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Accounting policies for the year ended 31 March 2007
The Group’s principal accounting policies that have been applied
in the preparation of its consolidated financial statements are
set out below. These policies have been consistently applied to
all the years presented.
A Basis of preparation
The consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (‘IFRS’), which
comprise standards and interpretations issued by either the International
Accounting Standards Board (‘IASB’) or the International Financial
Reporting Interpretations Committee (‘IFRIC’) or their predecessors,
as adopted by the European Union (‘EU’) and with those parts of
the Companies Act 1985 applicable to companies reporting under IFRS.
The consolidated financial statements have been prepared under
the historical cost convention, except for the measurement at fair
value of derivative financial instruments and certain financial
assets that are available for sale or held at fair value through
profit or loss. The carrying value of recognised assets and liabilities
that are hedged is adjusted to record changes in the fair values
attributable to the risks that are being hedged. This valuation
is in accordance with IAS 39. Brokerage has been classified as a
discontinued operation in these financial statements (see Policy
C).
Amendments to existing standards and IFRIC interpretations, that
became effective in the year, have been applied by the Group but
none of them has had a material impact on the financial statements
or accounting policies.
During the year to 31 March 2007 each Ordinary Share of 18 US cents
was sub-divided into six Ordinary Shares of 3 US cents each. All
comparative figures in the Annual Report relating to the number
of shares in issue, such as earnings per share and dividend per
share measures, have been restated by dividing the previously disclosed
measure by six.
IFRS – new standards and interpretations
The following standards and interpretations have been issued by
the IASB but are not effective for the year ended 31 March 2007
and have not been applied in preparing these financial statements.
The directors do not expect that the adoption of the following standards
in future periods will have a material impact on the results or
financial position of the Group.
IFRS 7 ‘Financial instruments: disclosure’ and an amendment to
IAS 1 ‘Presentation of financial statements’ on capital disclosures
were issued by the IASB in August 2005 and are required to be adopted
by the Group for reporting in its financial year ending 31 March
2008. This new standard and the revision to IAS 1 add further quantitative
and qualitative disclosures in relation to financial instruments
and how an entity manages its capital resources.
IFRS 8 ‘Operating segments’ was issued in November 2006 and, if
adopted by the EU, will be required to be adopted by the Group for
reporting in its financial year ending 31 March 2010. The new standard
adopts a ‘management approach’ under which segmental information
is to be disclosed on the same basis as that used for internal reporting
purposes.The directors do not expect that the adoption of the following
interpretations, which become effective in future periods, will
have a material impact on the results or financial position of the
Group.
IFRIC 8 – Scope of IFRS 2
IFRIC 9 – Reassessment of embedded derivatives
IFRIC 10 – Interim financial reporting and impairment
IFRIC 11 (IFRS 2) – Group and treasury share transactions
IFRIC 12 – Service concession arrangements.
Critical accounting estimates and judgements
The preparation of the financial statements requires management
to make estimates and assumptions that affect the reported amount
of revenues, expenses, assets and liabilities and the disclosure
of contingent liabilities. If in the future such estimates and assumptions,
which are based on management’s best judgement at the date of preparation
of the financial statements deviate from actual circumstances, the
original estimates and assumptions will be modified as appropriate
in the period in which the circumstances change. The areas where
a higher degree of judgement or complexity arise, or areas where
assumptions and estimates are significant to the consolidated financial
statements, are discussed below.
(1) Discontinued operations
On 30 March 2007 the Group Board announced that it intends to separate
its Brokerage business, effected by an initial public offering on
the New York Stock Exchange of a majority interest. It is intended
that the sale will take place in the third calendar quarter of 2007,
subject only to market conditions remaining favourable and shareholder
approval. As a result, Brokerage has been reclassified as a discontinued
operation in these financial statements.
(2) Goodwill and other intangible assets
The valuation and amortisation periods of intangible assets arising
on acquisition, such as customer relationships, and the impairment
testing of goodwill is based on value in use calculations prepared
on the basis of management’s assumptions and estimates of future
cash flows and discount rates.
The amortisation period of the sales commissions, representing
the Group’s contractual right to benefit from future income from
providing investment management services, is based on management’s
estimate of the weighted average period over which the Group expects
to earn economic benefit from the investor being invested in each
fund product. Management estimate that this period is five years
in both the current and the comparative year.
(3) Customer balances
Brokerage maintains certain balances on behalf of customers with
third party institutions in segregated accounts. The two main jurisdictions
in which customer monies are significant to the Group are in the
UK and in the US. These amounts and the related liabilities to customers,
whose recourse is limited to the segregated accounts, are not included
in the Group balance sheet. Under UK trust law these segregated
accounts are legally protected and the Group has concluded that
there is an analogous position in the US. Therefore, the Group does
not have a liability to its customers in the event that a third
party depository institution, where the segregated accounts are
held, does not return all the segregated funds. In addition, the
corresponding asset is not co-mingled with the Group’s funds and
the Group’s control over such assets is severely restricted. For
these reasons customer balances are not recognised on the balance
sheet as they do not give rise to an asset or a liability of the
Group.
