2)

(2)

(1)

Total current tax attributable to continuing operations

29

(3)

28



 

 

Deferred tax:


 

 

Deferred tax (credit)/expense arising from the current periods

(16)

13

-

Total deferred tax attributable to continuing operations

(16)

13

-



 

28

Total tax expense attributable to continuing operations

13

10

28




 

1    Comparatives for the six months ended 30 June 2017 and 12 months ended 31 December 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer to Note 4.2.

The standard UK corporation tax rate for the accounting period is 19% (six months ended 30 June 2017: 19.25%; 12 months ended 31 December 2017: 19.25%). The UK corporation tax rate was reduced to 19% from 1 April 2017 and will reduce to 17% from 1 April 2020. These changes have been taken into account in the calculation of the UK deferred tax balance at 30 June 2018.

The share of associates' and joint ventures' tax expense is £18m (six months ended 30 June 2017: £7m; 12 months ended 31 December
2017: £41m) and is included in profit before tax in the IFRS condensed consolidated income statement in Share of profit from associates and joint ventures.

The Group has been party to litigation in the UK, in respect of which the Supreme Court issued a judgement on the lead case on 25 July 2018, that has successfully challenged the tax treatment of non-UK dividends received before 2009. In connection with this judgement, the Group is seeking to recover claims by group entities for certain recent periods where the outcome remains uncertain and is also pursuing additional and related claims in respect of earlier periods where very significant uncertainties remain.

These claims and proceedings predominantly relate to assets in policyholder funds, primarily SLAL's Heritage With Profits Fund which is part of discontinued operations. The claims are not expected to materially impact profit after tax attributable to equity holders or total equity. No amounts have been recognised at 30 June 2018, 30 June 2017 or 31 December 2017 in continuing or discontinued operations in the respect of these claims and proceedings.

Tax relating to components of other comprehensive income is as follows:

 

6 months
2018

6 months
2017
1

Full year
2017
1

 

£m

£m

£m

Tax relating to defined benefit pension plan deficit

-

-

10

Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss

-

-

10

Current tax on net change in financial assets designated as available-for-sale

(1)

-

-

Tax relating to fair value losses recognised as cash flow hedges

-

-

(5)

Tax relating to cash flow hedge losses transferred to consolidated income statement

-

-

2

Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss

(1)

-

(3)

Tax relating to other comprehensive income from continuing operations

(1)

-

7

1    Comparatives for the six months ended 30 June 2017 and 12 months ended 31 December 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer to Note 4.2.

All of the amounts presented above are in respect of equity holders of Standard Life Aberdeen plc.

Tax relating to items taken directly to equity is as follows:


6 months
2018

6 months
2017

Full year
2017


£m

£m

£m

Tax expense on reserves for employee share-based payments

1

-

(1)

Tax credit relating to coupons payable on perpetual notes classified as equity

-

-

(2)

Tax relating to items taken directly to equity

1

-

(3)

4.7   Earnings per share 

Basic earnings per share is calculated by dividing profit attributable to ordinary equity holders by the weighted average number of ordinary shares in issue during the period excluding shares owned by the employee trusts that have not vested unconditionally to employees.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue during the period to assume the conversion of all dilutive potential ordinary shares, such as share options granted to employees.

Adjusted earnings per share is calculated on adjusted profit after tax attributable to ordinary equity holders of the Company i.e. adjusted profit net of dividends paid on preference shares.

The following table shows details of basic, diluted and adjusted earnings per share for the period:


6 months 2018

6 months 2017

Full year 2017


Continuing operations

Discontinued operations

Total

Continuing operations

Discontinued operations

Total restated1

Continuing operations

Discontinued operations

Total


£m

£m

£m

£m

£m

£m

£m

£m

£m

Adjusted profit before tax

311

167

478

192

166

358

475

379

854

Tax on adjusted profit

(48)

(29)

(77)

(31)

1

(30)

(77)

(31)

(108)

Share of associates' and joint ventures' tax expense

(18)

-

(18)

(7)

-

(7)

(41)

-

(41)

Adjusted profit after tax

245

138

383

154

167

321

357

348

705

Dividend paid on preference shares

(3)

-

(3)

-

-

-

-

-

-

Adjusted profit after tax attributable to equity holders of the Company

242

138

380

154

167

321

357

348

705

Adjusting items

(166)

(74)

(240)

(91)

55

(36)

4

(44)

(40)

Tax on adjusting items

35

10

45

21

(14)

7

49

(7)

42

Adjustment for coupons payable on perpetual notes classified as equity net of tax

-

-

-

-

-

-

(8)

-

(8)

Profit attributable to equity holders of the Company

111

74

185

84

292

402

699

 

6 months 2018

6 months 2017

Full year 2017

 

Millions

Millions

Millions

Weighted average number of ordinary shares outstanding



2,937


 

1,972

 

 

2,343

Dilutive effect of share options and awards



28


 

3

 

 

17

Weighted average number of diluted ordinary shares outstanding



2,965


 

1,975

 

 

2,360

 

6 months 2018

6 months 2017 (restated)1

Full year 2017

 

Continuing operations

Discontinued operations

Total

Continuing operations

Discontinued operations

Total

Continuing operations

Discontinued operations

Total

 

Pence

Pence

Pence

Pence

Pence

Pence

Pence

Pence

Pence

Basic earnings per share

3.8

2.5

6.3

4.3

10.5

14.8

17.1

12.7

29.8

Diluted earnings per share

3.7

2.5

6.2

4.3

10.5

14.8

17.0

12.6

29.6

Adjusted earnings per share

8.2

4.7

12.9

7.8

8.5

16.3

15.2

14.9

30.1

Adjusted diluted earnings per share

8.2

4.6

12.8

7.8

8.5

16.3

15.1

14.8

29.9

1    Following completion of the merger the Group has changed the calculation of adjusted profit (previously named operating profit). Short-term fluctuations in investment return and economic assumption changes are now only adjusted for insurance entities. Previously these adjustments also applied to non-insurance entities. This has resulted in a £3m reduction to the adjusted profit of the other segment, a £1m reduction to the Aberdeen Standard Investments segment and a corresponding £4m adjustment to short-term fluctuations in investment return and economic assumption changes within adjusting items, for the six months ended 30 June 2017.

