REG - Standard Life Aberdn - Final Results - Part 5 of 8
09/03/2021 07:00
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RNS Number : 5745R Standard Life Aberdeen plc 09 March 2021
Standard Life Aberdeen plc
Full Year Results 2020
Part 5 of 8
6. Independent auditors' report to the members of Standard Life Aberdeen plc
1. Our opinion is unmodified
We have audited the financial statements of Standard Life Aberdeen plc (the
Company) for the year ended 31 December 2020 which comprise the Consolidated
income statement, Consolidated statement of comprehensive income, Consolidated
statement of financial position, Consolidated statement of changes in equity,
Consolidated statement of cash flows, Company statement of financial position,
Company statement of changes in equity, Reconciliation of consolidated
adjusted profit before tax to IFRS profit for the year, and the related notes,
including the accounting policies in the Basis of preparation.
In our opinion:
· The financial statements give a true and fair view of the state of the
Group's and of the parent Company's affairs as at 31 December 2020 and of the
Group's profit for the year then ended
· The Group financial statements have been properly prepared in accordance
with international accounting standards in conformity with the requirements of
the Companies Act 2006 and International Financial Reporting Standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union
· The parent Company financial statements have been properly prepared in
accordance with UK accounting standards, including FRS 101 Reduced Disclosure
Framework
· The financial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation to the extent applicable
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities are described below.
We believe that the audit evidence we have obtained is a sufficient and
appropriate basis for our opinion. Our audit opinion is consistent with our
report to the Audit Committee.
We were first appointed as auditor by the shareholders on 16 May 2017. The
period of total uninterrupted engagement is for the four financial years ended
31 December 2020. We have fulfilled our ethical responsibilities under, and we
remain independent of the Group in accordance with, UK ethical requirements
including the FRC Ethical Standard as applied to listed public interest
entities. No non-audit services prohibited by that standard were provided.
Overview
Materiality: Group financial statements as a whole
£25m (2019: £31m)
2.7% (2019:4.4%) of normalised profit
before tax
Coverage 90% (2019:97%) of profits and losses that made up Group profit before tax
Key audit matters vs 2019
Recurring risks (Group and Parent Company) Recoverability of goodwill and of certain of the parent's investment in
subsidiaries
Recurring risk Carrying value of investment in Phoenix and the related share of profit
(Group)
New risk Impairment of Intangible Assets
(Group)
Recurring risk Valuation of UK defined benefit pension scheme obligation
(Group)
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were
of most significance in the audit of the financial statements and include the
most significant assessed risks of material misstatement (whether or not due
to fraud) identified by us, including those which had the greatest effect on:
the overall audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. We summarise below the key audit
matters, in decreasing order of audit significance, in arriving at our audit
opinion above, together with our key audit procedures to address those matters
and our findings from those procedures in order that the Company's members, as
a body, may better understand the process by which we arrived at our audit
opinion . These matters were addressed, and our findings are based on
procedures undertaken , in the context of, and solely for the purpose of, our
audit of the financial statements as a whole, and in forming our opinion
thereon, and consequently are incidental to that opinion, and we do not
provide a separate opinion on these matters.
The risk Our response
Recoverability of goodwill and of certain of the parent's investments in Subjective estimate: We performed the tests below rather than seeking to rely on any of the Group's
subsidiaries:
controls because the nature of the balance is such that we would expect to
The goodwill recognised at the Group and the carrying amount of certain of the obtain audit evidence primarily through the detailed procedures described.
(Goodwill: £85m (2019: £1000m); goodwill impairment losses recognised: parent Company's investments in subsidiaries are significant and at risk of
£915m (2019: £1,569m)) irrecoverability due to reductions in assets under management or a change in Our procedures included:
the mix of the assets under management which would impact revenues. The
(Parent Company: certain investments in subsidiaries: included within the estimated recoverable amount of these balances is subjective due to the Our valuation expertise: We engaged our own valuation specialists to assist us
total investments in subsidiaries balance of £4,013m (2019: £6,027m); inherent uncertainty involved in forecasting and discounting projected in assessing the appropriateness of the Group's primary valuation methodology
Impairment of investment in subsidiaries: £1,873m (2019: £795m)) adjusted profits and determining the applicable price to earnings multiples and its application in the valuation of the goodwill and certain of the parent
(including appropriate premiums for control and discounts for lack of Company's investment in subsidiaries, and the appropriateness of the input
Refer to page 59 (Audit Committee Report), page 143 (goodwill accounting liquidity) and expected costs of disposals which are the key assumptions of assumptions to the analyses.
policy and financial disclosures), page 214 (investment in subsidiaries the fair value less costs of disposal (FVLCOD).
accounting policy) and page 215 (investment in subsidiaries financial
Our sector expertise: We also used our sector experience to evaluate the
disclosures). The effect of these matters is that, as part of our risk assessment, we appropriateness of assumptions applied in key inputs such as deriving
determined that the recoverable amount of the goodwill and certain of the maintainable earnings, assessing the comparability of companies used by
parent's investment in subsidiaries has a high degree of estimation management for the purpose of deriving an appropriate price to earnings
uncertainty, with a potential range of reasonable outcomes greater than our multiple along with adjustments made to that market data in deriving an asset
materiality for the financial statements as a whole, and possibly many times management specific multiple.
that amount.
Sensitivity analysis: We performed our own sensitivity analysis which included
The financial statements (Note 15) disclose the range estimated by the Group. assessing the effect of reasonably possible changes in projected adjusted
profits and reasonable alternative assumptions in respect of applicable price
to earnings multiples and applied premiums and discounts to evaluate the
impact on the carrying value of the goodwill and investment in subsidiaries.
Assessing transparency: We assessed whether the Group's disclosures (in
respect of goodwill) and the parent Company's disclosures (in respect of
investment in subsidiaries) reflect the risks inherent in the impairment
assessment performed.
Our findings:
We found the carrying value of goodwill and the related impairment charge to
be cautious (2019: balanced) and the parent Company's carrying value of
certain of the investments in subsidiaries and the related impairment charge
to be cautious (2019: balanced) with proportionate (2019: proportionate)
disclosures of the related assumptions and sensitivities.
The risk Our response
Carrying value of investment in Phoenix and the related share of profit The value of the investment in Phoenix Group Holdings plc (Phoenix) is Our procedures in respect of the accounting treatment and application
impacted by a number of judgemental factors and accounting estimates. included:
(Carrying value of investment in Phoenix: £1,008m (2019: £961m); Share of
Phoenix profit: £110m (2019: £(5)m)) Accounting treatment and application Assessing principles: We assessed the nature of the relationship with Phoenix
following the ReAssure transaction and subsequent SLA plc shareholding
Refer to page 59 (Audit Committee On 22 July 2020 Phoenix acquired ReAssure Group plc "ReAssure"; as part of dilution and evaluated this against the indicators of significant influence in
this transaction the Group's shareholding was diluted. This resulted in a risk the accounting standards.
Report), and page 147 (accounting policy and financial disclosures). that Phoenix should subsequently be accounted for as an equity investment
rather than an associate. It additionally resulted in a risk associated with Assessing principles: Our component auditor critically assessed the
the acquisition accounting, in particular the valuation of the opening balance acquisition accounting approach adopted by Phoenix against the principles of
sheet (including intangible assets), and the determination of the bargain gain IFRS 3 Business Combinations, including the identification and valuation of
on purchase (recognised as part of the share of Phoenix profit). intangible assets in the business combination against the principles of
accounting standards.
Subjective estimate
Our procedures in respect of the share of Phoenix profit, and its
As a result of any declines in Phoenix's share price there is a risk of corresponding impact on the carrying value of Phoenix:
impairment of the carrying value of the investment.
Control design and operation: Our component auditor tested the design and
In addition, and consistent with previous years, the calculation of Phoenix's operating effectiveness of key controls including over Phoenix management's
profit, (with a resulting impact on the carrying value of the investment), is process for modelling insurance contract liabilities and for setting and
dependent on a number of Phoenix management's estimates, in particular the updating actuarial assumptions.
actuarial assumptions underpinning the movements in insurance contract
liabilities. In this regard, the assumptions that have the most significant Our actuarial experience: Our component auditor used actuarial specialists to
impact over the profit of the enlarged Phoenix group are the base and trend review and challenge the rationale for key assumptions adopted, including in
longevity and persistency assumptions. respect of acquired businesses.
The effect of these matters is that, as part of our risk assessment, we Our procedures in respect of any impairment to the carrying value include:
determined that the carrying value of the investment in Phoenix has a high
degree of estimation uncertainty, with a potential range of reasonable Tests of detail: We performed an assessment of the carrying value of the
outcomes greater than our materiality for the financial statements as a whole. investment in Phoenix by comparing to its market value at 31 December 2020.
The work performed by the component auditor was under the direction, oversight
and review of the Group team, as described in section 3.
Our findings:
In determining that Phoenix should continue to be treated as an associate
there is room for judgement and we found that, within that, the Group's
judgement was balanced.
We found the Group's carrying value of the investment in Phoenix and the
related share of profit to be balanced (2019: balanced) with proportionate
(2019: proportionate) disclosure of the related assumptions.
The risk Our response
Impairment of Intangible Assets Subjective estimate: We performed the tests below rather than seeking to rely on any of the Group's
controls because the nature of the balance is such that we would expect to
(Customer relationships and investment management contracts: £314m (2019: The Group's customer related intangible assets include customer relationships obtain audit evidence primarily through the detailed procedures described.