Customer balances are only relevant to Brokerage (discontinued operation)
and therefore, subject to the intended disposal of Brokerage being
completed, this accounting policy will not be relevant for the Group’s
financial statements in future periods.
(4) Treatment of fund entities of which the Group is the investment
manager
The Group is investment manager to a number of fund entities and
in addition provides a number of other administrative services.
Having considered all significant aspects of the Group’s relationships
with the fund entities, the directors are of the opinion that, although
the Group may have significant influence over fund entities, the
existence of the investment management contract and provision of
other administrative services do not give the Group control over
the fund entities. The key considerations taken into account in
reaching this judgement include: the existence of independent, empowered
boards of directors; the influence of investors; the investment
management contract termination provisions; and, the arm’s length
nature of the Group’s contracts with the fund entities.
(5) Exchangeable bonds
As at the date of the Group’s transition to IFRS (1 April 2004),
the £400 million exchangeable bonds issued by the Group were accounted
for as a liability measured at amortised cost with the conversion
option classified as a derivative (with foreign currency and own
equity characteristics) measured at fair value with the resulting
gains and losses being reported in the income statement. This accounting
treatment was adopted because the exchangeable bonds included a
cash settlement option and on application of IAS 21 the functional
currency of Man Group plc changed from sterling to US dollars. On
5 November 2004, the cash settlement option was revoked and the
Group put in place a US dollar/sterling cross currency swap. These
changes enabled the Group to split account for the exchangeable
bonds restoring the Group to the position it was in when it originally
issued the bonds (November 2002), as the conversion option would
be settled by exchanging a fixed amount of cash or other financial
asset for a fixed number of shares. Accordingly, the directors have
determined that the conversion option should be classified as an
equity instrument from 5 November 2004 and not subsequently remeasured.
(6) Income taxes
The Group is subject to income taxes in many jurisdictions. Judgement
is required in determining estimates in relation to the worldwide
provision for income taxes. There are transactions for which the
ultimate tax determination is uncertain during the ordinary course
of business. Where the final tax outcome of these matters is different
from the amounts that were initially recorded, such differences
will impact the income tax and deferred tax provisions in the period
in which such determination is made.
B Consolidation
(1) Subsidiaries
Subsidiaries are all entities (including special purpose entities)
over which the Group has the power to govern the financial and operating
policies. The existence and effect of potential voting rights that
are currently exercisable or convertible are considered when assessing
whether the Group controls another entity. Details of Forester Ltd,
the Group’s only material special purpose entity, are given in Note
33 to the financial statements.
Employee share ownership trusts have been established for the purposes
of satisfying certain share based awards. These trusts are fully
consolidated within the financial statements.
Subsidiaries are fully consolidated from the date on which control
is transferred to the Group. They are de-consolidated from the date
that control ceases.
The purchase method of accounting is used to account for the acquisition
of subsidiaries or businesses. The cost of an acquisition is measured
as the fair value of the assets given, equity instruments issued
and liabilities incurred or assumed at the date of exchange, plus
costs directly attributable to the acquisition. Identifiable assets
acquired and liabilities and contingent liabilities assumed in a
business combination are measured initially at their fair values
at the acquisition date, irrespective of the extent of any minority
interest. The excess of the cost of acquisition over the fair value
of the Group’s share of the identifiable net assets acquired is
recorded as goodwill.
Inter-company transactions and balances between Group companies
are eliminated. Unrealised losses are also eliminated unless the
transaction provides evidence of an impairment of the asset transferred.
Accounting policies of subsidiaries have been changed where necessary
to ensure consistency with the policies adopted by the Group for
preparing the consolidated financial statements.
(2) Associates and joint ventures
Associates are all entities in which the Group holds an interest
and over which it has significant influence but not control. Joint
ventures are all entities in which the Group holds a long-term interest
and which are jointly controlled by the Group and one or more other
parties under a contractual arrangement.
Investments in associates and joint ventures are generally accounted
for by the equity method of accounting and are initially recognised
at cost, except for investments in fund entities that are fair valued
through the income statement as described below. The Group’s investment
in associates and joint ventures includes goodwill (net of any accumulated
impairment loss) identified on acquisition (see Policy H).
Under the equity method, the Group’s share of its associates’ and
joint ventures’ post-acquisition profits or losses after tax that
is borne by the associate or joint venture is recognised in the
income statement, and its share of post-acquisition movements in
reserves is recognised in reserves. The cumulative post-acquisition
movements are adjusted against the carrying amount of the investment.