4.8   Adjusted profit and adjusting items  

Adjusted profit before tax (previously named operating profit before tax) is the Group's key alternative performance measure. Adjusted profit excludes impacts arising from short-term fluctuations in investment return and economic assumption changes in the Group's insurance entities. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from adjusted profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from adjusted profit and is presented within profit before tax.

Adjusted profit also excludes the impact of the following items:

·  Restructuring costs and corporate transaction expenses. Restructuring includes the impact of major regulatory change.

·  Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts

·  Profit or loss arising on the disposal of a subsidiary, joint venture or associate

·  Fair value movements in contingent consideration

·  Items which are one-off and, due to their size or nature, are not indicative of the long-term operating performance of the Group

Coupons payable on perpetual notes classified as non-controlling interests are included in adjusted profit before tax. For IFRS purposes, these are recognised directly in equity. Prior to these instruments being reclassified as a subordinated liability on 18 December 2017, this gave rise to an adjusting item relating to 'coupons payable on perpetual notes classified as equity'. Dividends payable on preference shares classified as non-controlling interests are excluded from adjusted profit in line with the treatment of ordinary dividends.

As disclosed in our Annual report and accounts 2017, the Group changed the calculation of adjusted profit in 2017. Short-term fluctuations in investment return and economic assumption changes are now only adjusted for insurance entities. Previously these adjustments also applied to holding companies and other non-insurance entities. Comparatives for the six months to 30 June 2017 have been restated to reflect this change.

(a)     Short-term fluctuations in investment return and economic assumptions changes - insurance entities

Short-term fluctuations in investment return and economic assumption changes relate solely to wholly owned insurance businesses which in the current period are all classified as held for sale. The components of IFRS profit attributable to market movements and interest rate changes which give rise to variances between actual and expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movement in equity holder liabilities, as well as the impact of changes in economic assumptions on equity holder liabilities, are excluded from adjusted profit for the Group's wholly owned insurance entities. Investments backing equity holder funds include investments backing annuities and subordinated debt, and investments from surplus capital in insurance companies.

For annuities this means that all fluctuations in liabilities and the assets backing those liabilities due to market interest rate (including credit risk) movements over the year are excluded from adjusted profit.

The expected rates of return for debt securities and equity securities are determined separately. The expected rates of return for equity securities are determined based on the gilt spot rates of an appropriate duration plus an equity risk premium of 3% (2017: 3%). Investments in pooled investment funds which target equity returns over the longer term, including absolute return funds, also use an expected rate of return determined based on the gilt spot rates of an appropriate duration plus a risk premium of 3% (2017: 3%).

In respect of debt securities at fair value through profit or loss, the expected rate of return is determined based on the average prospective yields for the debt securities actually held.

The expected rates of return used for both the assets backing subordinated liabilities and the subordinated liabilities themselves include a discount for expected credit defaults. This means that the interest expense included in adjusted profit for subordinated liabilities is after deducting a margin for own credit risk. Additionally, the effect of the accounting mismatch, where subordinated liabilities are measured at amortised cost and certain assets backing the liabilities are measured at fair value, is also excluded from adjusted profit.

There have been no defaults or impairments of assets backing subordinated liabilities during the six months ended 30 June 2018 or 30 June 2017 or the 12 months ended 31 December 2017. If these were to arise they would be excluded from adjusted profit.

Gains and losses on foreign exchange are deemed to represent short-term fluctuations in investment return and economic assumption changes and thus are excluded from adjusted profit.

Short-term fluctuations in investment return for the six months ended 30 June 2018 (six months ended 30 June 2017 and 12 months ended 31 December 2017) principally relate to the impact of interest rate changes on UK annuity liabilities and the assets backing those liabilities.

(b)     Other

In the reconciliation of consolidated adjusted profit before tax to profit for the period the Other adjusting item sub-total includes £nil (six months ended 30 June 2017: £24m; 12 months ended 31 December 2017: £24m) in relation to the impairment of a disposal group classified as held for sale and £4m (six months ended 30 June 2017: (£1m); 12 months ended 31 December 2017: £1m) net fair value movements in contingent consideration.

The Other adjusting item in 2018 relating to discontinued operations includes a held for sale accounting adjustment relating to the amortisation of intangible assets (primarily deferred acquisition costs) and depreciation of tangible assets of £38m. Following the classification of the UK and European Insurance business as held for sale on the announcement of the proposed transaction on 23 February 2018, no amortisation or depreciation is recognised. This increase to profit has been recognised as an adjusting item.

4.9   Dividends on ordinary shares


6 months 2018

6 months 2017

Full year 2017


Pence per
share

Pence per
share

£m

Pence per
share

£m

Dividends relating to reporting period

 





Interim dividend (2018 and 2017)

7.30

7.00

206

7.00

206

Final dividend (2017)

-

-

-

14.30

420

Total

7.30

7.00

206

21.30

626


 





Dividends paid in reporting period

 





Current year interim dividend

-

-

-

7.00

206

Final dividend for prior year

14.30

13.35

263

13.35

263

Total

 


263


469

Subsequent to 30 June 2018, the Directors have proposed an interim dividend for 2018 of 7.30 pence per ordinary share (interim 2017: 7.00 pence), an estimated £214m in total (interim 2017: £206m). The dividend is expected to be paid on 25 September 2018 and will be recorded as an appropriation of retained earnings in the financial statements for the year ended 31 December 2018.

4.10 Intangible assets

 

 

30 Jun
2018

30 Jun
2017

31 Dec
2017

 

£m

£m

£m

Acquired through business combinations:

 

 

 

Goodwill

3,419

224

3,427

Brand

77

-

86

Customer relationships and investment management contracts

727

145

774

Technology

32

1

40

Internally developed software

59

170

156

Purchased software and other

-

26

20

Cost of obtaining customer contracts

87

-

11

Total intangible assets

4,401

566

4,514

During the period, the Group acquired the right to provide asset management services to a number of US registered funds for a cash consideration of £77m. This payment is included within the cost of obtaining customer contracts.