£534m); Impairment of customer relationships and investment management and investment management contracts. There is a risk of impairment to the
contracts intangibles: £134m (2019: £0m)) carrying value of these intangible assets. Our procedures included:
Refer to page 59 (Audit Committee Management need to make subjective judgements when assessing whether there are Our valuation expertise: We evaluated whether for all of the Group's customer
any indicators of impairment to these intangible assets. relationships and management contract intangible assets there were indicators
Report), page 143 (accounting policy) and financial disclosures).
of impairment that would trigger an impairment review. This included a
Where there is an indicator of impairment, the estimated recoverable amount of critical assessment of the business performance, such as outflows of assets
these intangible assets is subjective due to the inherent uncertainty involved under management and / or reduction of revenue relating to each intangible
in forecasting and discounting future cash flows. asset.
The effect of these matters is that, as part of our risk assessment, we Where indicators were identified, we used our own valuation specialists to
determined that the value in use of these intangible assets has a high degree assist us in assessing the appropriateness of the Group's valuation model.
of estimation uncertainty, with a potential range of reasonable outcomes This included comparing the Group discount rate assumptions with our own
greater than our materiality for the financial statements as a whole and estimate of a range of reasonable discount rates, based on comparable company
possibly many times that amount. information.
The financial statements (Note 15) disclose the sensitivity estimated by the Our sector experience: Where there was an indicator of impairment, we used our
Group. sector experience to evaluate the appropriateness of assumptions applied in
key inputs such as revenue from contracts with customers, operating costs and
discount rates.
Sensitivity analysis: Where there was an indicator of impairment we performed
our own sensitivity analysis which included assessing the effect of reasonably
possible changes in forecast cash flows and discount rates to evaluate the
impact on the carrying value of the intangible assets.
Assessing transparency: We considered whether the Group's disclosures in
relation to the assumptions used in the value in use of customer relationships
and investment management contracts intangible assets appropriately represent
the sensitivities of the asset's value in use to the use of alternative
assumptions.
Our findings:
We found the carrying value of intangible assets and the related impairment
charge to be balanced (2019: balanced) with proportionate (2019:
proportionate) disclosures of the related assumptions and sensitivities.
The risk Our response
Valuation of the UK defined benefit pension scheme present value of funded Subjective valuation: We performed the tests below rather than seeking to rely on any of the Group's
obligation
controls because the nature of the balance is such that we would expect to
The present value of the Group's funded obligation for the UK defined benefit obtain audit evidence primarily through the detailed procedures described.
(£3,015m, 2019: £2,852m) (DB) pension scheme is an area that involves significant judgement over the
uncertain future settlement value. The Group is required to use judgment in Our procedures included:
Refer to page 59 (Audit Committee the selection of key assumptions covering both operating assumptions and
economic assumptions. Test of detail and our sector experience: Our component auditor considered,
Report), page 170 (accounting policy) and page 171 (financial disclosures).
with the support of internal actuarial specialists, the appropriateness of the
The key operating assumptions are base mortality and mortality improvement. base mortality assumption by reference to scheme and industry data on
The key economic assumptions are the discount rate and inflation. The risk is historical mortality experience and the outcome of the latest triennial
that inappropriate assumptions are used in determining the present value of report.
the funded obligation.
Our component auditor considered, with the support of internal actuarial
The effect of these matters is that, as part of our risk assessment, we specialists, the appropriateness of the mortality improvement assumptions by
determine that the valuation of the pension scheme obligation has a high reference to industry based expectations of future mortality improvements. The
degree of estimation uncertainty, with a potential range of reasonable component auditor considered the appropriateness of the discount rate and
outcomes greater than our materiality for the financial statements as a whole inflation assumptions by reference to industry practice.
and possibly many times that amount.
Benchmarking assumptions and our sector experience: Our component auditor
The financial statements (Note 34) disclose the sensitivity estimated by the utilised the results of KPMG benchmarking of base mortality, mortality
Group. improvement, discount rate and inflation assumptions and our actuarial
specialists' knowledge of industry practice to inform our challenge of the
Group's assumptions in these areas.
Assessing transparency: In conjunction with internal actuarial specialists, we
considered whether the Group's disclosures in relation to the assumptions used
in the calculation of present value of the funded obligation appropriately
represent the sensitivities of the obligation to the use of alternative
assumptions.
The work performed by the component auditor was under the direction, oversight
and review of the Group team, as described in section 3.
Our findings:
We found the estimated valuation of the UK defined benefit pension scheme
obligation to be balanced (2019: balanced) with proportionate (2019:
proportionate) disclosures of the related assumptions and sensitivities.
We have summarised below the changes to our key audit matters from the 31
December 2019 year end audit.
In our 31 December 2019 year end audit, we identified a significant risk
around the share of profit from Phoenix. In considering the current market
conditions and the ReAssure acquisition made by Phoenix in the period, we
consider that these result in a range of additional factors for us to consider
which will impact the carrying value of the investment. As such, we consider
our key audit matter to be broader than the share of profit, and have updated
this to include both the carrying value of the investment and the share of
profit.
We did not consider the impairment of intangible assets to be a key audit
matter in the 31 December 2019 year end audit, as there were no impairment
triggers identified. Given impairment triggers (and resulting impairments)
were identified in the year to 31 December 2020, we consider this to be a key
audit matter for the year.
We continue to perform procedures over the provision for separation costs.
However, ongoing progress in relation to the separation process has provided a
greater level of certainty over the separation costs and so the level of
estimation uncertainty associated with this provision has reduced in the year
to 31 December 2020, we have not assessed this as one of the most significant
risks in our current year audit and, therefore, it is not separately
identified in our report this year.
Diagram removed for the purposes of this announcement. However it can be
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3. Our application of materiality and an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set at £25m
(2019: £31m), determined as 5% of our estimate of Group profit before tax
made at the planning stage, normalised for our expectation of the level of
adjusting items including impairment, restructuring costs and the profits
arising on disposal of associate or past associate shareholdings. This equates
to 2.7% (2019: 4.4%) of reported Group profit normalised on a consistent basis
and to 2.9% (2019: 12.7%) of Group IFRS profit before tax from continuing
operations of £853m (2019: £243m).
Materiality of £8.8m (2019: £19m), as communicated by the Group audit team,
has been applied to the audit of the parent Company. This is lower than the
materiality we would otherwise have determined by reference to total assets,
and represents 0.1% of the Company's total assets (2019: 1.08% of normalised
profit before tax). We changed the benchmark to total assets as we consider it
to be the most appropriate benchmark for the Company in its capacity as the
Group holding company.
In line with our audit methodology, our procedures on individual account
balances and disclosures were performed to a lower threshold, performance
materiality, so as to reduce to an acceptable level the risk that individually
immaterial misstatements in individual account balances add up to a material
amount across the financial statements as a whole.
Performance materiality for the Group and parent Company was set at 75% (2019:
75%) of materiality for the financial statements as a whole, which equates to
£18.75m (2019: £23.25m) for the Group and £6.6m (2019: £14.3m) for the
parent Company.
We applied this percentage in our determination of performance materiality
because we did not identify any factors indicating an elevated level of risk.
We agreed to report to the Audit Committee any corrected or uncorrected
identified misstatements exceeding £1.25m (2019: £1.6m), in addition to
other identified misstatements that warranted reporting on qualitative
grounds.
During the year the Group changed its consolidation process with a
consequential increase in the number of reporting components identified. Of
the Group's 295 (2019: 28) reporting components, we subjected 15 (2019: 8) to
full scope audits for Group purposes and none (2019: 2) to specified
risk-focused audit procedures. In the year to 31 December 2019, the latter
were not individually financially significant enough to require a full scope
audit for Group purposes, but did present specific individual risks that
needed to be addressed.
As a result of the previous and ongoing structural changes in the Group, we
considered it appropriate to change those benchmarks we use to determine the
scope of our work. The comparatives presented opposite represent the coverage
obtained on the new benchmarks under the previous consolidation process
The components within the scope of our work accounted for the percentages
illustrated opposite. The remaining 27% (2019: 2%) of total Group fee income,
10% (2019: 3%) of the total profits and losses that made up Group profit
before tax and 23% (2019: 2%) of net Group assets is represented by 280 (2019:
18) reporting components, none of which individually represented more than 5%
of any of total Group fee income, Group profit before tax or of net Group
assets.
For those items excluded from Group fee income, the component teams performed
procedures on items relating to their components. The Group team performed
procedures on the remaining excluded items.
For these residual components, we performed analysis at an aggregated Group
level to re-examine our assessment that there were no significant risks of
material misstatement within these.
The Group team instructed component auditors as to the significant areas to be
covered, including the relevant risks detailed above and the information to be
reported back. The Group team approved the component materialities, which
ranged from £1.25m to £18.2m (2019: £3.1m to £26m), having regard to the
mix of size and risk profile of the Group across the components.
The work on 5 of the 15 components (2019: 8 of the 10 components) was
performed by component auditors and the rest, including the audit of the
parent Company, was performed by the Group team.
The Group team had planned to visit component locations in the United States,
Luxembourg and the UK. However, all but one of these visits were prevented by
movement restrictions relating to the COVID-19 pandemic. Instead video
conferences were held to discuss the audit risk and strategy and the component
audit findings reported to the Group team. The Group team visited 1 (2019: 6)
component location in the UK (2019: UK and Singapore), to assess the audit
risk and strategy and the findings reported to the Group team were discussed
in more detail. Video and telephone conference meetings were also held with
this component auditor. Any further work required by the Group team was then
performed by the component auditor.
4. Going concern
The Directors have prepared the financial statements on the going concern
basis as they do not intend to liquidate the Group or the Company or to cease
their operations, and as they have concluded that the Group's and the
Company's financial position means that this is realistic. They have also
concluded that there are no material uncertainties that could have cast
significant doubt over their ability to continue as a going concern for at
least a year from the date of approval of the financial statements (the going
concern period).