Gains and losses on transactions between the Group and its associates
and joint ventures are eliminated to the extent of the Group’s interest
in the associates and joint ventures. Unrealised losses are also
eliminated unless the transaction provides evidence of an impairment
of the asset transferred. Accounting policies of associates and
joint ventures have been changed where necessary to ensure consistency
with the policies adopted by the Group.
Where the Group is an investor and has significant influence over
the fund entities (through its role as investment manager) those
fund entities are associates of the Group. The investments in these
fund entities are either short-term ‘liquidity’ investments or ‘seeding’
investments. These investments are measured at fair value with changes
in fair value recognised in the income statement in the period of
the change.
C Discontinued operations
When the Group is committed to dispose of a business segment that
represents a separate major line of business, and it is intended
that such a disposal will be completed within one year of the decision
to sell, it classifies such a business segment as a discontinued
operation, in accordance with IFRS 5 ‘Non-current assets held for
sale and discontinued operations’. The assets of the discontinued
operation (disposal group) are presented separately from other assets
on the Group balance sheet and the liabilities of the discontinued
operation (disposal group) are presented separately from other liabilities
on the Group balance sheet. The assets and liabilities of the disposal
group classified as held for sale are measured at the lower of carrying
amount and fair value less costs to sell. The comparative balance
sheet is not restated. The post-tax result of the discontinued operation
is shown as a single amount on the face of the Group income statement,
with a restatement of the comparative period. In determining the
post-tax result of the discontinued operation only those central
costs that will be eliminated on disposal are allocated to the discontinued
operation.
D Presentation of exceptional items
For continuing operations, the Group shows any exceptional items
in a separate column or row on the face of the Group income statement.
For discontinued operations, the Group shows exceptional items separately
in the footnote analysing the income statement of the discontinued
operation. The Group defines exceptional items as those material
items, by virtue of their size or nature, which the Group considers
should be presented separately in order to aid comparability from
period to period.
E Segment reporting
A business segment is a group of assets and operations engaged in
providing services that are subject to risks and returns that are
different from those of other business segments. A geographical
segment is engaged in providing services within a particular economic
environment that are subject to risks and returns that are different
from those of components operating in other economic environments.
Business segments are the primary reporting segments as this is
the basis on which the Group is managed and reported internally.
Following the announcement on 30 March 2007 relating to the intention
to sell Brokerage, the Group has one continuing business segment,
being Asset Management. The analyses by geographical segment are
based on the location of the customer. In Asset Management, this
is the where the fund product entities, from which fee income is
earned, are registered.
F Foreign currency translation
(1) Functional and presentation currency
The consolidated financial statements are presented in US dollars,
which is the Company’s functional and presentation currency and
the currency in which the majority of the Group’s revenue streams,
assets, liabilities and funding is denominated. Items included in
the financial statements of each of the Group’s entities are measured
using the currency of the primary economic environment in which
the entity operates (‘the functional currency’).
(2) Transactions and balances
Foreign currency transactions are translated into the relevant Group
entity’s functional currency using the exchange rate prevailing
at the date of the transactions, or where it is more practical a
group entity may use an average rate for the week or month for all
transactions in each foreign currency occurring during that week
or month (as long as the relevant exchange rates do not fluctuate
significantly). Foreign exchange gains and losses resulting from
the settlement of such transactions and from the translation at
period end exchange rates of monetary assets and liabilities denominated
in foreign currencies are recognised in other operating income or
losses in the income statement, except when deferred in equity as
qualifying cash flow hedges.
(3) Group companies
The results and financial position of all the group entities (none
of which has the currency of a hyperinflationary economy) that have
a functional currency different from the presentation currency are
translated into the presentation currency as follows:
(a) assets and liabilities for each balance sheet are translated
at the closing rate at the date of that balance sheet;
(b) income and expenses for each income statement are translated
at average exchange rates for the relevant accounting periods;
(c) all resulting exchange differences are included in the cumulative
translation adjustment reserve within equity.
Goodwill and fair value adjustments arising on the acquisition
of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate at each balance
sheet date.
On transition to IFRS (1 April 2004), the Group brought forward
a nil opening balance on the cumulative translation adjustment reserve
arising from the retranslation of foreign operations.
G Property, plant and equipment
All property, plant and equipment is shown at cost, less subsequent
depreciation and impairment, except for land, which is shown at
cost less impairment. Cost includes expenditure that is directly
attributable to the acquisition of the assets. Subsequent costs
are included in the asset’s carrying amount or recognised as a separate
asset, as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Group and the
cost of the item can be measured reliably. All other repair and
maintenance expenditures are charged to the income statement during
the financial period in when they are incurred.