4.11   Issued share capital, share premium and shares held by trusts

(a)     Issued share capital

The movement in the issued ordinary share capital of the Company is:


6 months 2018

6 months 2017

Full year 2017

Issued shares fully paid

12 2/9p each

£m

12 2/9p each

£m

12 2/9p each

£m

At start of period

2,978,936,877

364

1,978,884,437

242

1,978,884,437

242

Shares issued in respect of business combinations

-

-

-

-

997,661,231

122

Shares issued in respect of share incentive plans

246,523

-

285,582

-

496,817

-

Shares issued in respect of share options

304,611

-

338,450

-

1,894,392

-

At end of period

2,979,488,011

364

1,979,508,469

242

2,978,936,877

364

All ordinary shares in issue in the Company rank pari passu and carry the same voting rights and entitlement to receive dividends and other distributions declared or paid by the Company.

Shares issued in respect of business combinations in the year ended 31 December 2017 relates solely to the Aberdeen merger as discussed in Note 4.2.

The Company can issue shares to satisfy awards granted under employee incentive plans which have been approved by shareholders.

(b)     Share premium


6 months
2018

6 months
2017

Full year
2017


£m

£m

£m

At start of period

639

634

634

Shares issued in respect of share options

1

1

5

At end of period

640

635

639

(c)     Shares held by trusts

Shares held by trusts relates to shares in Standard Life Aberdeen plc that are held by the Employee Share Trust (EST), the Aberdeen Asset Management Employee Benefit Trust 2003 (EBT) and the Unclaimed Asset Trust (UAT).

The EST and EBT purchase shares in the Company for delivery to employees under employee incentive plans. Purchased shares are recognised as a deduction from equity at the price paid for them. Where new shares are issued to the EST or EBT the price paid is the nominal value of the shares. When shares are distributed from the trust their corresponding value is released to retained earnings.

On completion of the merger on 14 August 2017, 31,483,948 Aberdeen Asset Management PLC shares held by the EBT were exchanged for 23,833,349 Standard Life Aberdeen plc shares at a total nominal value of £3m.

In July 2006, Standard Life demutualised and former members of the mutual company were allocated shares in the new listed Company. Some former members were yet to claim their shares and the UAT held these on their behalf. There was an off-setting obligation to deliver these shares which was also recognised in the shares held by trusts reserve. The shares and the off-setting obligation were both measured at £nil. The claim entitlement period for the UAT expired on 9 July 2016. Shares remaining in the UAT after 9 July 2016 continue to be measured at £nil.

The number of shares held in trust at 30 June 2018 was as follows:


30 Jun
2018

30 Jun
2017

31 Dec
2017

Number of shares held in trust




Employee Share Trust

16,810,802

11,123,356

16,031,679

Aberdeen Asset Management Employee Benefit Trust 2003

23,589,384

-

23,704,305

Unclaimed Asset Trust

175,994

188,646

180,766

On expiry of the claim period on 9 July 2016, the entitlement to the unclaimed shares remaining in the UAT transferred to the Company. During the period to 30 June 2017, 11,719,073 shares were transferred from the UAT to the EST for £nil consideration. An amount equivalent to the fair value of the shares as at the date of transfer was donated by the Company to the Standard Life Foundation.

4.12 Subordinated liabilities

On 1 March 2018, 7% US Dollar fixed rate perpetual capital notes issued by Aberdeen Asset Management PLC with a principal amount of US$500m were redeemed.

4.13 Pension and other post-retirement benefit provisions

The Group operates a number of defined benefit pension plans, the largest of which being the UK Standard Life Group staff defined benefit pension plan (principal plan) which is closed to future accrual. Following the merger with Aberdeen, the Group also operates two additional UK plans. These two UK plans were in deficit when the last valuations were completed with the trustees, and the Group has agreed funding plans to eliminate these deficits. These two UK plans are included in Other along with the Ireland Standard Life plan, which is closed to new membership, and a number of smaller funded and unfunded plans in other countries.

For the UK plans the trustees set the plan investment strategy to protect the ratio of plan assets to the trustees' measure of technical provisions. Technical provisions represent the trustees' prudent view of the amount of assets needed to pay future benefits. The investment strategy does not aim to protect the IAS 19 surplus or ratio of plan assets to the IAS 19 measure of liabilities.

(a)     Analysis of amounts recognised in the IFRS condensed consolidated income statement

The amounts recognised in the IFRS condensed consolidated income statement for defined contribution and defined benefit plans are as follows:


6 months
2018

6 months
20171

Full year
20171


£m

£m

£m

Current service cost

34

18

46

Interest income

(14)

(15)

(28)

Administrative expenses

1

1

3

Expense recognised in the IFRS condensed consolidated income statement

21

4

21

1    Comparatives for the six months ended 30 June 2017 and 12 months ended 31 December 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer to Note 4.2.

(b)     Analysis of amounts recognised on the IFRS condensed consolidated statement of financial position

 

30 June 2018

30 June 2017

31 December 2017

 

Principal plan

Other1

Total

Held for sale

Principal plan

Other

Total

Principal plan

Other

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Present value of funded obligation

(2,776)

(345)

(3,121)

-

(2,762)

(121)

(2,883)

(2,839)

(345)

(3,184)

Present value of unfunded obligation

-

(3)

(3)

(7)

-

(10)

(10)

-

(9)

(9)

Fair value of plan assets

4,359

281

4,640

-

4,465

74

4,539

4,530

276

4,806

Effect of limit on plan surplus

(554)

-

(554)

-

(596)

-

(596)

(592)

-

(592)

Net asset/(liability)

1,029

(67)

962

(7)

1,107

(57)

1,050

1,099

(78)

1,021

1    Included within Other is a defined benefit plan with a net asset position of £3m at 30 June 2018.

(c)     Principal assumptions

The principal economic assumptions for the Principal plan which are based in part on current market conditions are as follows:


30 Jun
2018

30 Jun
2017

31 Dec
 2017


%

%

%

Discount rate

2.55

2.70

2.60

Rates of inflation




Consumer Price Index (CPI)

2.10

2.15

2.20

Retail Price Index (RPI)

3.10

3.15

3.20

4.14 Risk management

The Group's strategic objectives and performance against them is subject to a number of financial and non-financial risks. The principal risks and uncertainties that affect the business model are set out in detail in the Group's Annual report and accounts for the year ended 31 December 2017. Key developments in the Group's principal risks since the Annual report and accounts was published are discussed in the Risk oversight section of the Management report. 