We used our knowledge of the Group, its industry and operating model, and the
general economic environment to identify the inherent risks to its business
model and analysed how those risks might affect the Group's financial
resources or ability to continue operations over the going concern period. The
risk that we considered most likely to adversely affect the Group's available
financial resources over this period was market volatility, including any
associated with COVID-19.
We considered whether these risks could plausibly affect the liquidity in the
going concern period by assessing the degree of downside assumptions that,
individually and collectively, could result in a liquidity issue, taking into
account the Group's current and projected cash and facilities (a reverse
stress test).
We critically assessed the assumptions in the base case and downside scenarios
in particular in relation to market volatility assumptions by comparing to
published growth and economic forecasts and overlaying our knowledge of the
entity's plans, based on approved budgets, and of the sector in which it
operates.
We considered whether the going concern disclosure in note (a) (v) to the
financial statements gives a full and accurate description of the Directors'
assessment of going concern.
Our conclusions based on this work:
· We consider that the directors' use of the going concern basis of
accounting in the preparation of the financial statements is appropriate
· We have not identified, and concur with the directors' assessment that
there is not, a material uncertainty related to events or conditions that,
individually or collectively, may cast significant doubt on the Group's or
Company's ability to continue as a going concern for the going concern period
· We have nothing material to add or draw attention to in relation to the
directors' statement in Note (a) (v) to the financial statements on the use of
the going concern basis of accounting with no material uncertainties that may
cast significant doubt over the Group and Company's use of that basis for the
going concern period, and we found the going concern disclosure in Note (a)
(v) to be acceptable
· The related statement under the Listing Rules set out on page 102 is
materially consistent with the financial statements and our audit knowledge
However, as we cannot predict all future events or conditions and as
subsequent events may result in outcomes that are inconsistent with judgements
that were reasonable at the time they were made, the above conclusions are not
a guarantee that the Group or the Company will continue in operation.
5. Fraud and breaches of laws and regulations - ability to detect
Identifying and responding to risks of material misstatement due to fraud
To identify risks of material misstatement due to fraud (fraud risks) we
assessed events or conditions that could indicate an incentive or pressure to
commit fraud or provide an opportunity to commit fraud. Our risk assessment
procedures included:
· Enquiring of directors, the Group Audit Committee, Group Internal Audit
and the Group's Legal team and inspection of policy documentation as to the
Group's high-level policies and procedures to prevent and detect fraud,
including the internal audit function, and the Group's channel for
'whistleblowing', as well as whether they have knowledge of any actual,
suspected or alleged fraud
· Reading Board minutes and attending Group Audit Committee and Risk and
Compliance Committee meetings
· Considering the findings of Group Internal Audit's reviews in the period
· Considering remuneration incentive schemes and performance targets for
management and directors
We communicated identified fraud risks throughout the audit team and remained
alert to any indications of fraud throughout the audit. This included
communication from the Group to full scope component audit teams of relevant
fraud risks identified at the Group level and request to full scope component
audit teams to report to the Group audit team any instances of fraud that
could give rise to a material misstatement at Group.
As required by auditing standards, and taking into account possible pressures
to meet profit targets and our overall knowledge of the control environment,
we perform procedures to address the risk of management override of controls,
in particular the risk that Group and component management may be in a
position to make inappropriate accounting entries and the risk of bias in
accounting estimates and judgements such as impairment and pension
assumptions. We requested component audit teams to report to the Group audit
team any instances of fraud that could give rise to a material misstatement at
Group.
On this audit we do not believe there is a fraud risk related to revenue
recognition, given the relative simplicity of the most significant revenue
streams and the separation of duties between management and third party
service providers.
We did not identify any additional fraud risks other than those professional
standards require us to consider.
We performed procedures including:
· Identifying journal entries and other adjustments to test for all full
scope components based on risk criteria and comparing the identified entries
to supporting documentation. These included those posted by senior finance
management and those posted to unusual accounts, as well as those which
comprised unexpected posting combinations.
· Assessing significant accounting estimates for bias.
Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations
We identified areas of laws and regulations that could reasonably be expected
to have a material effect on the financial statements from our general
commercial and sector experience, through discussion with the directors and
other management (as required by auditing standards), and from inspection of
the Group's regulatory and legal correspondence and discussed with the
directors and other management the policies and procedures regarding
compliance with laws and regulations.
As the Group is regulated, our assessment of risks involved gaining an
understanding of the control environment including the entity's procedures for
complying with regulatory requirements, how they analyse identified breaches
and assessing whether there were any implications of identified breaches on
our audit.
We communicated identified laws and regulations throughout our team and
remained alert to any indications of non-compliance throughout the audit. This
included communication from the Group to component audit teams of relevant
laws and regulations identified at the Group level, and a request for
component auditors to report to the Group team any instances of non-compliance
with laws and regulations that could give rise to a material misstatement at
Group.
The potential effect of these laws and regulations on the financial statements
varies considerably.
Firstly, the Group is subject to laws and regulations that directly affect the
financial statements including financial reporting legislation (including
related companies legislation), distributable profits legislation, taxation
legislation and pension's regulations and we assessed the extent of compliance
with these laws and regulations as part of our procedures on the related
financial statement items.
Secondly, the Group is subject to many other laws and regulations where the
consequences of non-compliance could have a material effect on amounts or
disclosures in the financial statements, for instance through the imposition
of fines or litigation. We identified the following areas as those most likely
to have such an effect: specific areas of regulatory capital and liquidity,
conduct including Client Assets, money laundering, market abuse regulations
and certain aspects of company legislation recognising the financial and
regulated nature of the Group's activities and its legal form.
Auditing standards limit the required audit procedures to identify
non-compliance with these laws and regulations to enquiry of the directors and
other management and inspection of regulatory and legal correspondence, if
any. Therefore if a breach of operational regulations is not disclosed to us
or evident from relevant correspondence, an audit will not detect that breach.
We have assessed the disclosure of provisions in Note 37 and contingent
liabilities in Note 42 in light of our understanding gained through the
procedures above, and consider that these are appropriate.
We discussed with the audit committee matters related to actual or suspected
breaches of laws or regulations, for which disclosure is not necessary, and
considered any implications for our audit.
Context of the ability of the audit to detect fraud or breaches of law or regulation
Owing to the inherent limitations of an audit, there is an unavoidable risk
that we may not have detected some material misstatements in the financial
statements, even though we have properly planned and performed our audit in
accordance with auditing standards. For example, the further removed
non-compliance with laws and regulations is from the events and transactions
reflected in the financial statements, the less likely the inherently limited
procedures required by auditing standards would identify it.
In addition, as with any audit, there remained a higher risk of non-detection
of fraud, as these may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal controls. Our audit procedures
are designed to detect material misstatement. We are not responsible for
preventing non-compliance or fraud and cannot be expected to detect
non-compliance with all laws and regulations.
6. We have nothing to report on the other information in the Annual report and Accounts
The directors are responsible for the other information presented in the
Annual report together with the financial statements. Our opinion on the
financial statements does not cover the other information and, accordingly, we
do not express an audit opinion or, except as explicitly stated below, any
form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider
whether, based on our financial statements audit work, the information therein
is materially misstated or inconsistent with the financial statements or our
audit knowledge. Based solely on that work we have not identified material
misstatements in the other information.
Strategic report and Directors' report
Based solely on our work on the other information:
· We have not identified material misstatements in the Strategic report and
the Directors' report
· In our opinion the information given in those reports for the financial
year is consistent with the financial statements
· In our opinion those reports have been prepared in accordance with the
Companies Act 2006
Directors' remuneration report
In our opinion the part of the Directors' Remuneration Report to be audited
has been properly prepared in accordance with the Companies Act 2006.
Disclosures of emerging and principal risks and longer-term viability
We are required to perform procedures to identify whether there is a material
inconsistency between the directors' disclosures in respect of emerging and
principal risks and the viability statement, and the financial statements and
our audit knowledge.
Based on those procedures, we have nothing material to add or draw attention
to in relation to:
· The Directors' confirmation within the Viability Statement and Risk
Management report that they have carried out a robust assessment of the
emerging and principal risks facing the Group, including those that would
threaten its business model, future performance, solvency and liquidity
· The Principal Risks disclosures describing these risks and how emerging
risks are identified, and explaining how they are being managed and mitigated
· The Directors' explanation in the Viability Statement of how they have
assessed the prospects of the Group, over what period they have done so and
why they considered that period to be appropriate, and their statement as to
whether they have a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions
We are also required to review the Viability Statement, set out on page 37
under the Listing Rules. Based on the above procedures, we have concluded that
the above disclosures are materially consistent with the financial statements
and our audit knowledge.
Our work is limited to assessing these matters in the context of only the
knowledge acquired during our financial statements audit. As we cannot predict
all future events or conditions and as subsequent events may result in
outcomes that are inconsistent with judgements that were reasonable at the
time they were made, the absence of anything to report on these statements is
not a guarantee as to the Group's and Company's longer-term viability.
Corporate governance disclosures
We are required to perform procedures to identify whether there is a material
inconsistency between the directors' corporate governance disclosures and the
financial statements and our audit knowledge.
Based on those procedures, we have concluded that each of the following is
materially consistent with the financial statements and our audit knowledge:
· The directors' statement that they consider that the Annual report and
financial statements taken as a whole is fair, balanced and understandable,
and provides the information necessary for shareholders to assess the Group's
position and performance, business model and strategy
· The section of the Annual report describing the work of the Audit
Committee, including the significant issues that the Audit Committee
considered in relation to the financial statements, and how these issues were
addressed
· The section of the Annual report that describes the review of the
effectiveness of the Group's risk management and internal control systems
We are required to review the part of Corporate Governance Statement relating
to the Group's compliance with the provisions of the UK Corporate Governance
Code specified by the Listing Rules for our review.
We have nothing to report in this respect.