Depreciation is calculated using the straight-line method to allocate
the cost of each asset to its residual value over its estimated
useful life as follows:
• Buildings
life of the lease
• Equipment 3 –
10 years
Major renovations are depreciated over the remaining useful life
of the related asset or to the date of the next major renovation,
whichever is sooner.
The assets’ residual values and useful lives are reviewed,
and adjusted if appropriate, at each balance sheet date. An asset’s
carrying amount is written down immediately to its recoverable amount
if the asset’s carrying amount is greater than its estimated
recoverable amount (see Policy I).
Gains and losses on disposals are determined by comparing the disposal
proceeds with the carrying amount and are included in the income
statement.
Any borrowing costs associated with purchasing property, plant
and equipment are expensed.
H Intangible assets
(1) Goodwill
Goodwill represents the excess of the cost of an acquisition over
the fair value of the Group’s share of the net identifiable assets
of the acquired subsidiary, associate or business at the date of
acquisition. Goodwill on acquisitions of subsidiaries and businesses
is included in intangible assets. Goodwill on acquisitions of associates
is included in investment in associates. Goodwill is tested annually
for impairment and carried at cost less accumulated impairment losses.
Gains and losses on the disposal of an entity include the carrying
amount of goodwill relating to the entity sold.
Goodwill arising on acquisitions before the date of transition
to IFRS has been retained at the previous UK GAAP amounts subject
to being tested for impairment at that date. Goodwill written off
to equity prior to 1998 has not been reinstated and is not included
in determining any subsequent profit or loss on disposal.
(2) Sales commissions
In Asset Management, sales commissions are paid to intermediaries
(agents) and to employees. Sales commissions are recognised as follows:
(a) Upfront commissions paid to distributors (intermediaries) and
to employees
In many instances, upfront commission is paid to distributors and/or
employees when a fund product is first launched, and is based on
the amount of investors’ monies introduced. This upfront commission
is an incremental cost that is directly attributable to securing
investors in fund products from which the Group earns income based
on an investment management contract with the relevant fund. Accordingly
an intangible asset is recognised in accordance with IFRS, representing
the Group’s contractual right to benefit from future income from
providing investment management services. The carrying value of
this intangible asset is based on the value of the initial upfront
commission payments made to distributors and employees less an amortisation
charge. This intangible asset is amortised over five years on a
straight-line basis, the weighted average period over which the
Group expects to earn an economic benefit from the investor being
invested in the fund product.
All unamortised sales commission is subject to impairment testing
each period to ensure that the future economic benefits arising
from each fund product sale made is in excess of the remaining unamortised
commission. Where it is not, the unamortised portion is written
down as a charge to the income statement.
(b) Trail commissions
Commission payments made to distributors (intermediaries) for ongoing
services (trail commissions) are charged to the income statement
in the period in which they are incurred.
(3) Customer relationships in Brokerage
Customer relationships are recognised when they are acquired through
a business combination. Their value at the date of acquisition is
generally determined using a combination of market comparable method
and income approach methodologies such as the discounted cash flow
method which estimates net cash flows attributable to the assets
over their economic lives and discounts to present value using an
appropriate rate of return that considers the relative risk of achieving
the cash flows and the time value of money. Customer relationships
are amortised using the straight-line method over their estimated
useful lives of 15 years.
(4) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring to use the specific software.These
costs are amortised using the straight-line method over their estimated
useful lives (three to five years).
Costs associated with developing or maintaining computer software
programmes are recognised as an expense as incurred. Costs that
are directly associated with the production of identifiable and
unique software products controlled by the Group, and that will
probably generate economic benefits exceeding costs beyond one year,
are recognised as intangible assets. Direct costs include software
development and associated employee costs. Computer software development
costs recognised as assets are amortised on a straight-line basis
over their estimated useful lives (not exceeding three years).
(5) All intangible assets
The assets’ residual values and useful lives are reviewed, and adjusted
if appropriate, at each balance sheet date. An asset’s carrying
amount is written down immediately to its recoverable amount if
the asset’s carrying amount is greater than its estimated recoverable
amount (see Policy I).
Gains and losses on disposals are determined by comparing the disposal
proceeds with the carrying amount and are included in the income
statement.
I Impairment of non-financial assets
Goodwill and assets that have an indefinite useful life are not
subject to amortisation and are tested annually for impairment.
Assets that are subject to amortisation or depreciation are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
An impairment loss is recognised in the income statement in the
period in which it occurs at the amount by which the asset’s carrying
amount exceeds its estimated recoverable amount. The recoverable
amount is the higher of an asset’s fair value less costs to sell
and value in use. Value in use is calculated by discounting the
expected future cash flows obtainable as a result of the asset’s
continued use, including those resulting from its ultimate disposal,
at a market-based discount rate on a pre-tax basis. For the purposes
of assessing impairment, assets are grouped at the lowest levels
for which there are separately identifiable cash flows (cash-generating
units).