The Group's IFRS condensed consolidated half year financial information does not include the financial risk management information and disclosures required in the Group's Annual report and accounts. This note should therefore be read in conjunction with the Group's Annual report and accounts for the year ended 31 December 2017.

There have been no significant changes to the Group's risk management framework since 31 December 2017. From 1 January 2018 we enhanced the Group's qualitative risk appetites which received Board approval. The business continues to be managed through a range of risk, capital and profit metrics.

On 23 February 2018, the Group announced the proposed sale of the UK and European insurance business. Refer to Note 4.2. The assets and liabilities of this business were classified as held for sale from this date. Additionally, on 29 March 2017, the Group announced the proposed sale of Standard Life Asia (Limited), the assets and liabilities of this business were classified as held for sale from this date. The Group's balance sheet exposure to market, credit, and demographic and expense risk will be significantly reduced by the sale of these assets and liabilities.

Included within debt securities of £469m (30 June 2017: £63,887m; 31 December 2017: £61,565m) and equity securities and interests in pooled investment funds of £3,196m (30 June 2017: £94,538m; 31 December 2017: £99,020m) at 30 June 2018 is £104m (30 June 2017: £29,051m; 31 December 2017: £26,821m) and £1,625m (30 June 2017: £84,206m; 31 December 2017: £88,362m) respectively relating to unit linked funds and third party interest in consolidated funds. The shareholder's exposure to unit linked funds market and credit risk arises from the changes in the value of future fee based revenue earned on unit linked funds due to market movements. The shareholder is not exposed to the market or credit risk in respect of third party interest in consolidated funds since the financial risks of the assets are borne by third parties.

4.15 Fair value of assets and liabilities

(a)     Determination of fair value hierarchy

To provide further information on the approach used to determine and measure the fair value of certain assets and liabilities, the following fair value hierarchy categorisation has been used:

·  Level 1: Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market exists where transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

·  Level 2: Fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

·  Level 3: Fair values measured using inputs that are not based on observable market data (unobservable inputs)

(b)     Methods and assumptions used to determine fair value of assets and liabilities including those held for sale

Information on the methods and assumptions used to determine fair values for each major category of instrument measured at fair value is given below. These methods and assumptions include those used to fair value assets and liabilities held for sale, including the individual assets and liabilities of operations held for sale.

Investments in associates at FVTPL, equity securities and interests in pooled investment funds and amounts seeded into funds classified as held for sale

Investments in associates at FVTPL are valued in the same manner as the Group's equity securities and interests in pooled investment funds. 

Equity instruments listed on a recognised exchange are valued using prices sourced from the primary exchange on which they are listed. These instruments are generally considered to be quoted in an active market and are therefore categorised as level 1 instruments within the fair value hierarchy.

Unlisted equities are valued using an adjusted net asset value. The Group's exposure to unlisted equity securities primarily relates to private equity investments. The majority of the Group's private equity investments are carried out through European fund of funds structures, where the Group receives valuations from the investment managers of the underlying funds.

The valuations received from investment managers of the underlying funds are reviewed and where appropriate adjustments are made to reflect the impact of changes in market conditions between the date of the valuation and the end of the reporting period. The valuation of these securities is largely based on inputs that are not based on observable market data, and accordingly these instruments are categorised as level 3 instruments within the fair value hierarchy. Where appropriate, reference is made to observable market data.

Where pooled investment funds have been seeded and the investment in the funds have been classified as held for sale, the costs to sell are assumed to be negligible. The fair value of pooled investment funds held for sale is calculated as equal to the observable unit price.

Investment property and owner occupied property

The fair value of investment property and all owner occupied property is based on valuations provided by external property valuation experts. The fair value of investment property is measured based on each property's highest and best use from a market participant's perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible. No adjustment has been made for vacant possession for the Group's owner occupied property.

In the UK and Europe, valuations are completed in accordance with the Royal Institution of Chartered Surveyors (RICS) valuation standards. These are predominantly produced using an income capitalisation approach. The income capitalisation approach is based on capitalising an annual net income stream using an appropriate yield. The annual net income is based on both current and estimated future net income. The yield and future net income used is determined by considering recent transactions involving property with similar characteristics to the property being valued. Where it is not possible to use an income capitalisation approach, for example on property with no rental income, a market comparison approach is used by considering recent transactions involving property with similar characteristics to the property being valued. In both approaches where appropriate, adjustments will be made by the valuer to reflect differences between the characteristics of the property being valued and the recent market transactions considered.

As income capitalisation and market comparison valuations generally include significant unobservable inputs including unobservable adjustments to recent market transactions, these assets are categorised as level 3 within the fair value hierarchy. 

Derivative financial assets and derivative financial liabilities

The majority of the Group's derivatives are over-the-counter derivatives which are measured at fair value using a range of valuation models including discounting future cash flows and option valuation techniques. The inputs are observable market data and over-the-counter derivatives are therefore categorised as level 2 in the fair value hierarchy.

Exchange traded derivatives are valued using prices sourced from the relevant exchange. They are considered to be instruments quoted in an active market and are therefore categorised as level 1 instruments within the fair value hierarchy.

Non-performance risk arising from the credit risk of each counterparty has been considered on a net exposure basis in line with the Group's risk management policies. At 30 June 2018, 30 June 2017 and 31 December 2017, the residual credit risk is considered immaterial and no credit risk adjustment has been made.

Debt securities

For debt securities, the Group has determined a hierarchy of pricing sources. The hierarchy consists of reputable external pricing providers who generally use observable market data. If prices are not available from these providers or are considered to be stale, the Group has established procedures to arrive at an internal assessment of the fair value. These procedures are based largely on inputs that are not based on observable market data. A further analysis by category of debt security is as follows:

·  Government, including provincial and municipal, and supranational institution bonds

These instruments are valued using prices received from external pricing providers who generally base the price on quotes received from a number of market participants. They are categorised as level 1 or level 2 instruments within the fair value hierarchy depending upon the nature of the underlying pricing information used for valuation purposes.