7. We have nothing to report on the other matters on which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if, in our
opinion:
· Adequate accounting records have not been kept by the parent Company, or
returns adequate for our audit have not been received from branches not
visited by us
· The parent Company financial statements and the part of the Directors'
Remuneration Report to be audited are not in agreement with the accounting
records and returns
· Certain disclosures of directors' remuneration specified by law are not
made
· We have not received all the information and explanations we require for
our audit
We have nothing to report in these respects.
8. Respective responsibilities
Directors' responsibilities
As explained more fully in their statement set out on page 103, the directors
are responsible for: the preparation of the financial statements including
being satisfied that they give a true and fair view; such internal control as
they determine is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud or error;
assessing the Group and parent Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and
using the going concern basis of accounting unless they either intend to
liquidate the Group or the parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor's responsibilities
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue our opinion in an auditor's report. Reasonable
assurance is a high level of assurance, but does not guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC's website
at www.frc.org.uk/auditorsresponsibilities
(http://www.frc.org.uk/auditorsresponsibilities)
9. The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company's members, as a body, in accordance
with Chapter 3 of Part 16 of the Companies Act 2006 and the terms of our
engagement by the Company. Our audit work has been undertaken so that we might
state to the Company's members those matters we are required to state to them
in an auditor's report, and the further matters we are required to state to
them in accordance with the terms agreed with the Company , and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's members, as
a body, for our audit work, for this report, or for the opinions we have
formed.
Jonathan Mills (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
Saltire Court
20 Castle Terrace
Edinburgh
EH1 2EG
9 March 2021
7. Group financial statements
Consolidated income statement
For the year ended 31 December 2020
2020 2019
Notes £m £m
Income
Investment return 3 163 464
Revenue from contracts with customers 4 1,527 1,743
Insurance contract premium income 31 31 66
Profit on disposal of interests in associates 1 1,858 1,542
Other income 5 30 178
Total income from continuing operations 3,609 3,993
Expenses
Insurance contract claims and change in liabilities 31 17 156
Change in non-participating investment contract liabilities 25 56 265
Administrative expenses
Restructuring and corporate transaction expenses 9 297 374
Impairment of goodwill - asset management 15 915 1,569
Other administrative expenses 6 1,608 1,651
Total administrative expenses 2,820 3,594
Change in liability for third party interest in consolidated funds (3) 21
Finance costs 30 36
Total expenses from continuing operations 2,920 4,072
Share of profit from associates and joint ventures 16 194 79
(Loss on)/reversal of impairment of interests in associates and joint ventures 16 (45) 243
Profit before tax from continuing operations 838 243
Tax (credit)/expense attributable to continuing operations 10 (15) 28
Profit for the year from continuing operations 853 215
(Loss)/profit for the year from discontinued operations 11 (15) 56
Profit for the year 838 271
Attributable to:
Equity shareholders of Standard Life Aberdeen plc
From continuing operations 848 210
From discontinued operations (15) 56
Equity shareholders of Standard Life Aberdeen plc 833 266
Non-controlling interests
From continuing operations - preference shares 30 5 5
838 271
Earnings per share from continuing operations
Basic (pence per share) 12 38.5 8.9
Diluted (pence per share) 12 37.9 8.8
Earnings per share
Basic (pence per share) 12 37.8 11.2
Diluted (pence per share) 12 37.2 11.1
The Notes on pages 123 to 210 are an integral part of these consolidated
financial statements.
Consolidated statement of comprehensive income
For the year ended 31 December 2020
2020 2019
Notes £m £m
Profit for the year 838 271
Less: loss/(profit) from discontinued operations 11 15 (56)
Profit from continuing operations 853 215
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gains/(losses) on defined benefit pension plans 34 280 (23)
Share of other comprehensive income of associates and joint ventures 16 (13) (17)
Equity holder tax effect of items that will not be reclassified subsequently 10 2 -
to profit or loss
Total items that will not be reclassified subsequently to profit or loss 269 (40)
Items that may be reclassified subsequently to profit or loss:
Fair value losses on cash flow hedges 20 (3) (10)
Exchange differences on translating foreign operations (8) (46)
Share of other comprehensive income of associates and joint ventures 16 13 7
Items transferred to the consolidated income statement
Fair value losses on cash flow hedges 20 13 22
Realised foreign exchange losses 1 6 -
Equity holder tax effect of items that may be reclassified subsequently to 10 (2) (2)
profit or loss
Total items that may be reclassified subsequently to profit or loss 19 (29)
Other comprehensive income for the year from continuing operations 288 (69)
Total comprehensive income for the year from continuing operations 1,141 146
(Loss)/profit from discontinued operations 11 (15) 56
Other comprehensive income from discontinued operations 11 - -
Total comprehensive income for the year from discontinued operations (15) 56
Total comprehensive income for the year 1,126 202
Attributable to:
Equity shareholders of Standard Life Aberdeen plc
From continuing operations 1,136 141
From discontinued operations (15) 56
Non-controlling interests
From continuing operations -- preference shares 5 5
1,126 202
The Notes on pages 123 to 210 are an integral part of these consolidated
financial statements.
Reconciliation of consolidated adjusted profit before tax to IFRS profit for
the year
For the year ended 31 December 2020
2020 2019
Continuing operations Discontinued operations Total Continuing operations Discontinued operations Total
Notes £m £m £m £m £m £m
Adjusted profit before tax
Asset management, platforms and wealth 284 - 284 395 - 395
Insurance associates and joint ventures 203 - 203 189 - 189
Adjusted profit before tax 2 487 - 487 584 - 584
Adjusted for the following items
Restructuring and corporate transaction expenses 9 (355) - (355) (407) - (407)
Amortisation and impairment of intangible assets acquired in business 2 (1,287) - (1,287) (1,844) - (1,844)
combinations and through the purchase of customer contracts
Profit on disposal of interests in associates 1 1,858 - 1,858 1,542 - 1,542
(Loss on)/reversal of impairment of interests in associates and joint ventures 16 (45) - (45) 243 - 243
Change in fair value of significant listed investments 13 65 - 65 - - -
Investment return variances and economic assumption changes 13 46 - 46 (25) - (25)
Other(1) 13 86 (15) 71 158 56 214
Total adjusting items 2 368 (15) 353 (333) 56 (277)
Share of associates' and joint ventures' tax credit/(expense) (17) - (17) (8) - (8)
2
Profit/(loss) before tax expense 838 (15) 823 243 56 299
Tax credit/(expense) attributable to
Adjusted profit 2 (38) - (38) (69) - (69)
Adjusting items 2 53 - 53 41 - 41
Total tax credit/(expense) 15 - 15 (28) - (28)
Profit/(loss) for the year 853 (15) 838 215 56 271
(1 ) The Other adjusting item in 2020 relating to continuing operations
includes £66m relating to our share of Phoenix gains relating to the
acquisition of ReAssure and the completion of the Part VII transfer of the
Legal and General mature savings business. The Other adjusting item in 2019
relating to continuing operations includes £140m received in relation to the
settlement of arbitration with Lloyds Banking Group/ Scottish Widows (LBG),
refer Note 5.
The Group's key alternative performance measure is adjusted profit before tax.
Refer Note 13 for further details.
The Notes on pages 123 to 210 are an integral part of these consolidated
financial statements.
Consolidated statement of financial position
As at 31 December 2020
2020 2019
Notes £m £m
Assets
Intangible assets 15 501 1,707
Pension and other post-retirement benefit assets 34 1,474 1,163
Investments in associates and joint ventures accounted for using the equity 16 1,371 1,509
method
Property, plant and equipment 17 236 266
Deferred tax assets 10 131 74
Financial investments 19 3,110 2,115
Receivables and other financial assets 19 621 560
Current tax recoverable 10 9 9
Other assets 22 46 55
Assets held for sale 23 19 767
Cash and cash equivalents 19 1,519 1,615
9,037 9,840
Assets backing unit linked liabilities (excluding held for sale) 25
Financial investments 1,395 1,528
Receivables and other unit linked assets 8 10
Cash and cash equivalents 38 44
1,441 1,582
Total assets 10,478 11,422
The Notes on pages 123 to 210 are an integral part of these consolidated
financial statements.
2020 2019
Notes £m £m
Liabilities
Third party interest in consolidated funds 32 77 119
Subordinated liabilities 32 638 655
Pension and other post-retirement benefit provisions 34 55 55
Deferred income 35 73 67
Deferred tax liabilities 10 66 87
Current tax liabilities 10 15 19
Derivative financial liabilities 20 13 3
Other financial liabilities 32 1,177 1,315
Provisions 37 93 102
Other liabilities 37 6 5
Liabilities of operations held for sale 23 11 747
2,224 3,174
Unit linked liabilities (excluding held for sale) 25
Investment contract liabilities 1,042 1,152
Third party interest in consolidated funds 388 416
Other unit linked liabilities 11 14
1,441 1,582
Total liabilities 3,665 4,756
Equity
Share capital 26 306 327
Shares held by trusts 27 (170) (134)
Share premium reserve 26 640 640
Retained earnings 28 4,970 2,886
Other reserves 29 1,064 2,845
Equity attributable to equity shareholders of Standard Life Aberdeen plc 6,810 6,564
Non-controlling interests
Ordinary shares 30 3 3
Preference shares 30 - 99
Total equity 6,813 6,666
Total equity and liabilities 10,478 11,422
The Notes on pages 123 to 210 are an integral part of these consolidated
financial statements.