J Investments
(1) Classification
The Group classifies its investments in the following categories:
financial assets at fair value through profit or loss; loans and
receivables; held to maturity investments; and available-for-sale
financial assets. The classification depends on the purpose for
which the investments were acquired. Management determines the classification
of investments at initial recognition and re-evaluates, where permitted,
this designation at each reporting date.
(a) Financial assets at fair value through profit or loss
This category includes financial assets held for trading and those
designated at fair value through profit or loss at inception. A
financial asset is classified in this category if acquired principally
for the purpose of selling in the short term or if so designated
by management. Derivatives are also categorised as held for trading
unless they are designated as hedges. Assets in this category are
classified as current assets if they are either held for trading
or are expected to be realised within 12 months of the balance sheet
date. Such investments in Brokerage include: long stock positions
held for matching CFD positions; certificates of deposit and US
treasury bills; and in Asset Management: investments in fund products
relating to seeding investments; and investments to aid short-term
rebalancing of the funds and redemption bridging activities (‘liquidity’
investments).
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market.
They arise when the Group provides money or services directly to
a debtor with no intention of trading the receivable. They are included
in current assets, except for maturities greater than 12 months
after the balance sheet date, which are classified as non-current
assets. Loans and receivables are included in trade and other receivables
in the balance sheet (see Policy L).
(c) Held to maturity investments
Held to maturity investments are non-derivative financial assets
with fixed or determinable payments and fixed maturity that the
Group intends to and has the ability to hold to maturity. The Group
uses this category for the repurchase agreements to maturity investments
in US treasuries in Brokerage.
(d) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are
either designated in this category or not classified in any of the
other categories. They are included in non-current assets unless
management intends to dispose of the investment within 12 months
of the balance sheet date. Such investments include exchange shares
and market seats.
(2) Measurement
Purchases and sales of investments are recognised on trade-date,
the date on which the Group commits to purchase or sell the asset.
Investments are initially recognised at fair value plus transaction
costs (for available-for-sale financial assets). Investments are
derecognised when the rights to receive cash flows from the investments
have expired or have been transferred and the Group has transferred
substantially all risks and rewards of ownership. Held to maturity
investments are measured at amortised cost. Available-for-sale financial
assets and financial assets and liabilities at fair value through
profit or loss are subsequently carried at fair value in the balance
sheet. Loans and receivables are carried at amortised cost using
the effective interest method. Fair value gains and losses arising
from changes in the fair value of financial assets and liabilities
at fair value through profit or loss are included in other operating
income or losses in the income statement in the period in which
they arise. Fair value gains and losses arising from changes in
the fair value of available-for-sale investments are recognised
as a separate component of equity until the investment is sold or
otherwise disposed of, or until the investment is determined to
be impaired, at which time the cumulative gain or loss previously
reported in equity is included in other operating income or losses
in the income statement.
The fair values of quoted investments are based on current bid
prices. If the market for a financial asset is not active (and for
unlisted securities), the Group establishes fair value by using
appropriate valuation techniques. These include the use of recent
arm’s length transactions, reference to other instruments that are
substantially the same, discounted cash flow analysis, and option
pricing models refined to reflect the issuer’s specific circumstances
(see Policy U).
(3) Impairment
The Group assesses at each balance sheet date whether there is objective
evidence that a financial asset or a group of financial assets is
impaired. In the case of equity securities classified as available-for-sale,
a significant or prolonged decline in the fair value of the security
below its cost is considered in determining whether the security
is impaired. If any such evidence exists for available-for-sale
financial assets, the cumulative loss, measured as the difference
between the acquisition cost and the current fair value, less any
impairment loss on the financial asset previously recognised in
profit or loss, is removed from equity and recognised in the income
statement. Impairment losses recognised in the income statement
on available-for-sale equity instruments are not reversed through
the income statement.
K Derivative financial instruments
(1) Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date on
which a derivative contract is entered into and are subsequently
remeasured at their fair value. The method of recognising the resulting
gain or loss depends on whether the derivative is designated as
a hedging instrument and, if so, the nature of the item being hedged.
The Group designates certain derivatives as either: (1) hedges of
the fair value of recognised assets or liabilities or a firm commitment
(fair value hedge); or (2) hedges of highly probable forecast transactions
(cash flow hedge).
The Group documents at the inception of the transaction the relationship
between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various hedge
transactions. The Group also documents its assessment, both at hedge
inception and on an ongoing basis, of whether the derivatives that
are used in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items.
(a) Fair value hedge
Changes in the fair value of derivatives that are designated and
qualify as fair value hedges are recorded in the income statement
in other operating income and losses, together with any changes
in the fair value of the hedged asset or liability that are attributable
to the hedged risk.
