Adoption of IFRS

Old Mutual PLC 03 May 2005 Old Mutual plc ISIN: GB0007389926 JSE Share code: OML NSX share code: OLM Issuer code: OLOML Presentation to investors and analysts on International Financial Reporting Standards Old Mutual plc ('the Group') is today briefing analysts and investors on the key impacts resulting from the adoption of International Financial Reporting Standards ('IFRS'). The transition to IFRS results in a small increase in both operating profits and earnings per share. Shareholders' equity will remain broadly unchanged as a result of the transition to IFRS. As expected, the most significant impact will be on basic EPS which is primarily due to the reversal of goodwill amortisation on the first-time adoption of IFRS. The briefing will commence in Johannesburg at 4pm SA time (3pm UK time, 10am Eastern US time) and will also be available via a live webcast on the website: http://www.oldmutual.com. An archived version of the webcast and slides will be available on the website later this afternoon and will be available for the next month. A telephone dial- in will also be available in order to participate in the Q&A at the end of the briefing: SA: Toll-free 0800 200 648 UK: Toll-free 0800 917 7042 US: Toll-free 1800 860 2442 The briefing will show that, while some reported figures may alter as a result of adopting IFRS, the business fundamentals and mechanics will not change. The briefing will also cover the impact of IFRS on the recent BEE deal. The full presentation will be available to download on the website approximately 30 minutes before the start of the briefing. A copy of the restatement of financial information for the year ended 31 December 2004 and six months ended 30 June 2004 is attached. 3 May 2005 ENQUIRIES: Old Mutual plc UK Investor Relations: Malcolm Bell (UK) + 44 (0) 20 7002 7166 Media Relations: Miranda Bellord (UK) + 44 (0) 20 7002 7133 Old Mutual plc SA Investor Relations: Deward Serfontein (SA) +27 11 523 9616 Media Relations: Nad Pillay (SA) +27 11 523 9612 For further information about Old Mutual plc visit www.oldmutual.com OLD MUTUAL PLC RESTATEMENT OF FINANCIAL INFORMATION FOR THE YEAR ENDED 31 DECEMBER 2004 AND SIX MONTHS ENDED 30 JUNE 2004 UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS ('IFRS') 3 MAY 2005 INTRODUCTION From 2005 onwards the Group will be required to prepare its consolidated financial statements in accordance with IFRS* as adopted by the European Union ('EU'). Previously these were prepared in accordance with UK Generally Accepted Accounting Practice ('UK GAAP'). This change applies to all financial reporting for accounting periods beginning on or after 1 January 2005 and, consequently, the Group's first IFRS financial statements will be for the year ending 31 December 2005. The date for transition to IFRS is 1 January 2004, this representing the start of the earliest period of comparative information. To explain how the Group's reported performance and financial position are affected by the change to IFRS, the Group has restated information previously published under UK GAAP to the equivalent basis under IFRS. This restatement follows the guidelines** set out by the Committee of European Securities Regulators ('CESR') applicable under IFRS 1, First-time Adoption of International Financial Reporting Standards ('IFRS 1'). This document includes the following: â€¢ Summary Consolidated Income Statements restated under IFRS for the six months ended 30 June 2004 and the year ended 31 December 2004 and under UK GAAP for the year ended 31 December 2004; â€¢ Consolidated Income Statements for the six months ended 30 June 2004 and the year ended 31 December 2004; â€¢ Consolidated Balance Sheets at 1 January 2004, 30 June 2004 and 31 December 2004; â€¢ Reconciliation of Income Statement for the six months ended 30 June 2004 and the year ended 31 December 2004; â€¢ Reconciliation of Equity at 1 January 2004, 30 June 2004 and 31 December 2004; â€¢ Basis of preparation and explanation of transitional arrangements and material adjustments; â€¢ Segmental analysis of operating performance for the six months ended 30 June 2004 and the year ended 31 December 2004; â€¢ Reconciliation of movements in consolidated equity shareholders' funds for the six months ended 30 June 2004 and the year ended 31 December 2004; â€¢ Description of the accounting policies adopted by the Group for the period from 1 January 2004. The basis of preparation of this financial information is explained on page 11. It is important to note that this financial information has been prepared on the basis of IFRSs expected to be applicable at 31 December 2005. These are subject to ongoing review and endorsement by the EU or possible amendment by interpretative guidance from the IASB and therefore may be subject to change. The special purpose auditors report from KPMG Audit Plc in connection with the work they have performed on the preliminary financial information for the year ended 31 December 2004 can be found on page 39. * IFRS refers to the application of International Accounting Standards and International Financial Reporting Standards. ** European Regulation on the application of IFRS in 2005: 'Recommendation for additional guidance regarding the transition to IFRS' - December 2003 (CESR/03-323e) INDEX SUMMARY CONSOLIDATED INCOME STATEMENT .......................................5 CONSOLIDATED INCOME STATEMENT................................................7 CONSOLIDATED BALANCE SHEET ..................................................8 NOTES TO THE RESTATEMENT DOCUMENT ...........................................9 RECONCILIATION OF INCOME STATEMENT .........................................9 RECONCILIATION OF EQUITY...................................................10 BASIS OF PREPARATION ......................................................11 MATERIAL ADJUSTMENTS ......................................................13 FOREIGN CURRENCIES ........................................................16 SEGMENT INFORMATION........................................................16 RECONCILIATION OF MOVEMENTS IN CONSOLIDATED EQUITY SHAREHOLDERS' FUNDS ....21 ACCOUNTING POLICIES .......................................................25 AUDITORS' REPORT............................................................39 SUMMARY CONSOLIDATED INCOME STATEMENT The following table summarises the Group's results in the Consolidated Income Statement. Adjusted operating profit represents the Directors' views of the underlying performance of the Group. This summary will not form part of the audited IFRS financial statements for 31 December 2005. UK GAAP** IFRS IFRS GBPm Year to Year to Six months to 31 Dec 2004 31 Dec 2004 30 June 2004 Africa Long term business 490 509 251 Asset management 53 54 22 Banking 177 241 54 General insurance 89 101 52 809 905 379 North America Long term business 96 97 40 Asset management 89 87 47 185 184 87 United Kingdom and Rest of World Long term business 8 6 - Asset management 10 (12) 7 Banking 14 - 11 32 (6) 18 Other shareholders' net expenses (70) (72) (33) Adjusted operating profit* 956 1,011 451 Goodwill amortisation and impairments (110) (33) (33) Restructuring and integration costs (21) - - (Loss) / profit on disposal of subsidiaries (35) (27) 12 Short term fluctuations in investment return 226 197 (48) Income from hedging activities that do not qualify for hedge accounting - 31 5 Investment return adjustment for own shares held in policyholders' funds (94) (94) (22) Fines and penalties (49) (49) (49) Operating profit before tax and minority interests 873 1,036 316 Income tax expense (286) (344) (120) Profit on ordinary activities after tax 587 692 196 Minority interests - ordinary shares (44) (74) (24) - preferred securities (59) (59) (27) Profit for the financial period attributable to equity holders 484 559 145 * For life assurance and general insurance business, IFRS adjusted operating profit is based on a long-term investment return and includes investment returns on own shares held within policyholders' funds and adjustments for unrealised gains on certain insurance contracts. For all businesses, adjusted operating profit excludes goodwill amortisation and impairments, fines and penalties, income from hedging activities that do not qualify for hedge accounting, and (loss) / profit on disposal of subsidiaries. ** UK GAAP information is extracted from the Summary Consolidated Profit and Loss Account contained within the Group's Annual Report and Accounts for the year ended 31 December 2004; segmental reallocations have been made to this information to make it consistent with the segmental analysis presented under IFRS. All segmental analysis within this Summary Consolidated Income Statement has been prepared on a gross of inter-segment transactions basis. SUMMARY CONSOLIDATED INCOME STATEMENT continued The adjusted operating profit on an after-tax and minority interests basis is determined as follows: UK GAAP IFRS IFRS GBPm Year to Year to Six months to 31 Dec 31 Dec 30 June 2004 2004 2004 Adjusted operating profit 956 1,011 451 Tax on adjusted operating profit (240) (306) (132) 716 705 319 Minority interests - ordinary shares (83) (94) (36) - preferred securities (59) (59) (27) Adjusted operating profit after tax and minority interests 574 552 256 The reconciliation of adjusted operating profit after tax and minority interests to profit for the financial period is as follows: Adjusted operating profit after tax and minority interests 574 552 256 Goodwill amortisation and impairment (83) (17) (17) Restructuring and integration costs (8) - - (Loss) / profit on disposal of subsidiaries (26) (21) 6 Short term fluctuations in investment return 162 149 (42) Income from hedging activities that do not qualify for hedge accounting - 31 5 Investment return adjustment for own shares held in policyholders' funds (94) (94) (22) Fines and penalties (41) (41) (41) Profit for the financial period 484 559 145 Earnings attributable to equity UK GAAP IFRS IFRS shareholders p Year to Year to Six months to 31 Dec 31 Dec 30 June 2004 2004 2004 Earnings per share Adjusted operating earnings per share* 15.3 14.8 6.9 Basic earnings per share 14.1 16.3 4.2 Diluted earnings per share 14.1 16.3 4.2 Adjusted weighted average number of shares - millions 3,748 3,738 3,735 Weighted average number of shares - millions 3,432 3,422 3,419 * Adjusted operating earnings per share is calculated on the same basis as adjusted operating profit, but is stated after tax and minority interests, with the calculation of the weighted average number of shares including own shares held in policyholders' funds. CONSOLIDATED INCOME STATEMENT IFRS IFRS GBPm Year to 31 Six months to December 30 June 2004 2004 Revenue Gross earned premiums 4,114 2,023 Outward reinsurance (140) (74) Net earned premiums 3,974 1,949 Investment return (net of investment losses) 4,257 379 Interest and similar income (banking) 2,017 979 Fee and commission income, and income from service activities 1,190 559 Other income 147 67 Total revenue 11,585 3,933 Expenses Claims and benefits (including change in insurance contract provisions) (5,901) (1,737) Reinsurance recoveries 143 55 Change in provision for investment contract liabilities (including amortisation) (760) (33) Losses on loans and advances (104) (33) Finance costs (including interest and similar expenses) (61) (21) Interest expense and similar charges (banking) (1,382) (681) Fees, commissions and other acquisition costs (399) (167) Third party interest in consolidated funds (55) (7) Other operating and administrative expenses (1,988) (981) Total expenses (10,507) (3,605) Share of associated undertakings' operating profit after tax 18 9 Goodwill impairments (33) (33) (Loss) / profit on disposal of subsidiaries (27) 12 Operating profit before tax and minority interests 1,036 316 Income tax expense (344) (120) Profit on ordinary activities after tax 692 196 Minority interests - ordinary shares (74) (24) - preferred securities (59) (27) Profit for the financial period attributable to equity holders 559 145 Earnings attributable to equity shareholders UK GAAP IFRS IFRS p Year to Year to Six months to 31 Dec 31 Dec 30 June 2004 2004 2004 Earnings per share Basic earnings per share 14.1 16.3 4.2 Diluted earnings per share 14.1 16.3 4.2 Weighted average number of shares - millions 3,432 3,422 3,419 CONSOLIDATED BALANCE SHEET IFRS IFRS IFRS GBPm At 31 Dec At 30 June At 1 Jan 2004 2004 2004 Assets Goodwill and other intangible assets 1,296 1,397 1,409 Investments in associated undertakings 149 186 182 Investment property 690 649 593 Property, plant and equipment 512 480 471 Deferred tax assets 440 360 559 Reinsurers' share of insurance contract provisions 317 338 330 Deferred acquisition costs 655 626 420 Current tax receivable 20 16 23 Loans, receivables and advances 17,183 15,706 15,276 Derivative financial instruments - assets 2,689 2,003 2,502 Other financial assets 9,763 8,705 7,396 Financial assets fair valued through profit and loss 27,935 23,183 22,967 Short term securities 3,063 2,978 2,643 Other assets 2,074 2,157 1,896 Cash and balances with the central bank 1,038 1,543 1,454 Placements with banks 392 42 266 Total assets 68,216 60,369 58,387 Liabilities Insurance contract provisions 18,883 16,643 15,743 Investment contract liabilities 13,293 11,768 11,198 Third party interests in consolidation of funds 556 395 395 Borrowed funds 1,492 1,319 1,020 Provisions 510 434 221 Deferred revenue 139 129 123 Deferred tax liabilities 400 257 470 Current tax payable 171 97 130 Deposits from banks 2,831 1,699 4,759 Amounts owed to depositors 18,334 17,047 14,673 Money market deposits 1,563 984 174 Derivative financial instruments - liabilities 2,599 1,774 2,445 Other liabilities 2,711 3,678 3,137 Total liabilities 63,482 56,224 54,488 Net assets 4,734 4,145 3,899 Equity attributable to equity holders of the parent 3,264 2,796 2,670 Minority interests - ordinary shares 788 691 583 - preferred securities 682 658 646 Total minority interests 1,470 1,349 1,229 Total equity 4,734 4,145 3,899 NOTES TO THE RESTATEMENT DOCUMENT RECONCILIATION OF INCOME STATEMENT Revenue 1 Year to Year to 31 December Six months to 31 December Note 2004 30 June 2004 2004 As reported under UK GAAP 12,875 4,370 11,815 Inclusion of amounts previously netted 1 - - - Reclassifications - available-for-sale investments moved to equity 2 (63) 207 - Adjustments for: Goodwill 3 - - - Consolidation of funds 4 84 22 84 Recognition and valuation of financial instruments 5 65 (3) 5 Revenue recognition 6 7 (1) - Elimination of equalisation provisions 7 - - (12) Investment contracts 8 (1,312) (643) (1,294) Insurance accounting 9 - - 5 Post-employment benefits 10 1 - (10) Dividend recognition 11 - - - Share-based payments 12 - - 17 Consolidation of other entities 13 (46) (19) (33) Elimination of policyholder investments in Nedcor 14 (27) (4) (15) Reclassification of policyholder loans 15 - - - Valuation of embedded derivatives 16 - - (40) Other items 17 1 4 (15) Minority interest impacts - - - As reported under IFRS 11,585 3,933 10,507 GBPm Profit after tax and Expenses 2 minority interests Year to Six months to 31 December Six months to Note 30 June 2004 2004 30 June 2004 As reported under UK GAAP 4,298 484 (62) Inclusion of amounts previously netted 1 - - - Reclassifications - available-for-sale investments moved to equity 2 - (36) 146 Adjustments for: Goodwill 3 - 83 31 Consolidation of funds 4 22 - - Recognition and valuation of financial instruments 5 (22) 48 14 Revenue recognition 6 (3) 5 - Elimination of equalisation provisions 7 (6) 12 6 Investment contracts 8 (643) (14) - Insurance accounting 9 6 (3) (4) Post-employment benefits 10 2 9 (1) Dividend recognition 11 - - - Share-based payments 12 5 (16) (4) Consolidation of other entities 13 (19) (2) - Elimination of policyholder investments in Nedcor 14 - (12) (4) Reclassification of policyholder loans 15 - - - Valuation of embedded derivatives 16 (26) 26 17 Other items 17 (9) 5 15 Minority interest impacts - (30) (9) As reported under IFRS 3,605 559 145 1. Revenue - represents the pre-tax operating inflows of the Group's ordinary activities, excluding profits from associated undertakings and profit / (losses) on disposal of subsidiaries. 