The consolidated financial statements on pages 115 to 210 were approved by the
Board and signed on its behalf by the following Directors:
Sir Douglas Flint Stephanie Bruce
Chairman Chief Financial Officer
9 March 2021 9 March 2021
Consolidated statement of changes in equity
For the year ended 31 December 2020
Non-controlling interests
Share capital Shares held by trusts Share premium reserve Retained earnings Other reserves Total equity attributable Ordinary shares Preference shares Total equity
to equity shareholders of Standard Life Aberdeen plc
Notes £m £m £m £m £m £m £m £m £m
1 January 2020 327 (134) 640 2,886 2,845 6,564 3 99 6,666
Profit for the year from continuing operations - - - 848 - 848 - 5 853
Loss for the year from discontinued operations - - - (15) - (15) - - (15)
Other comprehensive income for the year from continuing operations - - - 282 6 288 - - 288
Other comprehensive income for the year from discontinued operations - - - - - - - - -
Total comprehensive income for the year 28,29 - - - 1,115 6 1,121 - 5 1,126
Issue of share capital 26 - - - - - - - - -
Dividends paid on ordinary shares 14 - - - (479) - (479) - - (479)
Dividends paid on preference shares 30,33 - - - - - - - (3) (3)
Reclassification of preference shares to liability 30,33 - - - (1) - (1) - (101) (102)
Share buyback 26 (21) - - (402) 21 (402) - - (402)
Reserves credit for employee share-based payments 29 - - - - 64 64 - - 64
Transfer to retained earnings for vested employee share-based payments 28,29 - - - 38 (38) - - - -
Transfer between reserves on impairment of subsidiaries 28,29 - - - 1,834 (1,834) - - - -
Shares acquired by employee trusts - (54) - - - (54) - - (54)
Shares distributed by employee and other trusts and related dividend 28 - 18 - (21) - (3) - - (3)
equivalents
31 December 2020 306 (170) 640 4,970 1,064 6,810 3 - 6,813
Non-controlling interests
Share capital Shares held by trusts Share premium reserve Retained earnings Other reserves Total equity attributable Ordinary shares Preference shares Total equity
to equity shareholders of Standard Life Aberdeen plc
Notes £m £m £m £m £m £m £m £m £m
31 December 2018 353 (115) 640 2,778 3,782 7,438 2 99 7,539
Effect of change in accounting policy to IFRS 9(1) - - - (5) (7) (12) - - (12)
Effect of change in accounting policy to IFRS 16(1) - - - (12) - (12) - - (12)
1 January 2019 353 (115) 640 2,761 3,775 7,414 2 99 7,515
Profit for the year from continuing operations - - - 210 - 210 - 5 215
Profit for the year from discontinued operations - - - 56 - 56 - - 56
Other comprehensive income for the year from continuing operations - - - (33) (36) (69) - - (69)
Other comprehensive income for the year from discontinued operations - - - - - - - - -
Total comprehensive income for the year 28,29 - - - 233 (36) 197 - 5 202
Issue of share capital 26 - - - - - - - - -
Dividends paid on ordinary shares 14 - - - (518) - (518) - - (518)
Dividends paid on preference shares - - - - - - - (5) (5)
Share buyback 26 (26) - - (390) (100) (516) - - (516)
Other movements in non-controlling interests in the year - - - - - - 1 - 1
Reserves credit for employee share-based payments 29 - - - - 43 43 - - 43
Transfer to retained earnings for vested employee share-based payments 28,29 - - - 57 (57) - - - -
Transfer between reserves on impairment of subsidiaries 28,29 - - - 780 (780) - - - -
Shares acquired by employee trusts - (50) - - - (50) - - (50)
Shares distributed by employee and other trusts and related dividend 28 - 31 - (38) - (7) - - (7)
equivalents
Transfer from the Standard Life Unclaimed Asset Trust - - - 1 - 1 - - 1
31 December 2019 327 (134) 640 2,886 2,845 6,564 3 99 6,666
(1 ) The Group has initially applied IFRS 9 and IFRS 16 at 1 January
2019. Under the transition methods chosen, comparative information is not
restated and the cumulative effect of initially applying these standards is
recognised in retained earnings at the date of initial application.
The Notes on pages 123 to 210 are an integral part of these consolidated
financial statements.
Consolidated statement of cash flows
For the year ended 31 December 2020
2020 2019
Notes £m £m
Cash flows from operating activities
Profit before tax from continuing operations 838 243
(Loss)/profit before tax from discontinued operations 11 (15) 56
823 299
Change in operating assets 41 817 158
Change in operating liabilities 41 (991) (291)
Adjustment for non-cash movements in investment income 6 4
Other non-cash and non-operating items 41 (646) (28)
Dividends received from associates and joint ventures 16 80 93
Taxation paid(1) (33) (34)
Net cash flows from operating activities 56 201
Cash flows from investing activities
Purchase of property, plant and equipment 17 (13) (28)
Proceeds from sale of property, plant and equipment - 2
Acquisition of subsidiaries and unincorporated businesses net of cash acquired - (40)
Disposal of subsidiaries net of cash disposed of 41 (8) -
Acquisition of investments in associates and joint ventures 16 (5) (51)
Proceeds in relation to contingent consideration 40 3 63
Payments in relation to contingent consideration 40 (48) (18)
Disposal of investments in associates and joint ventures 1 914 1,720
Taxation paid on disposal of investments in associates and joint ventures(1) (33) (22)
Purchase of financial investments (521) (590)
Proceeds from sale or redemption of financial investments 737 800
Purchase of intangible assets (12) (15)
Net cash flows from investing activities 1,014 1,821
Cash flows from financing activities
Repayment of subordinated liabilities and preference shares (100) (455)
Payment of lease liabilities (35) (32)
Shares acquired by trusts (54) (50)
Interest paid (30) (39)
Share buyback 26 (361) (516)
Preference dividends paid (5) (5)
Ordinary dividends paid 14 (479) (518)
Net cash flows from financing activities (1,064) (1,615)
Net (decrease)/increase in cash and cash equivalents 6 407
Cash and cash equivalents at the beginning of the year 1,347 957
Effects of exchange rate changes on cash and cash equivalents 5 (17)
Cash and cash equivalents at the end of the year 24 1,358 1,347
Supplemental disclosures on cash flows from operating activities
Interest paid 2 5
Interest received 30 34
Dividends received 122 143
Rental income received on investment property 3 3
(1 ) Total taxation paid was £66m in 2020 (2019: £56m).
The Notes on pages 123 to 210 are an integral part of these consolidated
financial statements.
Presentation of consolidated financial statements
The Group's significant accounting policies are included at the beginning of
the relevant notes to the consolidated financial statements. This section sets
out the basis of preparation, a summary of the Group's critical accounting
estimates and judgements in applying accounting policies, and other
significant accounting policies which have been applied to the financial
statements as a whole.
(a) Basis of preparation
These consolidated financial statements have been prepared in accordance with
international accounting standards in conformity with the requirements of the
Companies Act 2006 and in accordance with international financial reporting
standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in
the European Union. The consolidated financial statements have been prepared
on a going concern basis and under the historical cost convention, as modified
by the revaluation of owner occupied property, derivative instruments and
other financial assets and financial liabilities at fair value through profit
or loss (FVTPL).
The principal accounting policies set out in these consolidated financial
statements have been consistently applied to all financial reporting periods
presented except as described below.
(a)(i) New standards, interpretations and amendments to existing standards that have been adopted by the Group
The Group has adopted the following new International Financial Reporting
Standards (IFRSs), interpretations and amendments to existing standards, which
are effective by EU endorsement for annual periods beginning on or after 1
January 2020.
Amendments to existing standards
· Amendments to IFRS 3 Definition of a business
· Amendments to IFRS 9, IAS 39 and IFRS 7 Interest rate benchmark reform
· Amendments to IAS 1 and IAS 8 Definition of material
The Group's accounting policies have been updated to reflect these amendments.
Management considers the implementation of the above amendments to existing
standards has had no significant impact on the Group's financial statements.
(a)(ii) Standards, interpretations and amendments to existing standards that are not yet effective and have not been early adopted by the Group
Certain new standards, interpretations and amendments to existing standards
have been published that are mandatory for the Group's annual accounting
periods beginning after 1 January 2020. The Group has not early adopted the
standards, amendments and interpretations described below:
IFRS 17 Insurance Contracts (effective for annual periods beginning on or
after 1 January 2023)
IFRS 17 was issued in May 2017 and will replace IFRS 4 Insurance Contracts.
IFRS 4 is an interim standard which permits the continued application of
accounting policies, for insurance contracts and contracts with discretionary
participation features, which were being used at transition to IFRS except
where a change satisfies criteria set out in IFRS 4. IFRS 17 introduces new
required measurement and presentation accounting policies for such contracts
which reflect the view that these contracts combine features of a financial
instrument and a service contract.
IFRS 17's measurement model, which applies to groups of contracts, combines a
risk-adjusted present value of future cash flows and an amount representing
unearned profit. On transition retrospective application is required unless
impracticable, in which case either a modified retrospective approach or a
fair value approach is required. IFRS 17 introduces a new approach to
presentation in the income statement and statement of comprehensive income.
The Group has no direct exposure to insurance contracts and contracts with
discretionary participating features which will be impacted by the adoption of
IFRS 17. However, the results of the Group's insurance associate, Phoenix and
the Group's joint venture HASL, are expected to be significantly impacted by
IFRS 17. The standard has not yet been endorsed by the EU nor by the UK
Endorsement Board.
Other
There are no other new standards, interpretations and amendments to existing
standards that have been published that are expected to have a significant
impact on the consolidated financial statements of the Group.
(a)(iii) Critical accounting estimates and judgements in applying accounting policies
The preparation of financial statements requires management to exercise
judgements in applying accounting policies and make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses arising
during the year. Judgements and sources of estimation uncertainty are
continually evaluated and based on historical experience and other factors,
including expectations of future events that are believed to be reasonable
under the circumstances.