(b) Cash flow hedge
The effective portion of changes in the fair value of derivatives
that are designated and qualify as cash flow hedges is recognised
in equity. The gain or loss relating to the ineffective portion
is recognised immediately in the income statement.
Amounts accumulated in equity are recycled in the income statement
in the periods when the hedged item will affect the income statement
(for instance when the forecast payment that is hedged takes place).
When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative gain
or loss existing in equity at that time remains in equity and is
recycled in the income statement when the forecast transaction is
ultimately recognised in the income statement. When a forecast transaction
is no longer expected to occur, the cumulative gain or loss that
was reported in equity is immediately transferred to the income
statement.
(c) Derivatives that are held for trading purposes or that do not
qualify for hedge accounting
Certain derivative instruments are held for trading or are held
for hedging purposes but do not qualify for hedge accounting. The
changes in the fair value of these derivative instruments are recognised
immediately in the income statement.
(2) Financial risk factors
A qualitative analysis of the financial risks facing the Group,
which includes quantitative disclosures, is provided in the Risk
Management section of this Annual Report.
L Trade receivables
Trade receivables are recognised initially at fair value and subsequently
measured at amortised cost using the effective interest method,
less provision for impairment. A provision for impairment of trade
receivables is established when there is objective evidence that
the Group will not be able to collect all amounts due according
to the original terms of the receivables. The amount of the provision
is the difference between the asset’s carrying amount and the present
value of estimated future cash flows, discounted at the effective
interest rate. The amount of the provision is recognised in the
income statement.
M Cash and cash equivalents
Cash and cash equivalents are carried in the balance sheet at cost.
Cash and cash equivalents comprise cash on hand, deposits held on
call with banks and other short-term, highly liquid investments
with original maturities of three months or less. Bank overdrafts
are included within borrowings in current liabilities in the balance
sheet. For the purposes of the cash flow statement, cash and cash
equivalents consist of cash and cash equivalents as defined above,
net of bank overdrafts where such facilities form an integral part
of the Group’s cash management.
N Borrowings
Borrowings are recognised initially at fair value, net of transaction
costs incurred. Borrowings are subsequently stated at amortised
cost. Any difference between proceeds (net of transaction costs)
and the redemption value is recognised in the income statement over
the period of the borrowings using the effective interest method.
Long-term borrowings include exchangeable bonds. The fair value
of the liability portion of the exchangeable bonds is determined
on the issue date using a market interest rate for an equivalent
non-exchangeable bond. This amount is recorded as a liability on
an amortised cost basis until extinguished on conversion or maturity
of the bonds. The remainder of the proceeds are allocated to the
conversion options. These are recognised as equity instruments and
included in equity, net of income tax effects.
Borrowings are classified as current liabilities unless the Group
has an unconditional right to defer settlement of the liability
for at least 12 months after the balance sheet date.
O Employee benefits
(1) Pension obligations
Group companies operate various pension schemes. The schemes are
funded through payments to trustee-administered funds or insurance
companies, determined by periodic actuarial calculations. The Group
has both defined benefit and defined contribution plans. A defined
benefit plan is a pension plan that defines the amount of pension
benefit that an employee will receive on retirement, usually dependent
on one or more factors such as age, years of service and compensation.
A defined contribution plan is a pension plan under which the Group
pays fixed contributions into a separate fund.
The liability recognised in the balance sheet in respect of defined
benefit pension plans is the present value of the defined benefit
obligation at the balance sheet date less the fair value of plan
assets, together with adjustments for unrecognised actuarial gains
or losses and past service costs. The defined benefit obligation
is calculated annually by independent actuaries using the projected
unit credit method. The present value of the defined benefit obligation
is determined by discounting the estimated future cash outflows
using interest rates of high-quality corporate bonds that are denominated
in the currency in which the benefits will be paid, and that have
terms to maturity approximating to the terms of the related pension
liability.
In accordance with the transitional provisions set out in IFRS
1 ‘First time adoption of international financial reporting standards’,
all cumulative actuarial gains and losses at the date of the Group’s
IFRS transition (1 April 2004) were recognised in full. Since 1
April 2004, actuarial gains and losses arising from experience adjustments
and changes in actuarial assumptions are not recognised in the current
period unless the cumulative unrecognised gain or loss at the end
of the previous reporting period exceeds the greater of 10% of the
scheme assets or liabilities. In these circumstances the excess
is charged or credited to the income statement over the employees’
expected average remaining working lives.
Past service costs are recognised immediately in the income statement,
unless the changes to the pension plan are conditional on the employees
remaining in service for a specified period of time (the vesting
period). In this case, the past service costs are amortised on a
straight-line basis over the vesting period.