·  Corporate bonds listed or quoted in an established over-the-counter market including asset-backed securities

These instruments are generally valued using prices received from external pricing providers who generally consolidate quotes received from a panel of banks into a composite price. As the market becomes less active the quotes provided by some banks may be based on modelled prices rather than on actual transactions. These sources are based largely on observable market data, and therefore these instruments are categorised as level 2 instruments within the fair value hierarchy. When prices received from external pricing providers are based on a single broker indicative quote, the instruments are categorised as level 3 instruments.

For instruments for which prices are either not available from external pricing providers or the prices provided are considered to be stale, the Group performs its own assessment of the fair value of these instruments. This assessment is largely based on inputs that are not based on observable market data, principally single broker indicative quotes, and accordingly these instruments are categorised as level 3 instruments within the fair value hierarchy.

·  Other corporate bonds including unquoted bonds, commercial paper and certificates of deposit

These instruments are valued using models. For unquoted bonds the model uses inputs from comparable bonds and includes credit spreads which are obtained from brokers or estimated internally. Commercial paper and certificates of deposit are valued using standard valuation formulas. The categorisation of these instruments within the fair value hierarchy will be either level 2 or 3 depending upon the nature of the underlying pricing information used for valuation purposes.

·  Commercial mortgages

These instruments are valued using models. The models use a discount rate adjustment technique which is an income approach. The key inputs for the valuation models are contractual future cash flows, which are discounted using a discount rate that is determined by adding a spread to the current base rate. The spread is derived from a pricing matrix which incorporates data on current spreads for similar assets and which may include an internal underwriting rating. These inputs are generally observable with the exception of the spread adjustment arising from the internal underwriting rating. The classification of these instruments within the fair value hierarchy will be either level 2 or 3 depending on whether the spread is adjusted by an internal underwriting rating.

·  Income strips

Income strips are transactions where an owner-occupier of a property has sold a freehold or long leasehold interest to the Group, and has signed a long lease (typically 30-45 years) or a ground lease (typically 45-175 years) and retains the right to repurchase the property at the end of the lease for a nominal sum (usually £1).

The valuation technique used by the Group to value these instruments is an income capitalisation approach, where the annual rental income is capitalised using an appropriate yield. The yield is determined by considering recent transactions involving similar income strips. Unlike, investment properties which typically are leased on shorter lease terms, the estimated rental value is not a significant unobservable input. This is due to the length of the lease together with the nature of the rent reviews where the annual rental increases over the term of the lease in line with inflation or fixed increases. As the income capitalisation valuations generally include significant unobservable inputs including unobservable adjustments to the yield observed in other income strip transactions, these assets are categorised as level 3 in the fair value hierarchy.

Contingent consideration assets and contingent consideration liabilities                                                         

Contingent consideration assets and liabilities have been recognised in respect of acquisitions. Generally valuations are based on unobservable assumptions regarding the probability weighted expected return and growth over the contractual period, discounted present value and therefore the assets and liabilities are classified as level 3 in the fair value hierarchy.

Non-participating investment contract liabilities

The fair value of the non-participating investment contract liabilities is calculated equal to the fair value of the underlying assets and liabilities in the funds. Thus, the value of these liabilities is dependent on the methods and assumptions set out above in relation to the underlying assets and liabilities in which these funds are invested. The underlying assets and liabilities are predominately categorised as level 1 or 2 and as such, the inputs into the valuation of the liabilities are observable. Therefore, the liabilities are categorised within level 2 of the fair value hierarchy.

Liabilities in respect of third party interest in consolidated funds

The fair value of liabilities in respect of third party interest in consolidated funds is calculated equal to the fair value of the underlying assets and liabilities in the funds. Thus, the value of these liabilities is dependent on the methods and assumptions set out above in relation to the underlying assets in which these funds are invested. When the underlying assets and liabilities are valued using readily available market information the liabilities in respect of third party interest in consolidated funds are treated as level 2. Where the underlying assets and liabilities are not valued using readily available market information the liabilities in respect of third party interest in consolidated funds are treated as level 3.

(b)(i) Fair value hierarchy for assets measured at fair value in the statement of financial position

The table below presents the Group's assets measured at fair value by level of the fair value hierarchy.

 

Fair value hierarchy

 

As recognised in the consolidated statement of financial position
line item

Classified as
held for sale

Total

Level 1

Level 2

Level 3

 

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Investment property

-

9,749

9,895

200

9,895

9,949

-

-

-

-

9,895

9,949

Owner occupied property

2

81

82

11

84

92

-

-

-

-

84

92

Derivative financial assets

7

3,053

2,588

-

2,595

3,053

722

990

1,873

2,063

-

-

Equity securities and interests in pooled investment vehicles

3,196

99,020

95,581

763

98,777

99,783

97,730

98,750

26

36

1,021

997

Debt securities

469

61,565

58,440

14

58,909

61,579

23,676

25,230

33,792

34,905

1,441

1,444

Contingent consideration asset

2

6

-

-

2

6

-

-

-

-

2

6

Total assets at fair value

3,676

173,474

166,586

988

170,262

174,462

122,128

124,970

35,691

37,004

12,443

12,488

 

 

Fair value hierarchy

 

As recognised in the consolidated statement of financial position
line item

Classified as
held for sale

Total

Level 1

Level 2

Level 3

30 June 2017

£m

£m

£m

£m

£m

£m

Investment property

10,038

26

10,064

-

-

10,064

Owner occupied property

77

8

85

-

-

85

Derivative financial assets

2,844

-

2,844

851

1,993

-

Equity securities and interests in pooled investment vehicles

94,538

664

95,202

94,278

2

922

Debt securities

63,887

11

63,898

26,874

36,084

940

Contingent consideration asset

10

-

10

-

-

10

Total assets at fair value

171,394

709

172,103

122,003

38,079

12,021

There were no significant transfers between levels 1 and 2 during the period (six months ended 30 June 2017: none; 12 months ended 31 December 2017: none). Refer to 4.15 (b)(iii) for details of movements in level 3. 