The areas where judgements have the most significant effect on the amounts
recognised in the consolidated financial statements are as follows:
Financial statement area Critical judgements in applying accounting policies Related note
Defined benefit pension plans Assessment of whether the Group has an unconditional right to a refund of the Note 34
surplus
Treatment of tax relating to the surplus
Investments in associates Determining whether the investments in Phoenix and HDFC Life should continue Note 16
to be classified as associates
Identification, valuation and determination of useful lives for equity
accounting purposes, of the Group's share of its associate's intangible assets
at the date of acquisition of an investment in the associate
Intangible assets Identification and valuation of intangible assets arising from business Note 15
combinations and the determination of useful lives
Provisions Determining whether a provision is required for separation costs Note 37
Determining the group of cash-generating units to which goodwill acquired in a
business combination should be allocated is no longer considered a critical
judgement in applying accounting policies following the impairment of goodwill
in 2020. Additionally, our judgement relating to the classification of Phoenix
and HDFC Life as associates has considered the reductions in these
shareholdings during the year ended 31 December 2020. There are no other
changes to critical judgements in applying accounting policies from the prior
year.
The areas where assumptions and other sources of estimation uncertainty at the
end of the reporting period have a significant risk of resulting in a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are as follows:
Financial statement area Critical accounting estimates and assumptions Related note
Defined benefit pension plans Determination of principal UK pension plan assumptions for mortality, discount Note 34
rate and inflation
Intangible assets Determination of the recoverable amount in relation to impairment assessment Note 15
of the segregated and similar customer relationship intangible asset
Investments in associates Determination of the recoverable amount in relation to the impairment Note 16
assessment of investments in associates
The following changes have been made to the Group's critical estimates and
assumptions:
· As a result of market and revenue movements, the determination of the
recoverable amount in relation to the impairment assessment of the segregated
and similar customer relationship intangible asset is now considered a
critical estimate
· The Group's asset management goodwill was fully impaired at 30 June 2020.
While there was significant judgement relating to the recoverable amount at 30
June (refer Note 15), this is no longer a source of estimation uncertainty at
the end of the reporting period.
· The determination of the fair value of contingent consideration assets
and liabilities relating to the sale of the UK and European insurance business
to Phoenix is no longer considered to be a critical area of estimation
uncertainty following the settlement of certain indemnities
All other critical accounting estimates and assumptions are the same as the
prior year.
Further detail on critical accounting estimates and assumptions is provided in
the relevant note.
(a)(iv) Foreign currency translation
The consolidated financial statements are presented in million pounds
Sterling.
The statements of financial position of Group entities, including associates
and joint ventures accounted for using the equity method, that have a
different functional currency than the Group's presentation currency are
translated into the presentation currency at the year end exchange rate and
their income statements and cash flows are translated at average exchange
rates for the year. All resulting exchange differences arising are recognised
in other comprehensive income and the foreign currency translation reserve in
equity. On disposal of a Group entity the cumulative amount of any such
exchange differences recognised in other comprehensive income is reclassified
to profit or loss.
Foreign currency transactions are translated into the functional currency at
the exchange rate prevailing at the date of the transaction. Gains and losses
arising from such transactions and from the translation at year end exchange
rates of monetary assets and liabilities denominated in foreign currencies are
recognised in the relevant line in the consolidated income statement.
Translation differences on non-monetary items, such as equity securities held
at fair value through profit or loss, are reported as part of the fair value
gain or loss within investment return in the consolidated income statement.
Translation differences on financial assets and liabilities held at amortised
cost are included in the relevant line in the consolidated income statement.
The income statements and cash flows, and statements of financial position of
Group entities that have a different functional currency from the Group's
presentation currency have been translated using the following principal
exchange rates:
2020 2019
Income statement and cash flows (average rate) Statement of financial position (closing rate) Income statement and cash flows (average rate) Statement of financial position (closing rate)
Euro 1.127 1.117 1.142 1.180
US Dollar 1.292 1.367 1.280 1.325
Indian Rupee 95.602 99.880 90.106 94.563
Chinese Renminbi 8.905 8.940 8.830 9.228
Hong Kong Dollar 10.024 10.599 10.030 10.322
Singapore Dollar 1.778 1.807 1.745 1.781
(a)(v) Going concern
The Group's business activities, together with the factors likely to affect
its future development, performance and financial position, are set out in the
Strategic report. This includes details on our liquidity and capital
management and our viability statement in the Chief Financial Officer's
overview section and our principal risks in the Risk management section
including the impact of COVID-19 on these principal risks. In addition, these
financial statements includes notes on the Group's subordinated liabilities
(Note 33), management of its risks including market, credit and liquidity risk
(Note 38), its contingent liabilities and commitments (Notes 42 and 43), and
its capital structure and position (Note 46).
In preparing these financial statements on a going concern basis, the
Directors have considered the following matters and have taken into account
the uncertainty created by COVID-19.
· The fundamental basis of our business has not been impacted by COVID-19,
although fee based revenue has been reduced as a result of the fall in global
equity markets and the shift in client preferences to assets with lower fees.
We consider that COVID-19 will accelerate the key global trends already
underway in our industry and already factored into our strategy which are
discussed further in the Strategic report on pages 10 to 11, and that the
Group is well placed to manage its business risks successfully.
· The Group has robust cash and liquid resources of £2.5bn at 31 December
2020. In addition the Company has a revolving credit facility of £400m as
part of our contingency funding plans which is due to mature in 2024 and
remains undrawn.
· The Group's indicative regulatory capital surplus was £2.3bn in excess
of capital requirements at 31 December 2020. The regulatory capital surplus
does not include the majority of the value of the Group's listed associates or
the listed investment in HDFC Life which were £2.3bn and £1.2bn respectively
at 31 December 2020.
· The Group performs regular stress and scenario analysis as described in
the Annual report and accounts 2020 Viability statement. The market stresses
considered in these analyses are considerably more severe than experienced as
a result of COVID-19, and the diverse range of management actions available
meant the Group was able to withstand these extreme stresses.
· In addition, the Group has performed specific scenario analysis in the
period taking into account COVID-19 impacts on revenue, asset mix, flows and
listed associates. These scenarios assumed that key equity market indexes held
at the lowest levels witnessed during the COVID-19 outbreak, with only modest
growth during 2021. Liquidity and capital remained robust over the going
concern period in these scenarios.
· The Group's operational resilience processes have operated effectively
during the period including the provision of services by key outsource
providers. We have put in place additional processes to monitor key outsource
providers during this remote working environment.
Based on a review of the above factors the Directors are satisfied that the
Group and Company have and will maintain sufficient resources to enable them
to continue operating for at least 12 months from the date of approval of the
financial statements. Accordingly, the financial statements have been prepared
on a going concern basis. There were no material uncertainties relating to
this going concern conclusion.
(b) Basis of consolidation
The Group's financial statements consolidate the financial statements of the
Company and its subsidiaries.
Subsidiaries are all entities (including investment vehicles) over which the
Group has control. Control arises when the Group is exposed, or has rights, to
variable returns from its involvement with the entity and has the ability to
affect those returns through its power over the entity. For operating entities
this generally accompanies a shareholding of 50% or more in the entity. For
investment vehicles, including structured entities, the control assessment
also considers the removal rights of other investors and whether the Group
acts as principal or agent in assessing the link between power and variable
returns. In determining whether the Group acts as principal, and therefore
controls the entity, the removal rights of other investors and the magnitude
of the variability associated with the returns are also taken into account. As
a result, the Group often is considered to control investment vehicles in
which its shareholding is less than 50%.
Where the Group is considered to control an investment vehicle, such as an
open-ended investment company, a unit trust or a limited partnership, and it
is therefore consolidated, the interests of parties other than the Group are
assessed to determine whether they should be classified as liabilities or as
non-controlling interests. The liabilities are recognised in the third party
interest in consolidated funds line in the consolidated statement of financial
position and any movements are recognised in the consolidated income
statement. The financial liability is designated at fair value through profit
or loss (FVTPL) as it is implicitly managed on a fair value basis as its value
is directly linked to the market value of the underlying portfolio of assets.
The interests of parties other than the Group in all other types of entities
are recorded as non-controlling interests.
All intra-group transactions, balances, income and expenses are eliminated in
full.
The Group uses the acquisition method to account for acquisitions of
businesses. At the acquisition date the assets and liabilities of the business
acquired and any non-controlling interests are identified and initially
measured at fair value on the consolidated statement of financial position.
When the Group acquires or disposes of a subsidiary, the profits and losses of
the subsidiary are included from the date on which control was transferred to
the Group until the date on which it ceases, with consistent accounting
policies applied across all entities throughout.
When the Group sells a subsidiary to an associate, the gain on sale of the
subsidiary is recognised in full, with no elimination being made for the
continuing interest in the subsidiary.
Notes to the Group financial statements
1. Group structure
(a) Composition
The following diagram is an extract of the Group structure at 31 December 2020
and gives an overview of the composition of the Group.
Diagram removed for the purposes of this announcement. However it can be
viewed in full in the pdf document
A full list of the Company's subsidiaries is provided in Note 48.
(b) Acquisitions
(b)(i) Prior year acquisitions of subsidiaries
On 29 November 2019, 1825 Financial Planning and Advice Limited (a subsidiary
of 1825 Financial Planning Limited) purchased the wealth advisory business of
Grant Thornton UK LLP through a business acquisition agreement under which the
majority of the clients and employees of the wealth advisory business
transferred to 1825 Financial Planning and Advice Limited. 1825 Financial
Planning and Advice also purchased the wealth management business of BDO
Northern Ireland through a similar business acquisition agreement on 1 July
2019.
On 15 February 2019, Aberdeen Asset Management PLC (AAM PLC) completed the
purchase of the entire share capital of Orion Partners Holding Limited and
Orion Partner Services Inc.