2. Expenses - represents the pre-tax operating expenses of the Group's ordinary activities, excluding goodwill impairments. NOTES TO THE RESTATEMENT DOCUMENT continued RECONCILIATION OF EQUITY GBPm Assets At 31 At At December 30 June 1 January Note 2004 2004 2004 As reported under UK GAAP 66,260 59,375 57,715 Inclusion for amounts previously netted 1 1,588 1,298 1,299 Reclassifications 2 - - - Adjustments for: Goodwill 3 (91) (128) (154) Consolidation of funds 4 1,159 899 688 Recognition and valuation of financial Instruments 5 629 190 157 Revenue recognition 6 124 121 112 Elimination of equalisation provisions 7 (5) (6) (5) Investment contracts 8 38 35 36 Insurance accounting 9 (216) (85) (201) Post-employment benefits 10 (23) (14) (13) Dividend recognition 11 - - - Share-based payments 12 1 1 1 Consolidation of other entities 13 (1,086) (830) (821) Elimination of policyholder investments in Nedcor 14 (195) (156) (169) Reclassification of policyholder loans 15 - (349) (314) Valuation of embedded derivatives 16 2 7 42 Other items 17 31 11 14 As reported under IFRS 68,216 60,369 58,387 Liabilities At 31 At At December 30 June 1 January Note 2004 2004 2004 As reported under UK GAAP 61,488 55,153 53,651 Inclusion for amounts previously netted 1 1,588 1,298 1,299 Reclassifications 2 - - - Adjustments for: Goodwill 3 - - - Consolidation of funds 4 1,159 899 688 Recognition and valuation of financial Instruments 5 502 103 127 Revenue recognition 6 132 129 124 Elimination of equalisation provisions 7 (65) (59) (49) Investment contracts 8 143 119 116 Insurance accounting 9 (75) (30) (70) Post-employment benefits 10 (44) (24) (24) Dividend recognition 11 (122) (60) (106) Share-based payments 12 17 4 - Consolidation of other entities 13 (1,108) (847) (876) Elimination of policyholder investments in Nedcor 14 (133) (131) (123) Reclassification of policyholder loans 15 - (349) (314) Valuation of embedded derivatives 16 3 18 70 Other items 17 (3) 1 (25) As reported under IFRS 63,482 56,224 54,488 Equity At 31 At At December 30 June 1 January Note 2004 2004 2004 As reported under UK GAAP 4,772 4,222 4,064 Inclusion for amounts previously netted 1 - - - Reclassifications 2 - - - Adjustments for: Goodwill 3 (91) (128) (154) Consolidation of funds 4 - - - Recognition and valuation of financial Instruments 5 127 87 30 Revenue recognition 6 (8) (8) (12) Elimination of equalisation provisions 7 60 53 44 Investment contracts 8 (105) (84) (80) Insurance accounting 9 (141) (55) (131) Post-employment benefits 10 21 10 11 Dividend recognition 11 122 60 106 Share-based payments 12 (16) (3) 1 Consolidation of other entities 13 22 17 55 Elimination of policyholder investments in Nedcor 14 (62) (25) (46) Reclassification of policyholder loans 15 - - - Valuation of embedded derivatives 16 (1) (11) (28) Other items 17 34 10 39 As reported under IFRS 4,734 4,145 3,899 GBPm Equity At At At 31 December 2004 30 June 2004 1 January 2004 UK GAAP Shareholders' equity 3,245 2,741 2,754 Minority interests 1,527 1,481 1,310 Total shareholders' equity 4,772 4,222 4,064 IFRS Shareholders' equity 3,264 2,796 2,670 Minority interest 1,470 1,349 1,229 Total shareholders' equity 4,734 4,145 3,899 NOTES TO THE RESTATEMENT DOCUMENT continued BASIS OF PREPARATION The Group has prepared the consolidated preliminary balance sheet at 31 December 2004, the related consolidated preliminary statements of income and changes in equity for the year then ended and the related notes, in accordance with IFRS adopted for use by the EU ('the preliminary financial information') as set out on pages 7 to 38 to establish the financial position and results of operations of the Group necessary to provide the comparative financial information expected to be included in the Group's first set of IFRS financial statements for the year to 31 December 2005. The preliminary financial information does not include comparative financial information for the prior period. The Board acknowledges its responsibility for the preparation of the preliminary financial information which has been prepared in accordance with IFRS adopted for use by the EU and policies expected to be adopted when the Board prepares the Group's first set of IFRS Financial Statements for the year to 31 December 2005. The Board approved the preliminary financial information at its meeting on 27 April 2005. The standards adopted by the Group are those adopted by the EU at the date the preliminary financial information was approved by the Board. In accordance with the guidance issued by the EU, the Group has accounted for unit linked contracts which fall within the scope of IAS 39, Financial Instruments: Recognition and Measurement ('IAS 39') at fair value, as permitted by the insurance accounts directive. The latest version of IAS 19, Employee Benefits ('IAS 19') which the Group has adopted, is expected to be adopted by the EU and be effective for the 31 December 2005 financial statements. The preliminary financial information does not reflect any changes in respect of any amendments to IAS 39 for the fair value option. Proposals to restrict the fair value option are being considered by the IASB and are the subject of continuing debate between the IASB, industry and regulators. The Group has applied the requirements of IAS 27, Consolidation ('IAS 27') in determining whether holdings in mutual funds, such as open-ended investment companies, should be consolidated. Old Mutual plc will continue to monitor industry developments in this area. Transitional arrangements The date of transition to IFRS for the Group is 1 January 2004, as required by IFRS. The Group's opening balance sheet at 1 January 2004 has been restated to reflect all existing IFRSs expected to be applicable at 31 December 2005. At transition IFRS 1 allows a number of exemptions to this retrospective application principle upon adoption of IFRS. The Group has taken advantage of the following transitional arrangements: Cumulative translation differences The Group has elected that the cumulative translation differences for foreign operations were deemed to be zero at the date of transition. Business combinations The Group has elected not to apply the retrospective application requirements of IFRS 3, Business Combinations ('IFRS 3') for combinations that occurred prior to 1 January 2004 and consequently no adjustment has been made. Property, plant and equipment The Group has elected to measure individual items of property, plant and equipment at fair value at the date of transition to IFRS, hence fair value is deemed to be cost at that date. Employee benefits The Group has elected to recognise all cumulative actuarial gains and losses on defined benefit post retirement schemes in equity at the date of transition. Equity compensation plans The Group has elected not to apply the provisions of IFRS 2, Share-based Payments ('IFRS 2') to equity-settled awards granted on or before 7 November 2002, or to awards granted after that date but which had vested prior to 1 January 2005. Compound financial instruments The Group has elected not to separate compound financial instruments into debt and equity portions provided that the debt component is no longer outstanding at the date of transition. Derecognition of financial assets and liabilities The Group has applied the derecognition requirements in IAS 39. Hedge accounting The Group has applied the requirements of IAS 39 relating to hedge accounting and the measurement of derivatives at fair value to its opening IFRS balance sheet. NOTES TO THE RESTATEMENT DOCUMENT continued BASIS OF PREPARATION continued Comparatives The Group has not taken advantage of the exemption within IFRS 1 that allows comparative information presented in the first year of adoption of IFRS not to comply with IAS 32, Financial Instruments: Disclosure and Presentation ('IAS 32'), IAS 39, and IFRS 4, Insurance Contracts ('IFRS 4'). Estimates The preliminary financial information is based on the UK GAAP financial statements approved by the Board on 28 February 2005, and adjusted to comply with IFRS. In accordance with IFRS 1 there have been no adjustments to the estimates made at the time of the preparation of the UK GAAP financial statements. Cash flow statement As a change from UK GAAP, cash flows from transactions with policyholders and third party interests in consolidated funds are now included in the cash flow statement under IFRS. However, there are no overall changes to Group cash and cash equivalents, as cash balances in policyholder funds are treated as financial assets in the balance sheet. Further changes The possibility exists that the preliminary financial information may require adjustment before its inclusion in the Group's first IFRS financial statements for the year ending 31 December 2005 because of revisions or changes to standards issued by the IASB or endorsed by the EU, and interpretations or guidance on the application of IFRS in a particular industry. Accounting policies The IFRS accounting policies adopted by the Group in preparing the preliminary financial information have been included on pages 25 to 38. NOTES TO THE RESTATEMENT DOCUMENT continued MATERIAL ADJUSTMENTS The basis for material adjustments between UK GAAP and IFRS, as shown in the Reconciliation of Equity and Reconciliation of Income Statement tables, is noted below. Note that the adjustments are net of the associated tax impact. Note 1: Inclusion of amounts previously netted Under IFRS, the Group has elected to move to trade date accounting for certain financial instruments held within the banking segment. The Group has also made adjustments for amounts previously netted under UK GAAP. This has resulted in an increase in assets and liabilities of GBP1,588m at 31 December 2004. There is no impact on net equity or profit and loss for the year. Note 2: Reclassifications The Group has reclassified certain financial assets as available-for-sale ('AFS') which had been classified under UK GAAP as fair value through profit and loss. This has resulted in a reclassification of profit after tax to the revaluation reserve in equity of GBP36m and a loss of GBP146m at 31 December 2004 and 30 June 2004 respectively. There is no impact on net equity. Note 3: Goodwill Under UK GAAP, the Group recognised acquired goodwill at cost and amortised it on a straight-line basis over its expected useful life. Under IFRS, goodwill is not amortised and is subject to impairment reviews both annually and when there are indications that the carrying value may not be recoverable. Under IFRS 1, the UK GAAP goodwill balance at 1 January 2004 has been carried forward and the amortisation of GBP83m charged in the year ended 31 December 2004 has been reversed. Included in the goodwill balance sheet adjustment is an adjustment to the treatment of goodwill of GBP154m at 1 January 2004 with an offsetting adjustment to minority interests within equity of GBP135m. Note 4: Consolidation of funds IFRS requires the consolidation of certain mutual funds and other investment vehicles, which did not previously require consolidation under UK GAAP. This arises from a more stringent definition of when an entity is considered to be under the control of an investor. As a result the Group has now consolidated a number of mutual funds and other investment vehicles on a line-by-line basis. The Group has applied IFRS and consolidated those vehicles that meet the definition of a subsidiary under IFRS. Old Mutual plc will continue to monitor industry developments in this area. This has resulted in an increase in total assets and total liabilities of GBP556m at 31 December 2004 representing that part of the funds owned by third parties. This third party interest is recorded within liabilities. The consolidation of mutual funds has no effect on equity or profit after tax. Note 5: Recognition and valuation of financial instruments Under IFRS, financial instruments have been classified as 'fair value through profit or loss', 'available-for-sale', 'held-to- maturity' and 'loans and receivables' and fair valued as required. The fair value movements for these financial instruments have been recognised in the income statement or equity as appropriate. Available-for-sale fair value adjustments are transferred out of equity to the income statement on sale or impairment. Derivatives, as required under IFRS, are included in the 'fair value through profit or loss' classification and recognised on the balance sheet at fair value. Under UK GAAP, the majority of investments within the Group's US Life segment were recorded at fair value with changes in fair value recorded in the income statement, while off balance sheet financial instruments were measured on a basis consistent with