(b)(ii)   Fair value hierarchy for liabilities measured at fair value in the statement of financial position

The table below presents the Group's liabilities measured at fair value by level of the fair value hierarchy.


Fair value hierarchy

 

As recognised in the consolidated statement of financial position line item

Classified as held for sale

Total

Level 1

Level 2

Level 3

 

30 Jun 2018

31 Dec 2017

30 Jun
2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Non-participating investment contract liabilities

1,274

105,765

102,242

62

103,516

105,827

-

-

103,516

105,827

-

-

Liabilities in respect of third party interest in consolidated funds

227

16,457

15,781

28

16,008

16,485

-

-

14,734

15,187

1,274

1,298

Derivative financial liabilities

32

813

897

-

929

813

168

161

761

652

-

-

Contingent consideration liabilities

39

25

-

-

39

25

-

-

-

-

39

25

Total liabilities at fair value

1,572

123,060

118,920

90

120,492

123,150

168

161

119,011

121,666

1,313

1,323

 

 

Fair value hierarchy

 

As recognised
in the consolidated statement of financial position line item

Level 1

Level 2

Level 3

30 June 2017

£m

£m

£m

£m

Non-participating investment contract liabilities

103,452

-

103,452

-

Liabilities in respect of third party interest in consolidated funds

16,080

-

14,857

1,223

Derivative financial liabilities

894

193

701

-

Contingent consideration liabilities

14

-

-

14

Total liabilities at fair value

120,440

193

119,010

1,237

There were no significant transfers between levels 1 and 2 during the six months ended 30 June 2018 (six months ended 30 June 2017: none; 12 months ended 31 December 2017: none). Refer to 4.15 (b)(iii) for details of movements in level 3. 

(b)(iii)  Reconciliation of movements in level 3 instruments

The movements during the period of level 3 assets and liabilities held at fair value, excluding assets and liabilities held for sale, are analysed below.

 

Investment
property

Owner occupied property

Equity securities and interests in pooled investment funds

Debt securities

Liabilities in
respect of third party interest in consolidated funds

 

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017

30 Jun 2018

31 Dec 2017


£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

At start of period

9,749

9,929

81

58

994

958

1,444

868

(1,298)

(1,228)

Reclassified to held for sale

(9,749)

(225)

(79)

(4)

(882)

-

(1,443)

-

1,298

-

Reclassification between investment property and debt securities1

-

(319)

-

319

Acquired through business combinations

-

-

-

2

-

100

-

-

-

-

Total gains/(losses) recognised in the consolidated income statement

-

485

-

4

4

72

-

35

-

(57)

Purchases

-

413

-

3

5

191

-

362

-

(88)

Settlement

-

-

-

-

-

-

-

-

-

75

Sales

-

(525)

-

-

(17)

(317)

-

(125)

-

-

Transfers in to level 32

-

-

-

-

-

8

-

27

-

-

Transfers out of level 32

-

-

-

-

-

(7)

-

(42)

-

-

Transfers between investment property and owner occupied property

-

(17)

-

17

-

-

-

-

-

-

Foreign exchange adjustment

-

11

-

-

-

(13)

-

-

-

-

Total gains recognised on revaluation of owner occupied property within other comprehensive income

-

-

-

1

-

-

-

-

-

-

Other

-

(3)

-

-

-

2

-

-

-

-

At end of period

-

9,749

2

81

104

994

1

1,444

-

(1,298)

 

 

Investment
property

Owner occupied property

Equity securities and interests in pooled investment funds

Debt securities

Liabilities in
respect of third party interest in consolidated funds

2017

£m

£m

£m

£m

£m

1 January

9,929

58

958

868

(1,228)

Reclassified to held for sale

(26)

-

-

-

-

Total gains/(losses) recognised in the consolidated income statement

229

-

12

18

(18)

Purchases

234

1

103

103

-

Settlement

-

-

-

-

23

Sales

(327)

-

(152)

(60)

-

Transfers in to level 32

-

-

8

27

-

Transfers out of level 32

-

-

-

(16)

-

Transfers between investment property and owner occupied property

(17)

17

-

-

-

Foreign exchange adjustment

8

-

(7)

-

-

Total gains recognised on revaluation of owner occupied property within other comprehensive income

-

1

-

-

-

Other

8

-

-

-

-

30 June

10,038

77

922

940

(1,223)

1    During 2017 income strips measured at £319m which were previously included within investment property were reclassified as debt securities to reflect the underlying nature of these instruments.

2    Transfers are deemed to have occurred at the end of the calendar quarter in which they arose.

 

Contingent consideration asset

Contingent consideration liabilities

 

30 Jun
2018

30 Jun
2017

31 Dec
2017

30 Jun
2018

30 Jun
2017

31 Dec
2017

 

£m

£m

£m

£m

£m

£m

At start of period

6

10

10

(25)

(15)

(15)

Acquired through business combinations

-

-

-

-

-

(39)

Total (losses)/gains recognised in the income statement

(4)

-

(4)

-

1

3

Additions

-

-

-

(17)

-

-

Settlements

-

-

-

3

-

261

At end of period

2

10

6

(39)

(14)

(25)

1    Restated.

For the six months ended 30 June 2018, £4m of total gains from continuing operations (six months ended 30 June 2017: gains of £2m; 12 months ended 31 December 2017: gains of £3m) were recognised in the IFRS condensed consolidated income statement in respect of assets and liabilities held at fair value classified as level 3 at the period end, excluding assets and liabilities held for sale. These amounts are recognised in investment return.

Transfers of equity securities and interests in pooled investment funds and debt securities into level 3 generally arise when external pricing providers stop providing a price or where the price provided is considered stale. Transfers of equity securities and interests in pooled investment funds and debt securities out of level 3 arise when acceptable prices become available from external pricing providers.