(b)(ii) Prior year acquisitions of joint ventures
On 31 July 2019, as part of the Group's strategic joint venture with Virgin
Money, AAM PLC completed the acquisition of 50% (less one share) of Virgin
Money Unit Trust Managers Limited (VMUTM) for an upfront cash payment of £40m
plus 50% of the capital in the business and certain other costs.
(c) Disposals
(c)(i) Subsidiaries
Standard Life (Asia) Limited (SL Asia)
On 29 March 2017, the Group announced the proposed sale of its wholly owned
Hong Kong insurance business, SL Asia, to the Group's Chinese joint venture
business, Heng An Standard Life Insurance Company Limited (HASL). SL Asia is
reported in the Asset management, platforms and wealth segment and HASL is
reported within the Insurance associates and joint ventures segment. The sale
to HASL of the entire issued share capital of SL Asia was completed on 30 June
2020.
Total consideration received comprised cash of £19m and the Group recognised
a gain on disposal of £8m in respect of the sale within continuing operations
in the consolidated income statement for the year ended 31 December 2020. On
disposal a gain of £8m was recycled from the translation reserve and was
included in determining the gain on sale.
Prior to the completion of the sale, SL Asia was classified as an operation
held for sale (refer Note 23).
(c)(ii) Associates
Profit on disposals of interests in associates of £1,858m includes £1,591m
of gains in relation to the sale of equity shares in HDFC Life and its
reclassification from an investment in associate, £263m of gains in relation
to the sale of equity shares in HDFC Asset Management and a £4m dilution gain
in Phoenix.
HDFC Life Insurance Company Limited (HDFC Life)
During 2020, the Group completed sales of equity shares in HDFC Life on the
National Stock Exchange of India Limited and BSE Limited. The gains on sales
and the gain on reclassification from an associate to an equity investment can
be summarised as follows:
2020
£m
Gain on sale of 50,000,000 equity shares in HDFC Life sold through a Bulk Sale 206
on 27 March 2020
Gain on sale of 40,000,000 equity shares in HDFC Life sold through a Bulk Sale 182
on 4 June 2020
Gain on sale of 27,772,684 equity shares in HDFC Life sold through a Bulk Sale 152
on 3 December 2020
Gain on reclassification of remaining 179,539,209 equity shares in HDFC Life
from an associate to equity investment on 3 December 2020 (Refer Note 16)
1,051
Gains on disposals and reclassification of HDFC Life 1,591
In total, 5.83% of the issued equity share capital of HDFC Life was sold for a
combined total consideration net of taxes and expenses of Rs 58,561m (£616m).
The combined gain on sale of £540m was calculated using the weighted-average
cost method. On disposal a loss of £5m was recycled from the translation
reserve and was included in determining the gain on sale.
Following the 3 December 2020 sale, the Group's shareholding in HDFC Life was
179,539,209 equity shares or 8.89% and HDFC Life is no longer considered to be
an associate of the Group. The Group's investment in HDFC Life has been
reclassified from an investment in associates accounted for using the equity
method to equity securities measured at fair value. Refer Note16 for further
details of this reclassification. A reclassification gain of £1,051m is
included in the profit on disposal of interests in associates for the year
ended 31 December 2020 as the fair value on 3 December 2020 of £1,168m is
higher than the previous carrying value as an associate of £111m. On
reclassification a loss of £6m was recycled from the translation reserve and
was included in determining the gain.
HDFC Asset Management Company Limited (HDFC Asset Management)
During 2020, the Group completed the following sale of equity shares in HDFC
Asset Management on the National Stock Exchange of India Limited and BSE
Limited:
· 12,000,000 equity shares in HDFC Asset Management sold through an Offer
for Sale on 17 and 18 June 2020
Through the sale, 5.64% of the issued equity share capital of HDFC Asset
Management was sold for a total consideration net of taxes and expenses of Rs
25,404m (£265m). The gain on sale of £263m before tax was calculated using
the weighted-average cost method. On disposal a loss of £3m was recycled from
the translation reserve and was included in determining the gain on sale. The
Group's shareholding in HDFC Asset Management at 31 December 2020 is
45,228,305 equity shares or 21.24%.
Phoenix Group Holdings (Phoenix)
On 22 July 2020 the Group's associate, Phoenix, announced the completion of
its acquisition of ReAssure Group plc. Under the terms of the transaction,
Phoenix issued 277,277,138 new ordinary shares as part consideration for the
acquisition. Completion of the transaction resulted in the Group's holding in
Phoenix becoming 14.43% of the enlarged Phoenix Group (31 December 2020:
14.42%). A dilution gain of £4m was recognised within the Profit on disposal
of interests in associates in the consolidated income statement as a result of
the transaction.
(c)(iii) Prior year disposal of associates
HDFC Life
During 2019, the Group completed the following sales of equity shares in HDFC
Life on the National Stock Exchange of India Limited and BSE Limited:
· 92,181,992 equity shares in HDFC Life sold through an Offer for Sale on
12 and 13 March 2019
· 33,032,381 equity shares in HDFC Life sold through an Offer for Sale from
3 to 6 May 2019
· 67,100,000 equity shares in HDFC Life sold through a Bulk Sale on 14
August 2019
· 100,000,000 equity shares in HDFC Life sold through a Bulk Sale on 30
October 2019
In total, 14.49% of the issued equity share capital of HDFC Life was sold for
a combined consideration net of taxes and expenses of
Rs 135,994m (£1,503m). The combined gain on sale of £1,337m was calculated
using the weighted-average cost method.
HDFC Asset Management
During 2019, the Group completed the following sale of equity shares in HDFC
Asset Management on the National Stock Exchange of India Limited and BSE
Limited:
· 6,422,310 equity shares in HDFC Asset Management sold through an Offer
for Sale on 4 and 5 December 2019
Through the sale, 3.02% of the issued equity share capital of HDFC Asset
Management was sold for a total consideration net of taxes and expenses of Rs
18,279m (£195m). The gain on sale of £204m before tax was calculated using
the weighted-average cost method.
2. Segmental analysis
The Group's reportable segments have been identified in accordance with the
way in which the Group is structured and managed. IFRS 8 Operating Segments
requires that the information presented in the financial statements is based
on information provided to the 'Chief Operating Decision Maker' which for the
Group is the executive leadership team.
(a) Basis of segmentation
The Group's reportable segments for 2020 and 2019 were as follows:
Continuing operations:
Asset management, platforms and wealth
This segment primarily relates to our asset management, platforms and wealth
activities. The Investments, Adviser and Personal vectors are all part of this
segment. Our asset management subsidiaries and our asset management associate
in India, HDFC Asset Management, provide a range of investment products and
services for individuals and institutional customers through a number of
different investment vehicles. Our platforms include the Standard Life branded
Wrap and Elevate platforms which provide administration services to advisers.
Our Wealth activity primarily relates to: Aberdeen Standard Capital which
manages assets for private clients, intermediaries acting for clients,
charities and trustees; 1825 which undertakes our financial planning and
advice activity; Parmenion which undertakes activities for clients and
intermediaries; and our strategic joint venture with Virgin Money (VMUTM). The
segment also includes other wholly owned activities of the Group including the
corporate centre and related activities and the UK and Ireland Standard Life
staff defined benefit pension plans.
Insurance associates and joint ventures
This segment comprises our life insurance associates and joint ventures in the
UK (Phoenix) and China (HASL) and our life insurance business in India (HDFC
Life), which was classified as an associate until 3 December 2020. These
businesses offer a range of pension, insurance and savings products to the UK,
European, Chinese and Indian markets.
The Group's reportable segments will be revised in 2021 to align with the
growth vectors.
(b) Reportable segments - Group adjusted profit before tax and revenue
information
(b)(i) Analysis of Group adjusted profit before tax
Adjusted profit before tax is the key alternative performance measure utilised
by the Group's management in their evaluation of segmental performance and is
therefore also presented by reportable segment.
Asset management, platforms Insurance associates and joint ventures Total continuing operations Discontinued operations Eliminations Total
and wealth
31 December 2020 Notes £m £m £m £m £m £m
Fee based revenue 1,425 - 1,425 - - 1,425
Adjusted operating expenses (1,206) - (1,206) - - (1,206)
Adjusted operating profit 219 - 219 - - 219
Capital management 21 - 21 - - 21
Share of associates' and joint ventures' profit before tax(1) 44 203 247 - - 247
Adjusted profit before tax 284 203 487 - - 487
Tax on adjusted profit (38) - (38) - - (38)
Share of associates' and joint ventures' tax expense 10 (12) (26) (38) - - (38)
Adjusted profit after tax 234 177 411 - - 411
Adjusted for the following items
Restructuring and corporate transaction expenses 9 (326) (29) (355) - - (355)
Amortisation and impairment of intangible assets acquired in business (1,180) (107) (1,287) - - (1,287)
combinations and through the purchase of customer contracts(2)
Profit on disposal of interests in associates 1 263 1,595 1,858 - - 1,858
Impairment of associates and joint ventures 16 (45) - (45) - - (45)
Change in fair value of significant listed investments 13 - 65 65 - - 65
Investment return variances and economic assumption changes 13 - 46 46 - - 46
Other 22 64 86 (15) - 71
Total adjusting items (1,266) 1,634 368 (15) - 353
Tax on adjusting items 53 - 53 - - 53
Share of associates' and joint ventures' tax expense on adjusting items 20 1 21 - - 21
Profit attributable to non-controlling interests (preference shares) (5) - (5) - - (5)
(Loss)/profit for the year attributable to equity shareholders of Standard (964) 1,812 848 (15) - 833
Life Aberdeen plc
Profit attributable to non-controlling interests
Preference shares 5 - - 5
Profit for the year 853 (15) - 838
(1 ) Share of associates' and joint ventures' profit before tax comprises
the Group's share of results of HDFC Asset Management, Phoenix, HASL, VMUTM
and HDFC Life (until 3 December 2020).