on balance sheet instruments. The effect of classifying these assets as available-for-sale under IFRS therefore has no material net impact on equity. Additionally, under IFRS, the Group has moved to an 'incurred loss' provisioning model within its banking segment. Under UK GAAP, the Group utilised an 'expected loss' provisioning model. The implementation of hedge accounting has resulted in a GBP27m increase in profit after tax and an GBP9m increase in equity at 31 December 2004. As a result of the stricter designation and documentation requirements and effectiveness testing required to qualify for hedge accounting under IAS 39, certain transactions undertaken as hedges under UK GAAP have not qualified for hedge accounting under IFRS and the fair value movements for these derivatives have been accounted for through the income statement. Unrealised profits and losses on UK GAAP hedges at transition have been included in reserves in accordance with IFRS 1 transitional arrangements. The impact of the above adjustments is an increase of GBP127m to equity at 31 December 2004 and an increase of GBP48m to profit after tax for the year ended 31 December 2004, mainly representing the cumulative fair value changes on financial instruments, the implementation of the amended loan provisioning model and hedging adjustments. Assets and liabilities have increased by GBP439m and GBP399m from 30 June 2004 to 31 December 2004 respectively. This increase represents fair value movements on increased holdings of financial instruments during this period as well as reclassifications of assets and liabilities previously shown net. NOTES TO THE RESTATEMENT DOCUMENT continued MATERIAL ADJUSTMENTS continued Note 6: Revenue recognition Under IAS 18, Revenue ('IAS 18'), fees that are directly attributable to securing an investment management service contract are deferred as a liability. This liability represents the deferred revenue from providing investment management services and is amortised as the related services are provided. Costs that are directly attributable to securing an investment management service contract are deferred as an asset and expensed in line with the related revenue as the services are provided. Both the long term business and asset management segments contain investment management service contracts. Additionally, the Group's banking segment has recognised fees and costs relating to securing loans in line with IAS 18, resulting in deferred acquisition costs and deferred revenue liability balances on the balance sheet. Past policy was to expense acquisition costs as incurred and recognise initial fees and recurring fees as received. The effect on the balance sheet at 31 December 2004 is an increase in assets and liabilities of GBP124m and GBP132m respectively resulting in a net decrease in equity of GBP8m. Profit after tax has increased by GBP5m for the year ended 31 December 2004. Note 7: Elimination of equalisation provisions Under UK GAAP an equalisation provision is recorded in the financial statements of individual general insurance companies within the Group to eliminate, or reduce, the volatility in incurred claims arising from exceptional levels of claims in certain classes of business. The provision is required by law even though no actual liability exists at the balance sheet date, with the annual change in the equalisation provision being recorded in the profit and loss account. Under IFRS 4, the recognition of equalisation provisions is not permitted. The removal of the equalisation provision results in an increase in equity of GBP60m at 31 December 2004 and a related increase of GBP12m to profit after tax for the year ended 31 December 2004. Note 8: Investment contracts Under IFRS 4, certain contracts previously accounted for as insurance are classified as investment contracts as they do not contain significant insurance risk. Those that have a discretionary participating feature continue to be accounted for using local GAAP. Under IAS 39, investment contracts without a discretionary participating feature are carried at either fair value (in the case of linked liabilities) or amortised cost. Fair value for these investment contracts is equal to the fair value of the related assets, or the policyholder's account balance. Adjustments to the account balance under the previous basis of accounting for Rand or Sterling reserves and actuarial funding have been reversed. The effect is to increase investment contract liabilities by GBP143m at 31 December 2004 and by GBP116m at 1 January 2004, with an impact on profit after tax of GBP14m. Amounts received under investment contracts (other than those with a discretionary participating feature) are no longer shown as premiums but are treated as deposits and added to investment contract liabilities. Similarly, amounts paid under investment contracts (other than those with a discretionary participating feature) are recorded not as claims but as deductions from investment contract liabilities. This is reflected as a reduction to both revenue and expenses of GBP1,312m for the year ended 31 December 2004. Note 9: Insurance accounting Under IFRS 4, the Group continues to account for insurance contracts using local GAAP for each Group entity, but has the option to make improvements to its policies if the changes make the financial statements more relevant to the decision-making needs of users. Insurance business in the United States ('US') continues to be accounted for under US Generally Accepted Accounting Practice ('US GAAP'), and the Group has elected to make certain improvements to its accounting for Deferred Acquisition Costs ('DAC') and Present Value of Future Profits ('PVFP') on insurance contracts. Under the revised policy, unrealised and actual realised gains are reflected in the amortisation of DAC / PVFP. The net impact of these improvements is to decrease equity by GBP141m and GBP131m at 31 December 2004 and 1 January 2004 respectively. Profit after tax is decreased by GBP3m for the year ended 31 December 2004. Note 10: Post-employment benefits Under UK GAAP, post-employment costs were charged to the income statement account so as to spread the related charges over the service lives of employees and were determined by independent qualified actuaries undertaking formal actuarial valuations at least every three years. In accordance with IAS 19, the projected benefit obligation is matched against the fair value of the underlying assets and other unrecognised actuarial gains and losses in determining the expense for the year. Any asset or obligation must be recorded in the balance sheet, and separate recognition of the operating and financing costs of defined benefits (and similarly funded employee benefits) is required in the income statement. IAS 19 permits a number of options for the recognition of actuarial gains and losses. The Group has elected to recognise actuarial gains and losses using the 'corridor' method and take advantage of the IFRS 1 exemption allowing any previously unrecognised actuarial gains or losses to be recognised in full on the balance sheet, at the date of transition (1 January 2004). The effect of these changes is to increase equity by GBP21m and GBP11m at 31 December 2004 and 1 January 2004 respectively. Profit after tax has increased by GBP9m for the year ended 31 December 2004. NOTES TO THE RESTATEMENT DOCUMENT continued MATERIAL ADJUSTMENTS continued Note 11: Dividend recognition Under UK GAAP, dividends were accrued in the period to which they related regardless of when they were declared and approved. Under IAS 10, Events after the Balance Sheet Date ('IAS 10'), dividends are only accrued when declared and appropriately approved. The reversal of accrued dividends has increased equity by GBP122m at 31 December 2004. There is no profit or loss impact. Note 12: Share-based payments Under UK GAAP, the costs of awards to employees under equity compensation plans, other than Save As You Earn plans, were recognised immediately if they were not conditional on performance criteria. If the award was conditional, the cost was recognised over the period to which the performance criteria related. The minimum cost for the award was the difference between the share price of the underlying equity instruments at the date of grant less any contribution required from the employee. The cost was based on a reasonable expectation of the extent to which the performance criteria would be met. Any subsequent changes in that expectation were reflected in the income statement. Under IFRS 2, equity instruments granted under equity-settled awards after 7 November 2002, which remain unvested at 1 January 2005, are measured at the fair value of the equity instruments granted. The fair value of those equity instruments is measured at grant date and is recognised over the vesting period, adjusted at the end of each reporting period to reflect actual and expected levels of vesting. Equity instruments granted under cash-settled awards are measured at fair value at each reporting date. The fair value is recognised over the vesting period and is re-measured until the underlying liability is settled. Any changes in the fair value are reflected in profit and loss. The effect of this change in treatment is a decrease in profit after tax of GBP16m and a corresponding decrease to equity at 31 December 2004. There is minimal impact on 1 January 2004 equity primarily due to the IFRS charge being offset by the reversal of related UK GAAP accruals. Note 13: Consolidation of other entities IFRS does not differentiate between shareholders' and policyholders' funds. Assets and liabilities, and income and expenditure items between group companies and policyholders' funds have now been eliminated on consolidation. Additionally, under IFRS, a charitable foundation has now been consolidated in the Group's preliminary financial information. The effect is to decrease assets and liabilities by GBP1,086m and GBP1,108m respectively at 31 December 2004. Profit after tax decreased by GBP2m for the year ended 31 December 2004. Note 14: Elimination of policyholder investments in Nedcor IFRS does not recognise the distinction between shareholder and policyholder investments and as a result the Group has eliminated certain policyholder investments in its Nedcor subsidiary, not previously eliminated under UK GAAP. This has resulted in a decrease of GBP195m and GBP133m to assets and liabilities at 31 December 2004 respectively. Profit after tax decreased by GBP12m in the year ended 31 December 2004. Note 15: Reclassification of policyholder loans Certain policyholder loans have been offset against investment contract liabilities in accordance with IAS 32 as the Group has both the contractual ability and right to offset and intends to settle on a net basis. The effect is to decrease assets by GBP349m at 30 June 2004 and by GBP314m at 1 January 2004. There is no equity or profit after tax impact. This adjustment was made within the UK GAAP balance sheet at 31 December 2004 and therefore does not feature in the IFRS reconciliation at 31 December 2004. Note 16: Valuation of embedded derivatives IFRS 4 requires that embedded derivatives within insurance contracts be separated and fair valued if the derivatives do not qualify as insurance contracts. The overall effect of the embedded derivatives adjustment is to decrease net equity by GBP1m at 31 December 2004 and GBP28m at 1 January 2004. Profit after tax increased by GBP26m for the year ended 31 December 2004. Note 17: Other items The other changes that arise as a result of the transition to IFRS are principally reclassifications and presentational changes, which individually and collectively have an immaterial effect on the Group's equity and profit after tax. Other items principally comprise of: â€¢ Properties previously held at cost which have been reclassified under IFRS as owner occupied properties and restated to depreciated fair value accordingly. This has resulted in a net increase to equity of GBP22m at 31 December 2004 and an associated decrease to profit after tax of GBP4m; â€¢ An adjustment under IAS 21 to reflect the transfer directly to equity of foreign exchange gains or losses incurred by entities with a non-Rand functional currency. Profit after tax has increased by GBP10m. There is no impact on equity. In aggregate these adjustments resulted in a GBP34m and GBP5m increase to equity and profit after tax respectively at 31 December 2004. NOTES TO THE RESTATEMENT DOCUMENT continued FOREIGN CURRENCIES Principal exchange rates used to translate the operating results; assets and liabilities of key foreign business segments to Sterling are presented below: Rand 31 December 30 June 1 January 2004 2004 2004 Income statement 11.7986 12.1544 12.3487 Balance sheet (closing rate) 10.8482 11.3037 11.9367 USD 31 December 30 June 1 January 2004 2004 2004 Income statement 1.8327 1.8222 1.6354 Balance sheet (closing rate) 1.9158 1.8144 1.7833 Foreign currency revenue transactions are translated at average exchange rates for the year. Foreign currency assets and liabilities are translated at year-end exchange rates. The assets and liabilities of foreign operations are translated from their respective functional currencies into the Group's presentation currency using the year-end exchange rates, and their income and expenses using the average exchange rates. Unrealised gains or losses resulting from translation of functional currencies to the presentation currency are included as a separate component of shareholders' equity, net of applicable deferred income taxes. SEGMENT INFORMATION (i) Basis of segmentation Geographical segments For management purposes the Group is organised on a geographical basis in the following segments: Africa, North America, UK and Rest of World. This is the basis on which the Group reports its primary segment information. Business segments Although the Group is managed primarily on a geographical basis, it operates in four principal areas of business: long term business, general insurance, banking and asset management. These business segments operate independently within each geographic area. Financial information about the Group's geographic and business segments is presented below. Where financial information is provided for both primary and secondary segments, this information is shown in the format of a matrix. Transactions between segments are determined on an arms length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. NOTES