The table below presents quantitative information about the significant unobservable inputs for level 3 instruments:

 

Fair value

 

 

 

30 June 2018

£m

Valuation technique

Unobservable input

Range (weighted average)

Investment property and owner occupied property

9,453

Income capitalisation

Equivalent yield

Estimated rental value

per square metre per annum

3.5% to 9.1% (5.1%)

£31 to £1,716 (£317)

Investment property

(hotels)

449

Income capitalisation

Equivalent Yield

Estimated rental value per room per annum

3.9% to 6.6% (5.0%)

£995 to £13,800 (£6,634)

Investment property and owner occupied property

77

Market comparison

Estimated value per square metre

£2 to £10,932 (£3,080)

Equity securities and interests in pooled investment funds

1,021

Adjusted net asset value

Adjustment to net asset value1

N/A

Debt securities

(commercial mortgages)

348

Discounted cash flow

Credit spread

1.9% to 2.6% (2.2%)

Debt securities

(income strips)

538

Income capitalisation

Equivalent yield

4.1% to 6.4% (5.3%)

Debt securities

(unquoted corporate bonds)

499

Discounted cash flow

Credit spread

0.8% to 2.4% (1.8%)

Debt securities

(infrastructure loans)

56

Discounted cash flow

Credit spread

1.8% to 2.9% (2.4%)

1    An adjustment is made to the valuation of private equity investments received from the investment managers of the underlying funds to estimate the effect of changes in market conditions between the date of their valuations and the end of the reporting period using market indices. The adjustment made at 30 June 2018 was £nil (30 June 2017: £40m; 31 December 2017: £nil).

 

 

Fair value

 

 

 

30 June 2017

£m

Valuation technique

Unobservable input

Range (weighted average)

Investment property and owner occupied property

9,478

Income capitalisation

Equivalent yield

Estimated rental value

per square metre per annum

3.4% to 8.9% (5.3%)

£16 to £1,711 (£319)

Investment property

(hotels)

608

Income capitalisation

Equivalent yield

Estimated rental value per room per annum

4.0% to 6.5% (5.2%)

£995 to £13,750 (£5,596)

Investment property and owner occupied property

63

Market comparison

Estimated value per square metre

£2 to £10,932 (£3,246)

Equity securities and interests in pooled investment funds

922

Adjusted net asset value

Adjustment to net asset value1

N/A

Debt securities

(commercial mortgages)

447

Discounted cash flow

Credit spread

1.9% to 2.6% (2.1%)

Debt securities

(unquoted corporate bonds)

449

Discounted cash flow

Credit spread

0.2% to 1.8% (1.6%)

Debt securities

(infrastructure loans)

16

Discounted cash flow

Credit spread

1.4% (1.4%)

Debt securities

(other)

28

Single broker

Single broker indicative price2

N/A



 

Fair value

 

 

 

31 December 2017

£m

Valuation technique

Unobservable input

Range (weighted average)

Investment property and owner occupied property

9,571

Income capitalisation

Equivalent yield

Estimated rental value

per square metre per annum

 

3.3% to 9.0% (5.2%)

£32 to £1,716 (£326)

Investment property

(hotels)

402

Income capitalisation

Equivalent yield

Estimated rental value per room per annum

3.8% to 6.6% (5.1%)

£995 to £10,000 (£5,841)

Investment property and owner occupied property

68

Market comparison

Estimated value per square metre

£2 to £10,932 (£3,451)

Equity securities and interests in pooled investment funds

997

Adjusted net asset value

Adjustment to net asset value1

N/A

Debt securities

(commercial mortgages)

379

Discounted cash flow

Credit spread

1.9% to 2.6% (2.2%)

Debt securities

(income strips)

520

Income capitalisation

Equivalent yield

 

4.1% to 6.5% (5.1%)

Debt securities

(unquoted corporate bonds)

506

Discounted cash flow

Credit spread

0.7% to 2.1% (1.6%)

Debt securities

(infrastructure loans)

39

Discounted cash flow

Credit spread

1.9% to 2.6% (2.3%)

1   An adjustment is made to the valuation of private equity investments received from the investment managers of the underlying funds to estimate the effect of changes in market conditions between the date of their valuations and the end of the reporting period using market indices. The adjustment made at 30 June 2018 was £nil (30 June 2017: £40m; 31 December 2017: £nil).

2   Debt securities which are valued using single broker indicative quotes are disclosed in level 3 in the fair value hierarchy. No adjustment is made to these prices. 

(b)(iv)  Sensitivity of level 3 instruments measured at fair value on the statement of financial position to changes in key assumptions

The Group's IFRS condensed consolidated half year financial information does not include the financial risk management information and disclosures required in the Group's Annual report and accounts. This note should therefore be read in conjunction with the Group's Annual report and accounts for the year ended 31 December 2017. The information presented in this note has been prepared on the same basis presented in the Group's Annual report and accounts. 

The shareholder is directly exposed to movements in the value of level 3 instruments held by the shareholder business (to the extent they are not offset by opposite movements in investment and insurance contract liabilities). Movements in level 3 instruments held by the participating business and unit linked funds risk segments are offset by an opposite movement in investment and insurance contract liabilities and therefore the shareholder is not directly exposed to such movements unless they are sufficiently severe to cause the assets of the participating business to be insufficient to meet the obligations to policyholders. Movements in level 3 instruments held in the TPICF and NCI risk segment are offset by opposite movements in the liabilities in respect of third party interest in consolidated funds and in equity attributable to non-controlling interest and therefore the shareholder is not directly exposed to such movements.

Changing unobservable inputs in the measurement of the fair value of level 3 financial assets and financial liabilities to reasonably possible alternative assumptions would not have a significant impact on profit attributable to equity holders or on total assets. The alternative assumptions used in this assessment for debt securities are:


Reasonably possible alternative assumptions


30 June 2018

30 June 2017 and
31 December 2017

Unquoted corporate bonds

Credit spread +/- 0.45%

Credit spread +/- 0.45%

Commercial mortgages

Credit spread +/- 0.40%

Credit spread +/- 0.40%

Profit attributable to non-controlling interests is exposed to movements in private equity investments, predominantly those held by Standard Life Private Equity Trust plc. The Group considers that a plausible range for the fair value of such private equity investments at 30 June 2018 is -10% to +25% of the 30 June 2018 valuation. The impact on profit attributable to non-controlling interests from discontinuing operations of £5m for the year to 30 June 2018 for such changes in fair value is to reduce or increase that profit by £25m or £63m respectively with no impact on profit attributable to equity holders.