For defined contribution plans, the Group pays contributions to
publicly or privately administered pension insurance plans on a
mandatory, contractual or voluntary basis. The Group has no further
payment obligation once the contributions have been paid. The contributions
are recognised as employee benefit expense when they are due. Prepaid
contributions are recognised as an asset to the extent that a cash
refund or a reduction in the future payments is available.
(2) Share-based compensation
The Group operates equity-settled, share-based compensation plans.
The fair value of the employee services received in exchange for
the share awards and options granted is recognised as an expense,
with the corresponding credit being recognised in equity. The total
amount to be expensed over the vesting period is determined by reference
to the fair value of the shares and options awarded/granted, excluding
the impact of any non-market vesting conditions (for example, earnings
per share and return on equity targets). Non-market vesting conditions
are included in assumptions about the number of options that are
expected to become exercisable. At each balance sheet date, the
Group revises its estimates of the number of options that are expected
to become exercisable. It recognises the impact of the revision
of original estimates, if any, in the income statement, and a corresponding
adjustment to equity.
The proceeds received net of any directly attributable transaction
costs are credited to share capital (nominal value) and share premium
when the options are exercised.
(3) Phantom equity-based compensation
The Group also operates ‘phantom’ cash-settled, equity-based compensation
plans. The equity base is typically some of the fund products of
which the Group is the investment manager. The fair value of the
employee services received in exchange for the phantom equity awards
is recognised as an expense. The total amount to be expensed over
the vesting period is determined by reference to the fair value
of the awards, remeasured at each reporting date until the settlement
date is reached. The fair value of the awards equates to the fair
value of the underlying investment in the nominated fund entity
at the settlement date.
(4) Profit-sharing and bonus plans
The Group recognises a liability and an expense for bonuses and
profit-sharing, based on a formula that takes into consideration
the profit attributable to the Company’s shareholders above a hurdle
rate based on the Group’s cost of equity.
(5) Termination benefits
Termination benefits are payable when employment is terminated before
the normal retirement date, or whenever an employee accepts voluntary
redundancy in exchange for these benefits. The Group recognises
termination benefits when it is demonstrably committed to either:
terminating the employment of current employees according to a detailed
formal plan without realistic possibility of withdrawal; or providing
termination benefits as a result of an offer made to encourage voluntary
redundancy. Benefits falling due more than 12 months after the balance
sheet date are discounted to present value.
P Provisions
Provisions for costs, such as restructuring costs and legal claims,
are recognised when: the Group has a present legal or constructive
obligation as a result of past events; it is more likely than not
that an outflow of resources will be required to settle the obligation;
and the amount can be reliably estimated.
Q Deferred income tax
Deferred income tax is provided in full, using the liability method,
on temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the consolidated financial
statements. However, if the deferred income tax arises from initial
recognition of an asset or liability in a transaction other than
a business combination that at the time of the transaction affects
neither accounting nor taxable profit or loss, it is not accounted
for. Deferred income tax is determined using tax rates (and laws)
that have been enacted or substantially enacted by the balance sheet
date and are expected to apply when the related deferred income
tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it
is probable that future taxable profit will be available against
which the temporary differences can be utilised.
Deferred income tax is provided on temporary differences arising
on investments in subsidiaries and associates, except where the
timing of the reversal of the temporary difference is controlled
by the Group and it is probable that the temporary difference will
not reverse in the foreseeable future.
R Share capital and own shares
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares or options are shown in
equity as a deduction, net of tax, from the proceeds.
Own shares held through an ESOP trust are recorded at cost, including
any directly attributable incremental costs (net of income taxes),
and are deducted from equity attributable to the Company’s equity
holders until the shares are transferred to employees or sold. Where
such shares are subsequently sold, any consideration received, net
of any directly attributable incremental transaction costs and the
related tax effects, is included in equity attributable to the Company’s
equity holders. Derivative contracts on own shares that only result
in the delivery of a fixed amount of cash or other financial asset
for a fixed number of own shares are classified as equity instruments.
All other contracts on own equity are treated as derivatives and
fair valued through the income statement.
Contracts entered into with a third party to buy back the Company’s
shares during a close period give rise to an obligation for the
Group. This obligation is included in trade and other payables and
deducted from equity on the balance sheet for the value of the maximum
number of shares that may be purchased under the contract with the
third party. If the number of shares repurchased by the third party
is not the maximum then there is a reversal through equity for that
amount. Any changes in the share price from the date of the contract
are taken through the income statement.
S Income recognition
(1) Revenue
Revenue comprises the fair value for the provision of services,
net of any value-added tax, rebates and discounts and after the
elimination of sales within the Group. Revenue is recognised as
follows:
(a) Performance fees in Asset Management
Performance fees are calculated as a percentage of the net appreciation
of the relevant fund products’ net asset value at the end of a given
contractual period (referred to as the performance period). In accordance
with IAS 18, performance fees are only recognised once they can
be measured reliably. The Group can only reliably measure performance
fees at the end of the performance period as the net asset value
of the fund products could move significantly, as a result of market
movements, between the Group’s balance sheet date and the end of
the performance period.