TO THE RESTATEMENT DOCUMENT continued SEGMENT INFORMATION continued (ii) Long-term business Year to 31 December 2004 GBPm UK and Africa North Rest Conso America of World lidated Gross premiums and investment contract deposits written Individual business Single 643 2,169 125 2,937 Recurring 973 205 13 1,191 1,616 2,374 138 4,128 Group business Single 452 - - 452 Recurring 321 - - 321 773 - - 773 Total gross premiums and investment contracts written 2,389 2,374 138 4,901 Insurance contracts 1,052 2,023 2 3,077 Investment contracts with discretionary participation features 402 - - 402 Other investment contracts 935 351 136 1,422 2,389 2,374 138 4,901 Less: Other investment contracts (935) (351) (136) (1,422) Total gross written premiums 1,454 2,023 2 3,479 Gross new business premiums and investment contract deposits written Individual business Single 643 2,169 125 2,937 Recurring 164 58 1 223 807 2,227 126 3,160 Group business Single 452 - - 452 Recurring 17 - - 17 469 - - 469 Total gross new business premiums and investment contracts written 1,276 2,227 126 3,629 Insurance contracts 319 1,876 - 2,195 Investment contracts with discretionary participation features 167 - - 167 Other investment contracts 790 351 126 1,267 1,276 2,227 126 3,629 Less: Other investment contracts (790) (351) (126) (1,267) Total gross new business premiums written 486 1,876 - 2,362 Annual premium equivalent* 290 275 14 579 Adjusted operating profit Individual business 215 97 6 318 Group business 82 - - 82 Policyholder tax 62 - - 62 359 97 6 462 Long term investment return 145 - - 145 Share of profit of associates (after tax) 5 - - 5 Adjusted operating profit 509 97 6 612 *Annual premium equivalent is defined as one tenth of single premiums plus annualised recurring premiums. NOTES TO THE RESTATEMENT DOCUMENT continued SEGMENT INFORMATION continued (ii) Long-term business continued Six months ended 30 June 2004 GBPm UK and Africa North Rest of Consol America World idated Gross premiums and investment contract deposits written Individual business Single 300 1,131 53 1,484 Recurring 467 94 8 569 767 1,225 61 2,053 Group business Single 217 - - 217 Recurring 155 - - 155 372 - - 372 Total gross premiums and investment contracts written 1,139 1,225 61 2,425 Insurance contracts 506 1,026 2 1,534 Investment contracts with discretionary participation features 191 - - 191 Other investment contracts 442 199 59 700 1,139 1,225 61 2,425 Less: Other investment contracts (442) (199) (59) (700) Total gross written premiums 697 1,026 2 1,725 Gross new business premiums and investment contract deposits written Individual business Single 300 1,131 53 1,484 Recurring 73 25 1 99 373 1,156 54 1,583 Group business Single 217 - - 217 Recurring 9 - - 9 226 - - 226 Total gross new business premiums and investment contracts written 599 1,156 54 1,809 Insurance contracts 124 957 - 1,081 Investment contracts with discretionary participation features 87 - - 87 Other investment contracts 388 199 54 641 599 1,156 54 1,809 Less: Other investment contracts (388) (199) (54) (641) Total gross new business premiums written 211 957 - 1,168 Annual premium equivalent* 134 138 6 278 Adjusted operating profit Individual business 103 40 - 143 Group business 47 - - 47 Policyholder tax 23 - - 23 173 40 - 213 Long term investment return 75 - - 75 Share of profit of associates (after tax) 3 - - 3 Adjusted operating profit 251 40 - 291 *Annual premium equivalent is defined as one tenth of single premiums plus annualised recurring premiums. NOTES TO THE RESTATEMENT DOCUMENT continued SEGMENT INFORMATION continued (iii) General Insurance GBPm Earned premiums net of reinsurance Year to Six months to Year to 31 December 30 June 31 December 2004 2004 2004 Result by class of business Commercial 219 105 129 Corporate 19 9 9 Personal lines 244 116 170 Risk financing 89 28 48 571 258 356 Claims incurred net of reinsurance Operating profit Six months to Year to Six months to 30 June 2004 31 Dec 2004 30 June 2004 Result by class of business Commercial 61 30 15 Corporate 5 5 2 Personal lines 79 13 7 Risk financing 16 5 3 161 53 27 Long term investment return 45 25 Share of profit of associates (after tax) 3 - Adjusted operating profit 101 52 (iv) Banking GBPm Year to Six months to 31 December 2004 30 June 2004 Segmental income statement Interest and similar income 2,017 979 Interest expense and similar charges (1,382) (681) Net interest income 635 298 Dividend income 12 4 Fees and commission receivable 515 205 Fees and commission payable (61) (16) Other operating income 174 32 Total net operating income 1,275 523 Losses on loans and advances (104) (33) Operating expenses (941) (431) Share of profit of associates (after tax) 11 6 Adjusted operating profit 241 65 NOTES TO THE RESTATEMENT DOCUMENT continued SEGMENT INFORMATION continued (v) Asset Management Revenue Year to 31 Six months to Year to 31 December 2004 30 June 2004 December 2004 Africa Fund management Old Mutual Asset Managers 44 20 (24) Old Mutual Unit Trust 23 10 (19) Other 39 8 (30) 106 38 (73) Old Mutual Specialised Finance 35 22 (22) Nedcor Unit Trusts and portfolio management 32 21 (24) 173 81 (119) US asset management 366 177 (279) UK and Rest of World Fund management 63 24 (50) Fund investment platform 9 3 (15) Other financial services 9 7 (34) 81 34 (99) Nedcor Unit Trust and Portfolio management 34 27 (28) 115 61 (127) Adjusted operating profit 654 319 (525) GBPm Adjusted Expense operating profit Six months to Year to Six months to 30 June 2004 31 Dec 2004 30 June 2004 Africa Fund management Old Mutual Asset Managers (11) 20 9 Old Mutual Unit Trust (8) 4 2 Other (7) 9 1 (26) 33 12 Old Mutual Specialised Finance (14) 13 8 Nedcor Unit Trusts and portfolio management (19) 8 2 (59) 54 22 US asset management (130) 87 47 UK and Rest of World Fund management (16) 13 8 Fund investment platform (6) (6) (3) Other financial services (12) (25) (5) (34) (18) - Nedcor Unit Trust and Portfolio management (20) 6 7 (54) (12) 7 Adjusted operating profit (243) 129 76 GBPm US asset management Year to Six months to 31 December 30 June 2004 2004 Revenue Investment management fees 315 153 Transaction, performance and other fees 51 24 366 177 Expenses Staff costs - fixed and variable (121) (56) Other (158) (74) (279) (130) Adjusted operating profit 87 47 (viii) Other shareholders' net expenses GBPm Year ended Six months to 31 December 30 June 2004 2004 Distribution of unclaimed share trust 16 - Provisions for contributions to public benefits and charitable organisations (16) - Interest receivable 9 4 Net other income / (expense) - 6 Net corporate expenses (39) (19) Debt service costs (42) (24) (72) (33) NOTES TO THE RESTATEMENT DOCUMENT continued RECONCILIATION OF MOVEMENTS IN CONSOLIDATED EQUITY SHAREHOLDERS' FUNDS Year ended 31 December 2004 Millions No. of shares Attributable to issued and fully equity holders of paid the parent 1 January 2004 3,837 2,670 Changes in equity arising in the year: Fair value gains / (losses): Gain on property revaluation - 9 AFS investments - 118 Fair value of equity settled share options - 3 Shadow accounting - (35) Currency translation differences / exchange differences on translating foreign operations - 10 Cash flow hedge amortisation - (4) Aggregate tax effect of items taken directly to or transferred from equity - (18) Net acquisition / disposal of minority interest - - Other - 78 Net income recognised directly in equity - 161 Profit for the year - 559 Total recognised income and expense for the year - 720 Dividend for 2004 - (166) Issue of share capital - - Purchase / sales of treasury shares - 25 Exercise of share options 17 15 31 December 2004 3,854 3,264 GBPm Total minority interests Total equity 1 January 2004 1,229 3,899 Changes in equity arising in the year: Fair value gains / (losses): Gain on property revaluation - 9 AFS investments - 118 Fair value of equity settled share options - 3 Shadow accounting - (35) Currency translation differences / exchange differences on translating foreign operations 103 113 Cash flow hedge amortisation - (4) Aggregate tax effect of items taken directly to or transferred from equity - (18) Net acquisition / disposal of minority interest 66 66 Other (15) 63 Net income recognised directly in equity 154 315 Profit for the year 133 692 Total recognised income and expense for the year 287 1,007 Dividend for 2004 (58) (224) Issue of share capital 5 5 Purchase / sales of treasury shares - 25 Exercise of share options 7 22 31 December 2004 1,470 4,734 NOTES TO THE RESTATEMENT DOCUMENT continued RECONCILIATION OF MOVEMENTS IN CONSOLIDATED EQUITY SHAREHOLDERS' FUNDS continued Year ended 31 December 2004 Attributable to equity holders of the parent Share Share Other Translation capital premium reserves reserve 1 January 2004 384 587 367 - Changes in equity arising in the year: Fair value gains / (losses): Gain on property revaluation - - 9 - AFS investments - - 118 - Fair value of equity settled share options - - - - Shadow accounting - - (35) - Currency translation differences / exchange differences on translating foreign operations - - - 10 Cash flow hedge amortisation - - (4) - Aggregate tax effect of items taken directly to or transferred from equity - - (18) - Other - - 2 - Net income recognised directly in equity - - 72 10 Profit for the year - - - - Total recognised income and expense for - - 72 10 the period Dividend for 2004 - - - - Issue of share capital - - - - Purchase / sales of treasury sales - - - - Exercise of share options 2 13 - - 31 December 2004 386 600 439 10 GBPm Attributable to equity holders of the parent Retained Treasury earnings shares Total 1 January 2004 1,883 (551) 2,670 Changes in equity arising in the year: Fair value gains / (losses): Gain on property revaluation - - 9 AFS investments - - 118 Fair value of equity settled share options 3 - 3 Shadow accounting - - (35) Currency translation differences / exchange differences on translating foreign operations - - 10 Cash flow hedge amortisation - - (4) Aggregate tax effect of items taken directly to or transferred from equity - - (18) Other 76 - 78 Net income recognised directly in equity 79 - 161 Profit for the year 559 - 559 Total recognised income and expense for 638 - 720 the period Dividend for 2004 (166) - (166) Issue of share capital - - - Purchase / sales of treasury sales - 25 25 Exercise of share options - - 15 31 December 2004 2,355 (526) 3,264 NOTES TO THE RESTATEMENT DOCUMENT continued RECONCILIATION OF MOVEMENTS IN CONSOLIDATED EQUITY SHAREHOLDERS' FUNDS continued Six months ended 30 June 2004 Millions GBPm Attributable No. of shares to issued equity Total and fully paid holders of minority the parent interests Total equity 1 January 2004 3,837 2,670 1,229 3,899 Changes in equity arising in the period: Fair value gains/(losses): AFS investments - (166) - (166) Fair value of equity settled share options - 1 - 1 Shadow accounting - 117 - 117 Currency translation differences /exchange differences on translating foreign operations - 124 46 170 Cash flow hedge amortisation - (2) - (2) Aggregate tax effect of items taken directly to or transferred from equity - 14 - 14 Net acquisition /disposal of minority interests - - 66 66 Other - (4) (12) (16) Net income recognised directly in equity - 84 100 184 Profit for the period - 145 51 196 Total recognised income and expense for the period 229 151 380 Dividend for 2004 - (106) (31) (137) Purchase/ sales of treasury shares - (5) - (5) Exercise of share options 12 8 - 8 30 June 2004 3,849 2,796 1,349 4,145 NOTES TO THE RESTATEMENT DOCUMENT continued RECONCILIATION OF MOVEMENTS IN CONSOLIDATED EQUITY SHAREHOLDERS' FUNDS continued Six months ended 30 June 2004 Attributable to equity holders of the parent Share Share Other Translation capital premium reserves reserve 1 January 2004 384 587 367 - Changes in equity arising in the period: Fair value gains / (losses): Gain on property revaluation - - - - Available-for-sale investments - - (166) - Fair value of equity settled share options - - - - Shadow accounting - - 117 - Currency translation differences/exchange differences on translating foreign operations - - - 124 Cash flow hedge amortisation - - (2) - Aggregate tax effect of items taken directly to or transferred from equity - - 14 - Other - - 8 - Net income recognised directly in equity - - (29) 124 Profit for the period - - - - Total recognised income and expense for (29) 124 the period Dividend for 2004 - - - - Purchase / sales of treasury sales - - - - Exercise of share options - 8 - - 30 June 2004 384 595 338 124 GBPm Attributable to equity holders of the parent Retained Treasury earnings shares Total 1 January 2004 1,883 (551) 2,670 Changes in equity arising in the period: Fair value gains / (losses): Gain on property revaluation - - - Available-for-sale investments - - (166) Fair value of equity settled share options 1 - 1 Shadow accounting - - 117 Currency translation differences/exchange differences on translating foreign operations - - 124 Cash flow hedge amortisation - - (2) Aggregate tax effect of items taken directly to or transferred from equity - - 14 Other (12) - (4) Net income recognised directly in equity (11) - 84 Profit for the period 145 - 145 Total recognised income and expense for 134 - 229 the period Dividend for 2004 (106) - (106) Purchase / sales of treasury sales - (5) (5) Exercise of share options - - 8 30 June 2004 1,911 (556) 2,796 NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES The following principal accounting policies have been applied consistently in dealing with items that are considered material in relation to the Group's financial statements. (a) Basis of preparation The Group has prepared the consolidated preliminary balance sheet at 31 December 2004, the related consolidated preliminary statements of income and changes in equity for the year then ended and the related notes, in accordance with IFRS adopted for use by the EU ('the preliminary financial information') as set out on pages 7 to 38 to establish the financial position and results of operations of the Group necessary to provide the comparative financial information expected to be included in the Group's first set of IFRS financial statements for the year to 31 December 2005. The preliminary financial information does not include comparative financial information for the prior period. The Board acknowledges its responsibility for the preparation of the preliminary financial information which has been prepared in accordance with IFRS