Whilst not having an impact on profit for the year, the Group has also considered the plausible range for the fair value of investment property at 30 June 2018. Based on independent research that has considered the reasonableness of historic UK property values by comparing valuations with actual sales prices achieved a plausible range for the fair value of the Group's UK property portfolio, comprising over 90% of the Group investment property portfolio is considered to be -5% to +8.5% of the 30 June valuation.

(c)     Assets and liabilities not carried at fair value

The table below presents estimated fair values by level of the fair value hierarchy of assets and liabilities whose carrying value does not approximate fair value. Fair values of assets and liabilities are based on observable market inputs where available, or are estimated using other valuation techniques.

 

As recognised in the consolidated statement of financial position
line item

Fair value

 

30 Jun
2018

30 Jun 2017

31 Dec
2017

30 Jun
2018

30 Jun 2017

31 Dec
2017

 

£m

£m

£m

£m

£m

£m

Assets

 

 

 

 

 

 

Loans secured by mortgages

-

63

57

-

71

64

Liabilities

 

 


 

 


Capital notes

-

-

377

-

-

377

Subordinated notes

1,081

500

1,056

1,113

558

1,128

Subordinated guaranteed bonds

519

519

502

691

626

650

Mutual Assurance Capital Securities

309

308

318

333

340

349

In addition to the above there are £52m (30 June 2017: £nil; 31 December 2017: £nil) of loans secured by mortgages classified as held for sale at 30 June 2018 with a fair value of £60m (30 June 2017: £nil; 31 December 2017: £nil) and £6m (30 June 2017: £4m; 31 December 2017: £4m) of non-participating investment contract liabilities classified as held for sale at 30 June 3018 with a fair value of £6m (30 June 2017: £4m; 31 December 2017: £4m).

The estimated fair values of the subordinated liabilities are based on the quoted market offer price. The estimated fair values of the other instruments detailed above are calculated by discounting the expected future cash flows at current market rates.

It is not possible to reliably calculate the fair value of participating investment contract liabilities. The assumptions and methods used in the calculation of these liabilities are set out in Note 31 of the Group's Annual report and accounts 2017. The carrying value of participating investment contract liabilities at 30 June 2018, which were entirely reclassified as held for sale in the period was £15,012m (30 June 2017: £15,300m; 31 December 2017: £15,313m).

The carrying value of all other financial assets and liabilities measured at amortised cost approximates their fair value.

4.16 Contingent liabilities and contingent assets

Legal proceedings, complaints and regulations

The Group is subject to regulation in all of the territories in which it operates insurance and investment businesses. In the UK, where the Group primarily operates, the FCA has broad powers, including powers to investigate marketing and sales practices.

The Group, like other financial organisations, is subject to legal proceedings, complaints and regulatory discussions, reviews and challenges in the normal course of its business. All such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the Group incurring a liability. Where it is concluded that it is more likely than not that a material outflow will be made, a provision is established based on management's best estimate of the amount that will be payable. In some cases it will not be possible to form a view, for example because the facts are unclear or because further time is needed to properly investigate, and no provisions are held for such matters. It is not possible to predict with certainty the extent and timing of the financial impact of legal proceedings, complaints and related regulatory matters. 

4.17 Commitments

(a)     Capital commitments

The Group's investment property is classified as held for sale at 30 June 2018. Capital expenditure that was authorised and contracted for, but not provided and incurred, was £260m at 30 June 2017 and £167m at 31 December 2017 in respect of investment property. At 30 June 2017 and 31 December 2017, £199m and £147m respectively, related to the contractual obligations to purchase, construct or develop investment property and, £61m and £20m respectively, related to the contractual obligations to repair, maintain or enhance investment property.

(b)     Unrecognised financial instruments

The Group has committed £512m (30 June 2017: £449m; 31 December 2017: £447m) in respect of unrecognised financial instruments to customers and third parties. Of this amount £391m (30 June 2017: £357m; 31 December 2017: £360m) is committed by consolidated private equity funds classified as held for sale. These commitments will be funded through contractually agreed additional investments both by the Group, through its controlling interests, and the funds' non-controlling interests. The level of funding provided by each will not necessarily be in line with the current ownership profile of the funds.

(c)     Operating lease commitments

The Group has entered into commercial non-cancellable leases on certain property, plant and equipment where it is not in the best interest of the Group to purchase these assets. Such leases have varying terms, escalation clauses and renewal rights.

The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

 

30 Jun

2018

30 Jun
2017

restated1

31 Dec
2017

restated1

 

£m

£m

£m

Not later than one year

36

16

37

Later than one year and no later than five years

82

39

90

Later than five years

57

47

61

Total operating lease commitments for continuing operations

175

102

188

1    Comparatives for the six months ended 30 June 2017 and 12 months ended 31 December 2017 have been restated to reflect the classification of the UK and European insurance business as discontinued operations. Refer to Note 4.2.

4.18 Related party transactions

In the normal course of business, the Group enters into transactions with related parties that relate to insurance and investment management business. There have been no changes in the nature of these transactions during the period to those reported in the Group's Annual report and accounts for the year ended 31 December 2017. There were no transactions with related parties that have materially affected the result or financial position of the Group during the period ended 30 June 2018, 30 June 2017 or 31 December 2017.

Details of the proposed sale of a subsidiary to our joint venture business are included in Note 4.2.

4.19   Events after the reporting date

HDFC Asset Management Company Limited (HDFC AMC), the Group's associate Indian asset management business announced in November 2017 that its board of directors had approved initiation of an initial public offering (IPO) with the Group offering up a portion of the paid up capital of HDFC AMC. On 6 August 2018, HDFC AMC listed on the National Stock Exchange of India Limited and the Bombay Stock Exchange Limited following completion of the IPO. Through the IPO, the Group sold 16,864,585 equity shares in HDFC AMC for a total net consideration of approximately Rs.16.2bn (approximately £180m). The gain on sale from the IPO is estimated to be £150m after tax and using the weighted-average cost method. Following the sale HDFC AMC will remain an associate of the Group and the Group's shareholding subsequent to the IPO is 63,650,615 equity shares or 30.03% of the issued share capital of HDFC AMC.


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