(b) Management fees in Asset Management
Management fees, which include all non-performance related fees,
are recognised in the period in which the services are rendered.
(c) Fees and commissions in Brokerage
Execution and clearing commissions are recognised in the period
in which the services are rendered. To represent the substance of
matched principal transactions entered into by the Group, where
it acts as principal for the simultaneous purchase and sale of securities
to third parties, commission income is the difference between the
consideration received on the sale of the security and its purchase.
Administration fee income earned from customer balances is recognised
in the period in which services are rendered.
(2) Interest income
Interest income is recognised on a time-proportion basis using the
effective interest method. When a receivable is impaired, the Group
reduces the carrying amount to its recoverable amount – being the
estimated future cash flow discounted at the original effective
interest rate of the instrument – and continues unwinding the discount
as interest income.
(3) Dividend income
Dividend income is recognised when the right to receive payment
is established.
T Cost of sales
Commissions and distribution fees payable are recognised over the
period for which the service is provided. Further details on the
amortisation of intangible assets relating to upfront sales commissions
are given in Policy H.
U Fair value estimation
The fair value of financial instruments traded in active markets
(such as exchange traded derivatives, and trading and available-for-sale
securities) is based on quoted market prices at the balance sheet
date.
Where a bid/offer spread exists, the quoted market price used for
financial assets held by the Group is the current bid price; the
appropriate quoted market price for financial liabilities is the
current offer price. The fair value of financial instruments that
are not traded in an active market (for example, over-the-counter
derivatives) is determined by using valuation techniques. The Group
uses a variety of methods and makes assumptions that are based on
market conditions existing at each balance sheet date. Other techniques,
such as estimated discounted cash flows, are used to determine fair
value for the remaining financial instruments.
V Leases
Leases in which a significant portion of the risks and rewards of
ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases (net of any incentives
received from the lessor) are charged to the income statement on
a straight-line basis over the period of the lease.
W Dividend distribution
Dividend distribution to the Company’s shareholders is recognised
as a liability in the Group’s financial statements, and directly
in equity, in the period in which the dividend is paid or, if required,
approved by the Company’s shareholders.
The following accounting policies and changes in presentation only
apply to the discontinued operation:
X Customer balances
As required by the United Kingdom Financial Services and Markets
Act 2000 and by the US Commodity Exchange Act, Brokerage maintains
certain balances on behalf of clients with banks, exchanges, clearing
houses and brokers in segregated accounts. These amounts and the
related liabilities to clients, whose recourse is limited to the
segregated accounts, are not included in the balance sheet. They
are not recognised on the Group balance sheet as the Group does
not control the assets and does not have a present obligation arising
from customer money lodged with third party financial institutions,
and hence the customer funds and related liabilities do not meet
the definition of an asset and liability as defined by the IAS framework.
Y Retention payments
Retention payments are made in Brokerage to certain recruited employees
or to those who join the Group through acquisitions. These payments
are deferred in the balance sheet and charged to the income statement
(on the administrative expenses line) over the period in which they
are committed to give their services to the Group. If an employee
leaves during the retention period, the Group recovers an appropriate
proportion of their loan.
Z Gross up of Brokerage assets and liabilities relating
to its repurchase agreements to maturity transactions
As part of the acquisition of the Refco assets towards the end of
the prior financial year, Brokerage acquired a line of business
whereby it enters into repurchase transactions with counterparties
that have an end date which is the same as the maturity of the underlying
collateral, which is in the form of US Treasuries.
During the financial year ended 31 March 2007, once complete reporting
procedures had been agreed and implemented for this new line of
business, it was determined that the assets and liabilities should
be presented on a gross basis on the balance sheet, as the derecognition
criteria in IAS 39 ‘Financial Instruments: recognition and measurement’
have not been met. Although a significant proportion of the risks
and rewards in relation to the assets and liabilities have been
transferred when considering the repurchase transaction as a whole,
they have not been transferred when considering the asset and related
liability in isolation, as required by IAS 39. The gross up of assets
in 2007 is included in: non-current investments $261 million (2006:
$1,927 million); non-current receivables $257 million (2006: $1,941
million); short-term investments $4,203 million (2006: $1,570 million);
and current trade and other receivables $3,589 million (2006: $146
million). The gross up of liabilities in 2007 is included in: non-current
trade payables $518 million (2006: $3,868 million) and current payables
of $7,792 million ($2006: $1,716 million). There is no impact on
the income statement or on net assets or cash flow in either year.
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