adopted for use by the EU and policies expected to be adopted when the Board prepares the Group's first set of IFRS Financial Statements for the year to 31 December 2005. The Board approved the preliminary financial information at its meeting on 27 April 2005. The standards adopted by the Group are those adopted by the EU at the date the preliminary financial information was approved by the Board. In accordance with the guidance issued by the EU, the Group has accounted for unit linked contracts which fall within the scope of IAS 39, Financial Instruments: Recognition and Measurement ('IAS 39') at fair value, as permitted by the insurance accounts directive. The latest version of IAS 19, Employee Benefits ('IAS 19') which the Group has adopted, is expected to be adopted by the EU and be effective for the 31 December 2005 financial statements. The preliminary financial information does not reflect any changes in respect of any amendments to IAS 39 for the fair value option. Proposals to restrict the fair value option are being considered by the IASB and are the subject of continuing debate between the IASB, industry and regulators. The Group has applied the requirements of IAS 27, Consolidation ('IAS 27') in determining whether holdings in mutual funds, such as open-ended investment companies, should be consolidated. Old Mutual plc will continue to monitor industry developments in this area. (b) Foreign Currency Translation (i) Foreign currency transactions The Group's presentation currency is Sterling (GBP). The functional currency of the Group's foreign operations is the currency of the primary economic environment in which these entities operate. Transactions in foreign currencies are converted into the functional currency at the rate of exchange ruling at the date of the transaction. The functional currency of the Group's foreign operations is the currency of the primary economic environment in which these entities operate. Monetary assets and liabilities denominated in foreign currencies are translated into the relevant functional currency at rates of exchange ruling at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated into the functional currency at foreign exchange rates ruling at the dates the fair values were determined. Non-monetary assets and liabilities denominated in foreign currencies that are stated at historical cost are converted into the functional currency at the rate of exchange ruling at the date of the initial recognition of the asset and liability and are not subsequently retranslated. Exchange gains and losses on the translation and settlement during the period of foreign currency assets and liabilities are recognised in the income statement. Exchange differences for non-monetary items are recognised in equity when the changes in the fair value of the non-monetary item is recognised in equity, and in the income statement if the changes in fair value of the non-monetary item is recognised in the income statement. (ii) Foreign investments The assets and liabilities of foreign operations are translated from their respective functional currencies into the Group's presentation currency using the year-end exchange rates, and their income and expenses using the average exchange rates. Unrealised gains or losses resulting from translation of functional currencies to the presentation currency are included as a separate component of shareholders' equity, net of applicable deferred income taxes. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (c) Group accounting (i) Subsidiary undertakings and special purpose entities Subsidiary undertakings are those entities controlled by the company. Subsidiary undertakings include special purpose entities created to accomplish a narrow, well-defined objective, which may take the form of a corporation, trust, partnership or unincorporated entities, and where the substance of the relationship between the company and the entity indicates that the entity is controlled by the company. Control exists when the company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The company considers the existence and effect of potential voting rights currently exercisable or convertible when assessing whether it has control. Entities in which the company holds half or less of the voting rights, but which are controlled by the virtue of the company retaining the majority of risks or benefits, are also included in the consolidated accounts. The Group accounts include the assets, liabilities and results of the company and subsidiary undertakings (including special purpose entities). The results of subsidiary undertakings acquired or disposed of in the year are included in the consolidated income statement from the date of acquisition or up to the date of disposal or control ceasing. Intragroup balances and transactions, and all profits and losses arising from intragroup transactions, are eliminated in preparing the group financial statements. Unrealised losses are not eliminated to the extent that they provide evidence of impairment. (ii) Associates An associate is an entity, including an unincorporated entity such as a partnership, over which the group exercises significant influence but not control, through participation in the financial and operating policy decisions of the investee (and that is neither a subsidiary nor an investment in a joint venture). The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. The carrying amount of such investments is reduced to recognise any impairment in the value of individual investments. Where a group enterprise transacts with an associate of the group, unrealised profits and losses are eliminated to the extent of the group's interest in the relevant associate. Unrealised losses are eliminated in the same way but only to the extent there is no evidence of impairment. Investments in associates, which are held with a view to subsequent resale are accounted for as non-current assets held for sale (see (s)) and those held by policyholder long-term insurance funds are accounted for as financial assets fair valued through profit or loss (see (e)(viii)). (d) Insurance and investment contracts Long-term business (i) Classification of contracts Contracts under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder are classified as insurance contracts. Insurance risk is risk other than financial risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts. Contracts with a discretionary participating feature are those under which the policyholder holds a contractual right to receive additional payments as a supplement to guaranteed minimum payments. These additional payments, the amount or timing of which is at the Group's discretion, represent a significant portion of the total contractual payments and are contractually based on (i) the performance of a specified pool of contracts or a specified type of contract, (ii) realised and/or unrealised investment returns on a specified pool of assets held by the Group; or (iii) the profit or loss of the Group. Contracts with a discretionary participating feature may be classified either as insurance contracts or investment contracts. All contracts with a discretionary participating feature are accounted for in the same manner as insurance contracts. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (d) Insurance and investment contracts continued Long-term business continued (ii) Premiums on long term insurance Premiums and annuity considerations receivable under insurance contracts and investment contracts with a discretionary participating feature are stated gross of commission, and exclude taxes and levies. Premiums in respect of linked insurance contracts are recognised when the liability is established. Premiums in respect of other insurance contracts and investment contracts with a discretionary participation feature are recognised when due for payment. Outward reinsurance premiums are recognised when due for payment. Amounts received under investment contracts other than those with a discretionary participating feature are recorded as deposits to investment contract liabilities. (iii) Revenue on investment management service contracts Fees charged for investment management services provided in conjunction with an investment contract are recognised as revenue as the services are provided. Initial fees, which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period in which services will be provided. Fees charged for investment management service contracts in the asset management segment are also recognised on this basis. (iv) Claims paid on long term insurance Claims paid under insurance contracts and investment contracts with a discretionary participating feature include maturities, annuities, surrenders, death and disability payments. Maturity and annuity claims are recorded as they fall due for payment. Death and disability claims and surrenders are accounted for when notified. Reinsurance recoveries are accounted for in the same period as the related claim. Amounts paid under investment contracts other than those with a discretionary participating feature are recorded as deductions from investment contract liabilities. (v) Insurance contract provisions Insurance contract provisions for South African and other African businesses have been computed using a gross premium valuation method. Provisions in respect of South African business have been made in accordance with the Financial Soundness Valuation basis as set out in the guidelines issued by the Actuarial Society of South Africa in Professional Guidance Note (PGN) 104 (2001). Under this guideline, provisions are valued using realistic expectations of future experience, with prescribed margins for prudence and deferral of profit emergence. Provisions for investment contracts with a discretionary participating feature are also computed using the gross premium valuation method in accordance with the Financial Soundness Valuation basis. Surplus allocated to policyholders but not yet distributed (i.e. bonus smoothing reserve) related to these contracts is included as a provision. For the US business, the insurance contract provisions are calculated using the net premium method, based on assumptions as to investment yields, mortality, withdrawals and policyholder dividends. Assumptions are set at the time the contract is issued. Universal life and deferred annuity reserves are computed on the retrospective deposit method, which produces reserves equal to the cash value of the contracts. Reserves on immediate annuities and guaranteed payments are computed on the prospective deposit method, which produces reserves equal to the present value of future benefit payments. For other territories, the valuation bases adopted are in accordance with local actuarial practices and methodologies. Derivatives embedded in an insurance contract are not separated and measured at fair value if the embedded derivative itself qualifies for recognition as an insurance contract. In this case the entire contract is measured as described above. The Group performs liability adequacy testing on its insurance liabilities to ensure that the carrying amount of its liabilities (less related deferred acquisitions costs and intangibles assets) is sufficient in view of estimated future cash flows. When performing the liability adequacy test, the Group discounts all contractual cash flows and compares this amount to the carrying value of the liability. Where a shortfall is identified, an additional provision is made. The provision estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected in the income statement as they occur. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (d) Insurance and investment contracts continued Long-term business continued Whilst the directors consider that the gross insurance contract provisions and the related reinsurance recovery are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjustments to the amount provided. (vi) Investment contract liabilities Liabilities for unit linked and market linked contracts are reported at fair value. For unit linked and market linked contracts, this is calculated as the account balance, which is the value of the units allocated to the policyholder, based on the bid price value of the assets in the underlying fund (adjusted for tax). For other linked contracts, the fair value of the liability is determined by reference to the fair value of the underlying assets. The fair value of the liability is subject to the 'deposit floor' such that the liability established cannot be less than the amount repayable on demand. Non-linked investment contract liabilities are measured at amortised cost. Derivatives embedded in investment contracts are separated and measured at fair value, when their risks and characteristics are not closely related to those of the host contract and the host contract liability is calculated on an amortised cost basis. (vii) Acquisition costs Acquisition costs for insurance contracts comprise all direct and indirect costs arising from the sale of insurance contracts. As the gross premium valuation method used in South Africa and other African territories to determine insurance contract provisions makes implicit allowance for the deferral of acquisition costs, no explicit deferred acquisition cost asset is recognised in the balance sheet for the contracts issued in these areas. For the US life insurance business, an explicit deferred acquisition costs asset has been established in the balance sheet. Deferred acquisition costs are amortised over the period that profits on the related insurance policies are expected to emerge. Acquisition costs are deferred to the extent that they are deemed recoverable from available future profit margins. Deferral of costs on other insurance business is limited to the extent that they are deemed recoverable from available future margins. (viii) Intangible asset in respect of investment management service contracts Costs that are directly attributable to securing an investment management service contract are deferred if they can be identified separately and measured reliably and it is probable that they will be recovered. The intangible asset represents the contractual right to benefit from providing investment management services and is amortised as the related revenue is recognised. Costs attributable to investment management service contracts in the asset management segment are also recognised on this basis. General insurance business All classes of general insurance business are accounted for on an annual basis. (ix) Premiums on general insurance Premiums are stated gross of commissions, exclude taxes and levies and are accounted for in the period in which the risk commences. The proportion of the premiums written relating to periods of risk after the balance sheet date is carried forward to subsequent accounting periods as unearned premiums, so that earned premiums relate to risks carried during the accounting period. Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct insurance. (x) Claims on general insurance Claims incurred comprise the settlement and handling costs of paid and outstanding claims arising during the year and adjustments to prior year claim provisions. Outstanding claims comprise claims incurred up to, but not paid, at the end of the accounting period, whether reported or not. Outstanding claims do not include any provision for possible future claims where the claims arise under contracts not in existence at the balance sheet date (e.g. equalisation and catastrophe provisions). The Group performs liability adequacy testing on its claim liabilities to ensure that the carrying amount of its liabilities (less related deferred acquisition costs and the unearned premium reserve) is sufficient in view of estimated future cash flows. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (d) Insurance and investment contracts continued General insurance business continued Whilst the directors consider that the gross provisions for claims and the related reinsurance recoveries are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events, and may result in significant adjustments to the amount provided. Adjustments to the amounts of claims provisions established in prior years are reflected in the financial statements for the period in which the adjustments are made, and disclosed separately if material. The methods used and estimates made are reviewed regularly. (xi) Acquisition costs on general insurance Acquisition costs, which represent commission and other related expenses, are deferred and amortised over the period in which the related premiums are earned. (e) Financial instruments (i) Recognition and de-recognition A financial asset or liability is recognised when and only when the group becomes a party to the contractual provisions of the financial instrument. The group derecognises a financial asset when and only when: â€¢ The contractual rights to the cash flows arising from the financial assets have expired or been forfeited by the group; or â€¢ It transfers the financial asset including substantially all the risks and rewards of ownership of the asset; or â€¢ It transfers the financial asset, neither retaining nor transferring substantially all the risks and rewards of ownership of â€¢ The asset, but no longer retains control of the asset. A financial liability is derecognised when and only when the liability is extinguished, that is, when the obligation specified in the contract is discharged, cancelled or has expired. The difference between the carrying amount of a financial liability (or part thereof) extinguished or transferred to another party and consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss. (ii) Derivative financial instruments Derivative financial instruments including foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other derivative financial instruments are initially recognized in the balance sheet at fair value. Fair values are obtained from quoted market prices, discounted cash flow models and options pricing models as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives not designated as hedges for hedge accounting purposes are included in investment income. (iii) Hedge accounting Qualifying hedging instruments must either be derivative financial instruments or non derivative financial instruments used to hedge the risk of changes in foreign currency exchange rates, changes in fair value or cash flows of which are expected to offset changes in the fair value or cash flows of the underlying hedged item. The Group designates certain qualifying hedging instruments as either (1) a hedge of the exposure to changes in fair value of a recognised asset or liability (fair value hedge); (2) a hedge of a future cash flow attributable to a recognised asset or liability, a forecasted transaction or a firm commitment and could affect profit or loss (cash flow hedge); or, (3) a hedge of a net investment in a foreign operation. Hedge accounting is used for qualifying hedging instruments designated in this way provided certain criteria are met. The Group's criteria for a qualifying hedging instrument to be accounted for as a hedge include: â€¢ Upfront formal documentation of the hedging instrument, hedged item or transaction, risk management objective and strategy, the nature of the risk being hedged and the effectiveness measurement methodology that will be applied is prepared before hedge accounting is adopted; â€¢ The hedge is documented showing that it is expected to be highly effective in offsetting the changes in the fair value or cash flows attributable to the hedged risk, consistent with the risk management and strategy detailed in the upfront hedge documentation; â€¢ The effectiveness of the hedge can be reliably measured; â€¢ The hedge is assessed and determined to have been highly effective on an ongoing basis; and â€¢ For cash flow hedges of a forecast transaction, an assessment that it is highly probable that the hedged transaction will occur and will carry profit and loss risk. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (e) Financial instruments continued Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that prove to be highly effective in relation to hedged risk, are recorded in the income statement, along with the corresponding change in fair value of the hedged asset or liability that is attributable to that specific hedged risk. If the hedge no longer meets the criteria for hedge accounting, hedge accounting is discontinued prospectively. Any previous adjustment to the carrying amount of a hedged interest-bearing financial instrument carried at amortised cost, (as a result of previous hedge accounting), is amortised in the income statement from the date hedge accounting ceases, to the maturity date of the financial instrument, based on the effective interest rate method. The adjustment to the carrying amount of a previously hedged available for sale security remains in retained earnings until the disposal of the equity security. Changes in the fair value of derivatives that are designated and qualify as cash flow hedges or hedges of a net investment in a foreign operation and that prove to be highly effective in relation to the hedged risk are recognised in equity. Where the forecasted transaction results in the recognition or firm commitment results in the recognition of a non financial asset or of a liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. Otherwise, amounts deferred in equity are transferred to the income statement and classified as revenue or expense in the periods during which the hedged firm commitment or forecasted transaction or the resulting financial asset or liability affects the income statement. For hedges of a net investment in a foreign operation, any cumulative gains or losses recognised in equity are recognised in the income statement on disposal of the foreign operation. (iv) Embedded derivatives Certain derivatives embedded in other financial and non-financial instruments, such as the conversion option in a convertible bond, are treated as separate derivatives and recognised as such on a stand alone basis, when their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value with unrealised gains and losses reported in the income statement. If it is not possible to determine the fair value of the embedded derivative, the entire hybrid instrument is categorised as fair value through profit or loss and measured at fair value. (v) Offsetting financial instruments and related income Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to set off and there is intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. Income and expense items are offset only to the extent that their related instruments have been offset in the balance sheet, with the exception of those relating to hedges, which are disclosed in accordance with the income statement effect of the hedged item. (vi) Interest income and expense Interest income and expense is recognised in the income statement using the effective interest rate method taking into account the expected timing and amount of cash flows. Interest income and expense include the amortisation of any discount or premium or other differences between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest rate basis. (vii) Non-interest revenue See (d) (iii) for non-interest revenue arising on investment contracts. Fees and commission Loan origination fees for loans that are probable of being drawn down, are deferred (together with related direct costs) and recognised as an adjustment to the effective yield on the loan. Commission and fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, are recognised on completion of the underlying transaction. Other Revenue other than interest, fees and commission and insurance premiums, which includes exchange and securities trading income, dividends from investments and net gains on the sale of investment banking assets, is recognised in the income statement when the amount of revenue from the transaction or service can be measured reliably, it is probable that the economic benefits of the transaction or service will flow to the group and the costs associated with the transaction or service can be measured reliably. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (e) Financial instruments continued (viii) Financial assets carried at fair value through profit or loss Financial assets carried at fair value through profit or loss are comprised of trading securities and those securities that the Group has elected to designate as fair value through profit or loss. Trading securities are those that were either acquired for generating a profit from short-term fluctuations in price or dealer's margin, or are securities included in a portfolio in which a pattern of short-term profit taking exists, or are derivatives that are not designated and effective hedging instruments. Financial assets carried at fair value through profit or loss are initially recognised at fair value and subsequently re-measured at fair value based on quoted bid prices. If quoted bid prices are unavailable the fair value of the financial asset is estimated using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate used is a market-related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market-related measures at the balance sheet date. All related realised and unrealised gains and losses are included in Investment income. Interest earned whilst holding trading securities is reported as interest income. Dividends received are included in dividend income. All purchases and sales of financial assets carried at fair value through profit or loss that require delivery within the time frame established by regulation or market convention ('regular way' purchases and sales) are recognised at trade date, which is the date that the Group commits to purchase or sell the asset. Otherwise such transactions are treated as derivatives until settlement occurs. (ix) Sale and repurchase agreements and lending of securities Securities sold subject to linked repurchase agreements are retained in the financial statements as trading or investment securities and the counter party liability is included in amounts owed to other depositors, deposits from other banks, or other money market deposits, as appropriate. Securities purchased under agreements to resell at a pre-determined price are recorded as loans and advances to other banks or customers as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the lives of agreements using the effective yield method. Securities lent to counter parties are also retained in the financial statements and any interest earned recognised in the income statement using the effective yield method. Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in trading income. The obligation to return them is recorded at fair value as a trading liability. (x) Other financial assets The Group classifies its other financial assets into the following two categories: held-to-maturity and available-for-sale assets. Other financial assets with fixed maturity where management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Investment securities intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices are classified as available-for-sale. Management determines the appropriate classification of its investments at the time of the purchase. Other financial assets are initially recognised at their fair value, which includes transaction costs. Available-for-sale financial assets are subsequently re-measured at fair value based on quoted bid prices. If quoted bid prices are unavailable the fair value of the financial asset is estimated using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate used is a market-related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market-related measures at the balance sheet date. Unrealised gains and losses arising from changes in the fair value of financial assets classified as available-for-sale are recognised in equity. When available-for-sale financial assets are disposed of or impaired, the related accumulated fair value adjustments are included in the income statement as gains and losses from available-for-sale financial assets or as an impairment charge. Held-to-maturity investments are carried at amortised cost using the effective yield method, less any impairment write-downs. Interest earned whilst holding other financial assets is reported as interest income, within Investment income.Dividends receivable are included separately in dividend income, within Investment income, when a dividend is declared. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (e) Financial instruments continued (xi) Impairment of investment securities and purchased loans and receivables A financial asset is deemed to be impaired when its carrying amount is greater than its estimated recoverable amount. The amount of the impairment loss for assets carried at amortised cost is calculated as being the difference between the asset's carrying amount and the present value of expected future cash flows discounted at the financial instrument's original effective interest rate. The recoverable amount of an instrument measured at fair value is the present value of expected future cash flows discounted at the current market rate of interest for a similar financial asset. If the amount of the impairment in a financial asset held at amortised cost or a debt instrument classified as available for sale subsequently reverses due to an event occurring after an impairment write down, the release of the impairment allowance account is credited to the income statement. Reversal of impairment losses in the income statement for an equity investment classified as available for sale is done through shareholders' equity. (xii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those classified by the Group as fair value through profit or loss or available for sale. Loans and receivables are carried at amortised cost. Third party expenses, such as legal fees, incurred in securing a loan are treated as part of the cost of the transaction. All loans and receivables are recognised when cash is advanced to borrowers. (xiii) Impairment of loans and receivables An allowance account for loan impairment is established if there is objective evidence that the Group will not be able to collect all amounts due from a financial contract. The amount of the impairment is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted based on the effective interest rate at inception. The impairment allowance account also covers losses where there is objective evidence that losses are present in components of the loan portfolio at the balance sheet date, but these components have not yet been specifically identified. When a loan is uncollectable, it is written off against the related impairment allowance account. Subsequent recoveries are credited to the bad and doubtful debt expense in the income statement. If the amount of impairment subsequently decreases due to an event occurring after the write down, the release of the impairment allowance account is credited to the bad and doubtful debt expense. Impairment reversals are limited to what the carrying amount would have been, had no impairment losses been recognised. Interest income on loans and receivables held at amortised cost is recognised on the impaired amount using the original effective interest rate before the impairment. (xiv) Borrowings, including convertible bonds Borrowings are recognised initially at their issue proceeds net of transaction costs incurred. Subsequently borrowings are stated at amortised cost and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. The conversion options included in convertible bonds are recorded separately in shareholders' equity. The Group does not recognise any change in the value of this option in subsequent periods. The remaining obligation to make future payments of principal and interest to bondholders is calculated using a market interest rate for an equivalent non-convertible bond and is presented on the amortised cost basis in other borrowed funds until extinguished on conversion or maturity of the bonds. If the Group purchases its own debt, it is removed from the balance sheet and the difference between the carrying amount of a liability and the consideration paid is included in net trading income. (xv) Acceptances Acceptances comprise undertakings by the Group to pay bills of exchange drawn on customers. The Group expects most acceptances to be settled simultaneously with the reimbursement from customers. Acceptances are disclosed as liabilities with the corresponding contra-asset recorded in the balance sheet. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (e) Financial instruments continued (xvi) Financial liabilities, including investment contracts Financial liabilities are classified as either 'At fair value through profit or loss' or 'Other financial liabilities'. Financial liabilities held for trading are classified as 'At fair value through profit or loss' and carried at fair value. The fair value of a financial liability with a demand feature is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid. All other non-trading financial liabilities are classified as 'Other' and are recognised initially at cost, less attributable transaction costs. Subsequent to initial recognition all other financial liabilities are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. (f) Tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. (i) Current tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. (ii) Deferred tax Deferred taxation is provided using the balance sheet liability method, based on temporary differences. Temporary differences are differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base. The amount of deferred taxation provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantively enacted at the balance sheet date. Deferred taxation is charged to the income statement except to the extent that it relates to a transaction that is recognised directly in equity, or a business combination that is an acquisition. The effect on deferred taxation of any changes in tax rates is recognised in the income statement, except to the extent that it relates to items previously charged or credited directly to equity. A deferred-tax asset is recognised only to the extent that it is probable that future taxable income will be available, against which the unutilised tax losses and deductible temporary differences can be used. Deferred-tax assets are reduced to the extent that it is no longer probable that the related tax benefits will be realised. (g) Intangible assets (i) Goodwill and goodwill impairment All business combinations are accounted for by applying the purchase method. At acquisition date, the Group recognises the fair value of the acquiree's identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria at their fair value. The cost of a business combination is the fair value of purchase consideration due at date of acquisition plus any directly attributable transaction costs. Contingent purchase consideration is recognised to the extent that it is probable and can be measured reliably. Any minority interest in the acquiree is stated at the minority's proportion of the net fair values of those items. Any excess between the cost of the business combination and the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is recognised as goodwill. Goodwill is adjusted for any subsequent re-measurement of contingent purchase consideration. Purchased goodwill is allocated to one or more cash-generating units (CGUs), being the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. The directors test for impairment each CGU containing goodwill and intangible assets with indefinite useful lives annually. An impairment loss is recognised whenever the carrying amount of an asset or its CGU exceeds its recoverable amount. However, impairment losses relating to goodwill are not reversed. Where businesses are acquired as part of the same investment, these units are combined for the purposes of determining recoverability of the related goodwill. (ii) Present value of acquired in-force insurance and investment contract business The present value of acquired in-force insurance and investment contract business is capitalised in the consolidated balance sheet as an intangible asset. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (g) Intangible assets continued The capitalised value is the present value of cash flows anticipated in the future from the relevant book of insurance and investment contract policies acquired. This is calculated by performing a cash flow projection of the associated long-term fund and book of in-force policies in order to estimate future after tax profits attributable to shareholders. The valuation is based on actuarial principles taking into account future premium income, mortality, disease and surrender probabilities, together with future costs and investment returns on the assets supporting the fund. These profits are then discounted at a rate of return allowing for the risk of uncertainty of the future cash flows. This calculation is particularly sensitive to the assumptions regarding discount rate, future investment returns and the rate at which policies discontinue. The asset is amortised over the expected profit recognition period on a systematic basis over the anticipated lives of the related contracts, which the directors have considered to be 30 years. The amortisation charge is stated net of any unwind in the discount rate used to calculate the asset. The recoverable amount of the asset is re-calculated at each balance sheet date and any impairment losses recognised accordingly. (iii) Internally developed software Internally developed software is amortised over its estimated useful life. Such assets are stated at cost less accumulated amortisation and impairment losses. Software is recognised in the balance sheet if, and only if, it is probable that the relevant future economic benefits attributable to the software will flow to the Group and its cost can be measured reliably. Costs incurred in the research phase are expensed whereas costs incurred in the development phase can be capitalised. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of the relevant software, which range between 2 and 5 years. (iv) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (h) Impairment (all assets other than goodwill and financial instruments) The Group assesses all assets (other than goodwill and intangible assets with an indefinite useful life) for indications of an impairment loss or the reversal of a previously recognised impairment at each balance sheet date, recognising such impairments (where the carrying value of the asset exceeds its recoverable amount) or the reversal of a previously recognised impairment accordingly. (i) Property, plant and equipment (i) Owned assets Owner-occupied property is stated at revalued amounts, being fair value at the date of revaluation less subsequent accumulated depreciation and accumulated impairment losses. Plant and equipment, principally computer equipment, motor vehicles, fixtures and furniture, are stated at cost less accumulated depreciation and impairment losses. (ii) Subsequent expenditure Subsequent expenditure is capitalised when it is measurable and will result in probable future economic benefits. Expenditure incurred to replace a separate component of an item of owner occupied property, plant or equipment is capitalised to the cost of the item of owner occupied property, plant and equipment and the component replaced is derecognised. All other expenditure is recognised in the income statement as an expense when incurred. (iii) Revaluation of owner-occupied property Owner-occupied property is valued on the same basis as for investment property. When an individual property is re-valued, any increase in its carrying amount (as a result of the revaluation) is transferred to a revaluation reserve, except to the extent that it reverses a revaluation decrease of the same property previously recognised as an expense in the income statement. When the value of an individual property is decreased as a result of a revaluation, the decrease is charged against any related credit balance in the revaluation reserve in respect of that property. However, to the extent that it exceeds any surplus, it is recognised as an expense in the income statement. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (i) Property, plant and equipment continued (iv) Derecognition On derecognition of an owner-occupied property, or item of plant or equipment, any gain or loss on disposal, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is included in the income statement in the period of the derecognition. In the case of owner-occupied property, any surplus in the revaluation reserve in respect of the individual property is transferred directly to retained earnings. (v) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of owner- occupied property, plant and equipment that are accounted for separately. In the case of owner-occupied property, on revaluation any accumulated depreciation at the date of the revaluation is eliminated against the gross carrying amount of the property concerned and the net amount restated to the revalued amount. Subsequent depreciation charges are adjusted based on the revalued amount for each property. Any difference between the depreciation charge on the revalued amount and that which would have been charged under historic cost is transferred net of any related deferred tax, between the revaluation reserve and retained earnings as the property is utilised. Land is not depreciated. The maximum estimated useful lives are as follows: Computer equipment 5 years Computer software 3 years Motor vehicles 6 years Fixtures and furniture 10 years Leasehold property 20 years Freehold Property 50 years (j) Investment properties Investment property is real estate held to earn rentals or for capital appreciation. It does not include real estate held for use in the production or supply of goods or services or for administrative purposes. Investment properties are stated at fair value. Internal professional valuers perform valuations annually. For practical reasons, valuations are carried out on a cyclical basis over a twelve-month period due to the large number of properties involved.External valuations are obtained once every three years on a cyclical basis. In the event of a material change in market conditions between the valuation date and balance sheet date an internal valuation is performed and adjustments made to reflect any material changes in value. The valuation methodology adopted is dependent upon the nature of the property. Income generating assets are valued using discounted cash flows. Vacant land, land holdings and residential flats are valued according to sales of comparable properties. Near vacant properties are valued at land value less the estimated cost of demolition. Surpluses and deficits arising from changes in fair value are reflected in the income statement. For properties reclassified during the year from property, plant and equipment to investment properties any revaluation gain arising is initially recognised in the income statement to the extent of previously charged impairment losses. Any residual excess is taken to the revaluation reserve. Revaluation deficits are recognised in the revaluation reserve to the extent of previously recognised gains and any residual deficit is accounted for in the income statement. Investment properties that are reclassified to owner occupied property are revalued at the date of transfer, with any difference being taken to the income statement. (k) Borrowing costs Borrowing costs directly attributable to the acquisition, construction and production of qualifying assets are capitalised as part of the costs of those assets. Qualifying assets are those that necessarily take a substantial period of time to prepare for their intended use or sale. Capitalisation of borrowing costs continues up to the date when the assets are substantially ready for their use or sale. All other borrowing costs are expensed in the period in which they are incurred. Details of borrowing costs capitalised will be disclosed in the notes to the accounts by fixed-asset category and are calculated at the group's average funding cost except to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. Where this occurs actual borrowing costs incurred less any investment income on the temporary investment of those borrowings is capitalised. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (l) Pension plans and retirement benefits Defined benefit and defined contribution schemes have been established for eligible employees of the Group with the assets held in separate trustee administered funds. Pension obligations are accounted for in accordance with IAS 19, Employee Benefits. The projected unit credit method is used to determine the defined benefit obligations based on actuarial assessments, which incorporate not only the pension obligations known on the balance sheet date but also information relevant to their expected future development. The discount rates used are determined based on the yields for investment grade corporate bonds that have maturity dates approximating the terms of the Group's obligations. Actuarial gains or losses are accounted for using the 'corridor method'. Actuarial gains and losses are recognised eligible for recognition in the income statement to the extent that they exceed 10 per cent of the greater of the fair value of the plan assets or the present value of the gross defined benefit obligations in the scheme. Actuarial gains and losses exceeding 10 per cent are spread over the expected average remaining working lives of the employees participating in the scheme. Where the calculation results in a benefit to the Group, the recognised asset is limited to the net total of any unrecognised actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement. Contributions in respect of defined contribution schemes are recognised as an expense in the income statement as incurred. Certain group companies make provision for post retirement medical and housing benefits for eligible employees. Non- pension post- retirement benefits are accounted for according to their nature, either as defined contribution or defined benefit plans. The expected costs of post retirement benefits that are defined benefit plans in nature are accounted for in the same manner as for defined benefit pension plans. (m) Share-based payments Equity-settled share-based payment transactions with employees The services received in an equity-settled transaction with employees are measured at the fair value of the equity instruments granted. The fair value of those equity instruments is measured at grant date. If the equity instruments granted vest immediately and the employee is not required to complete a specified period of service before becoming unconditionally entitled to those instruments, the services received are recognised in full on grant date in profit and loss for the period, with a corresponding increase in equity. Where the equity instruments do not vest until the employee has completed a specified period of service, it is assumed that the services rendered by the employee, as consideration for those equity instruments will be received in the future, during the vesting period. These services are accounted for in profit and loss as they are rendered during the vesting period, with a corresponding increase in equity. Cash-settled share-based payment transactions with employees The services received in cash-settled transactions with employees and the liability to pay for those services, are recognised at fair value as the employee renders services. Until the liability is settled, the fair value of the liability is re-measured at each reporting date and at the date of settlement, with any changes in fair value recognised in profit or loss for the period. Measurement of fair value of equity instruments granted The equity instruments granted by the Group are measured at fair value at measurement date using standard option pricing valuation models. The valuation technique is consistent with generally acceptable valuation methodologies for pricing financial instruments, and incorporates all factors and assumptions that knowledgeable, willing market participants would consider in setting the price of the equity instruments. (n) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition and which are highly liquid and subject to an insignificant risk of changes in value, including: cash and balances with central banks, treasury bills and other eligible bills, amounts due from other banks and trading securities, but excluding cash balances held for investment purposes. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (o) Other provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will occur, and where a reliable estimate can be made of the amount of the obligation. Where the effect of discounting is material, provisions are discounted and the discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Specific policies: A provision for onerous contracts is recognised when the expected benefits to be derived by the group from a contract are lower than the unavoidable cost of meeting the obligations under the contract. A provision for restructuring is recognised only if the group has approved a detailed formal plan and raised a valid expectation, among those parties directly affected, that the plan will be carried out either by having begun implementation or by publicly announcing the plan's main features. No provision is made for future operating costs or losses. (p) Segment reporting The Group's primary segments are geographic and secondary segments are lines of business. The Group policy is to disclose segmental information mandatory under IAS14 and to disclose additional supplemental information for each business segment at the Group management's discretion. Where financial information is required for primary and secondary segments this is provided by way of a matrix format. The segmental disclosure of results by geography is determined by the origin of business transacted. This is not materially different to the segmental disclosure determined by market destination. Business transacted with South African residents in terms of their personal offshore allowances is conducted by the Group's offshore companies and is therefore disclosed under the Rest of the World Segment. Assets, liabilities, revenues or expenses that are not directly attributable to a particular segment are allocated between segments where there is a reasonable basis for doing so. The Group accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices. (q) Treasury shares Upon consolidation, the balance sheet and income statement are adjusted for own shares held by Employee Share Ownership Trusts (ESOPs) and policyholder funds, within OMLAC (SA) and OMLAC (Namibia). Own shares are deducted from equity to eliminate the inter-company portion. Balance sheet presentation On purchase, the cost of the shares acquired is deducted from equity. Subsequently, any gain or loss on the sale or cancellation of an entity's own equity instruments is recognised in equity. Income statement presentation Any net income in relation to own shares, both dividends received and unrealised losses on own shares are eliminated before stating the profit for the year. Dividends paid in respect of these shares are also excluded when determining the retained profit for the year. Earnings per share In calculating the basic earnings per share, the exclusion of the income in respect of own shares from the income statement requires the exclusion of treasury shares from the weighted average number of shares. When calculating the diluted earnings per share, the number of shares included in the weighted average, reflects the potential issue in respect of the ESOP Trusts and the US Dollar Guaranteed Convertible Bond, but excludes treasury shares held within the policyholders' funds. (r) Share capital Ordinary and preference share capital is classified as equity if it is non-redeemable by the shareholder and any dividends are discretionary. Dividends are recognised as distributions within equity. Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders or if dividend payments are not discretionary. Dividends thereon are recognised in the income statement as interest expense. NOTES TO THE RESTATEMENT DOCUMENT continued ACCOUNTING POLICIES continued (s) Dividends Dividends payable to holders of equity instruments are recognised in the period in which they are declared and approved by the shareholders. AUDITORS' REPORT Special Purpose Audit Report of KPMG Audit Plc to Old Mutual Plc ('the Company') on its Preliminary International Financial Reporting Standards ('IFRS') Financial Information. In accordance with the terms of our engagement letter dated 20 January 2005, we have audited the accompanying consolidated preliminary IFRS balance sheet of Old Mutual Plc ('the Company') as at 31 December 2004, and the related consolidated statements of income and changes in equity for the year then ended and the related accounting policy notes ('the preliminary IFRS financial information') set out on pages 7 to 38. Respective responsibilities of directors and KPMG Audit Plc As described on page 11, the directors of the Company have accepted responsibility for the preparation of the preliminary IFRS financial information which has been prepared as part of the Company's conversion to IFRS. Our responsibilities, as independent auditors, are established in the United Kingdom by the Auditing Practices Board, our profession's ethical guidance and the terms of our engagement. Under the terms of engagement we are required to report to you our opinion as to whether the preliminary IFRS financial information has been properly prepared, in all material respects, in accordance with the basis of preparation to the preliminary IFRS financial information. We also report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We read the other information accompanying the preliminary IFRS financial information and consider whether it is consistent with the preliminary IFRS financial information. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the preliminary IFRS financial information. Our report has been prepared for the Company solely in connection with the Company's conversion to IFRS. Our report was designed to meet the agreed requirements of the Company determined by the Company's needs at the time. Our report should not therefore be regarded as suitable to be used or relied on by any party wishing to acquire rights against us other than the Company for any purpose or in any context. Any party other than the Company who chooses to rely on our report (or any part of it) will do so at its own risk. To the fullest extent permitted by law, KPMG Audit Plc will accept no responsibility or liability in respect of our report to any other party. Basis of audit opinion We conducted our audit having regard to Auditing Standards issued by the UK Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the preliminary IFRS financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the preliminary IFRS financial information, and of whether the accounting policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the preliminary IFRS financial information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the preliminary IFRS financial information. Emphasis of matters Without qualifying our opinion, we draw your attention to the following matters: â€¢ The basis of preparation note to the preliminary IFRS financial statements explains why the accompanying preliminary IFRS financial information may require adjustment before its inclusion as comparative information in the IFRS financial statements for the year ending 31 December 2005 when the Company prepares its first IFRS financial statements. â€¢ As described in the basis of preparation note to the preliminary IFRS financial information, as part of its conversion to IFRS, the Company has prepared the preliminary IFRS financial information for the year ended 31 December 2004 to establish the financial position, and results of operations of the Company necessary to provide the comparative financial information expected to be included in the Company's first complete set of IFRS financial statements for the year ending 31 December 2005. The preliminary IFRS financial information do not themselves include comparative financial information for the prior period. â€¢ As explained in the basis of preparation in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, no adjustments have been made for any changes in estimates made at the time of approval of the UK GAAP financial statements on which the preliminary IFRS financial statements are based. Opinion In our opinion, the accompanying preliminary IFRS financial information for the year-ended 31 December 2004 has been prepared, in all material respects, in accordance with the basis set out in the basis of preparation, which describes how IFRS have been applied under IFRS 1, including the assumptions made by the directors of the Company about the standards and interpretations expected to be effective, and the policies expected to be adopted, when they prepare the first complete set of consolidated IFRS financial statements of the Company for the year ending 31 December 2005. KPMG Audit Plc Chartered Accountants London 3 May 2005 This information is provided by RNS The company news service from the London Stock Exchange

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Old Mutual Limited NPV (DI) (OMU)

Thursday, 6th June 2024

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