(2 ) Amortisation and impairment of intangible assets acquired in
business combinations and through the purchase of customer contracts includes
£1,180m included in administrative expenses and set out in Note 15, and
£107m relating to intangibles recognised on the part acquisition of
associates and included in Share of profit from associates and joint ventures
in the consolidated income statement.
Fee based revenue is reported as the measure of revenue in the analysis of
adjusted profit before tax and relates to revenues generated from external
customers. Refer Note 4 for a reconciliation of fee based revenue to revenue
from contracts with customers.
All interest income, interest expense, depreciation and amortisation from
continuing operations relates to the Asset management, platforms and wealth
segment.
In the year ended 31 December 2020, transactions with one external customer
amounted to more than 10% of fee based revenue. This fee based revenue of
£195m is included in the Asset management, platforms and wealth segment.
Asset management, platforms Insurance associates and joint ventures Total continuing operations Discontinued operations Eliminations Total
and wealth
31 December 2019 Notes £m £m £m £m £m £m
Fee based revenue 1,634 - 1,634 - - 1,634
Adjusted operating expenses (1,333) - (1,333) - - (1,333)
Adjusted operating profit 301 - 301 - - 301
Capital management 37 - 37 - - 37
Share of associates' and joint ventures' profit before tax(1) 57 189 246 - - 246
Adjusted profit before tax 395 189 584 - - 584
Tax on adjusted profit (69) - (69) - - (69)
Share of associates' and joint ventures' tax expense 10 (21) (25) (46) - - (46)
Adjusted profit after tax 305 164 469 - - 469
Adjusted for the following items
Restructuring and corporate transaction expenses 9 (379) (28) (407) - - (407)
Amortisation and impairment of intangible assets acquired in business (1,733) (111) (1,844) - - (1,844)
combinations and through the purchase of customer contracts(2)
Profit on disposal of interests in associates 1 205 1,337 1,542 - - 1,542
Reversal of impairment of associates 16 - 243 243 - - 243
Investment return variances and economic assumption changes 13 - (25) (25) - - (25)
Other 160 (2) 158 56 - 214
Total adjusting items (1,747) 1,414 (333) 56 - (277)
Tax on adjusting items 41 - 41 - - 41
Share of associates' and joint ventures' tax expense on adjusting items (5) 43 38 - - 38
Profit attributable to non-controlling interests (preference shares) (5) - (5) - - (5)
(Loss)/profit for the year attributable to equity shareholders of Standard (1,411) 1,621 210 56 - 266
Life Aberdeen plc
Profit attributable to non-controlling interests
Preference shares 5 - 5
Profit for the year 215 56 271
(1 ) Share of associates' and joint ventures' profit before tax comprises
the Group's share of results of HDFC Life, HDFC Asset Management, Phoenix,
HASL and VMUTM.
(2 ) Amortisation and impairment of intangible assets acquired in
business combinations and through the purchase of customer contracts includes
£1,733m included in administrative expenses and set out in Note 15, and
£111m relating to intangibles recognised on the part acquisition of
associates and included in Share of profit from associates and joint ventures
in the consolidated income statement.
(b)(ii) Total income and expenses
The following table provides a reconciliation of fee based revenue and
adjusted operating expenses, as presented in the analysis of Group adjusted
profit by segment, to total income and total expenses respectively, as
presented in the IFRS consolidated income statement.
2020 2019
Income Expenses Income Expenses
£m £m £m £m
Fee based revenue and adjusted operating expenses as presented in the analysis 1,425 (1,206) 1,634 (1,333)
of Group adjusted profit by segment from continuing operations
Insurance and participating investment contract claims and change in 17 (17) 156 (156)
liabilities
Change in non-participating investment contract liabilities 56 (56) 265 (265)
Change in liability for third party interest in consolidated funds (3) 3 21 (21)
Other presentation differences 144 (144) 177 (177)
Profit on disposal of interests in associates 1,858 - 1,542 -
Amortisation and impairment of intangible assets acquired in business - (1,180) - (1,733)
combinations and through the purchase of customer contracts
Other adjusting items included in income and expenses 91 (320) 161 (387)
Capital management 21 - 37 -
Total income and expenses as presented in the IFRS consolidated income 3,609 (2,920) 3,993 (4,072)
statement from continuing operations
This reconciliation includes a number of reconciling items which arise due to
presentation differences between IFRS reporting requirements and the
determination of fee based revenue and adjusted operating expenses. Fee based
revenue and adjusted operating expenses exclude items which have an equal and
opposite effect on IFRS income and IFRS expenses in the consolidated income
statement, such as investment returns which are for the account of
policyholders. Other presentation differences generally relate to items
included in administrative expenses which are borne by policyholders or are
directly related to fee income. Other presentation differences include
commission expenses and other cost of sales which are presented in expenses in
the consolidated income statement but are netted against fee based revenue in
the analysis of Group adjusted profit by segment.
(c) Total income from continuing operations by geographical location
Total income from continuing operations as presented in the consolidated
income statement split by geographical location is as follows:
2020 2019
£m £m
UK 1,399 1,862
Europe, Middle East and Africa 180 265
Asia Pacific 1,880 1,708
Americas 150 158
Total 3,609 3,993
The income of the operating businesses shown above is allocated based on where
the income is earned. The return on investment funds is allocated based on
where funds are registered.
(d) Non-current non-financial assets by geographical location
2020 2019
£m £m
UK 629 1,700
Europe, Middle East and Africa 15 60
Asia Pacific 17 71
Americas 76 142
Total 737 1,973
Non-current non-financial assets for this purpose consist of property, plant
and equipment and intangible assets.
3. Investment return
Gains and losses resulting from changes in both market value and foreign
exchange on investments classified as fair value through profit or loss are
recognised in the consolidated income statement in the period in which they
occur. The gains and losses include investment income received such as
interest payments but exclude dividend income. Dividend income is separately
recognised in the consolidated income statement when the right to receive
payment is established.
Interest income on financial instruments measured at amortised cost is
separately recognised in the consolidated income statement using the effective
interest rate method. The effective interest rate method allocates interest
and other finance costs at a constant rate over the expected life of the
financial instrument, or where appropriate a shorter period, by using as the
interest rate the rate that exactly discounts the future cash receipts over
the expected life to the net carrying value of the instrument.
2020 2019
£m £m
Interest and similar income
Cash and cash equivalents 10 18
Debt securities measured at amortised cost 9 10
19 28
Gains on financial instruments at fair value through profit or loss
Equity securities and interests in pooled investment funds (other than 137 365
dividend income)
Debt securities 5 21
Derivative financial instruments (30) 1
112 387
Dividend income 41 52
Gains on financial instruments at amortised cost - 1
Foreign exchange losses on financial instruments other than those at fair (9) (4)
value through profit or loss
Investment return from continuing operations 163 464
Included in investment return from continuing operations of £163m (2019:
£464m) is £49m (2019: £392m) in relation to unit linked business including
(£13m) (2019: £107m) relating to operations held for sale. Investment
returns relating to unit linked business are for the account of policyholders
and are excluded from adjusted operating income as they have an equal and
opposite effect on IFRS income and IFRS expenses in the consolidated income
statement.
Following the reclassification of HDFC Life from an associate to an equity
security on 3 December 2020 gains of £65m have been included in equity
securities and interests in pooled investment funds (refer Note 16 for further
details of the reclassification).
4. Revenue from contracts with customers
Revenue from contracts with customers is recognised as services are provided
i.e. as the performance obligation is satisfied and it is highly probable that
a significant reversal will not occur. Where revenue is received in advance
(front-end fees), this income is deferred and recognised as a deferred income
liability until the services have been provided (refer Note 35).
Revenue from contracts with customers excludes premium written and earned on
insurance and participating investment contracts (Refer Note 31).
(a) Revenue from contracts with customers
The following table provides a breakdown of total revenue from contracts with
customers:
2020 2019
£m £m
Asset management
Management fee income - Insurance(1) 216 312
Management fee income - Other clients(1) 1,008 1,122
Performance fees 30 37
Revenue from contracts with customers for asset management 1,254 1,471
Fund platforms
Fee income 193 204
Other revenue from contracts with customers 80 68
Total revenue from contracts with customers from continuing operations 1,527 1,743
(1 ) In addition to revenues earned as a percentage of AUM, management
fee income includes certain other revenues such as registration fees.
Asset management
Through a number of its subsidiaries, the Group provides asset management
services to its customers. This performance obligation is performed over time
with the revenue recognised as the obligation is performed. The Group
generally receives asset management fees based on the percentage of the assets
under management. The percentage varies depending on the level and nature of
assets under management. Asset management fees are either deducted from assets
or invoiced. Deducted fees are generally calculated, recognised and collected
on a daily basis. Other asset management fees are invoiced to the customer
either monthly or quarterly with receivables recognised for unpaid invoices.
The payment terms for invoiced revenue vary but are typically 30 days from
receipt of invoice. Accrued income is recognised to account for income earned
but not yet invoiced. There is also some use of performance fees and carried
interest arrangements. Performance fees and carried interest are earned from
some investment mandates when contractually agreed performance levels are
exceeded within specified performance measurement periods. Performance fees
and carried interest are only recognised once it is highly probable that a
significant reversal will not occur in future periods. Given the
unpredictability of future performance, the risk of a significant reversal
occurring will typically only be considered low enough to make recognition
appropriate upon the crystallisation event occurring.
Fund platforms
Through a number of its subsidiaries, the Group offers customers access to
fund platforms. The platforms give customers the ongoing functionality to
manage and administer their investments. This performance obligation is
performed over time with the revenue recognised as the obligation is
performed. Customers pay a platform charge which is generally calculated as a
percentage of their assets. The percentage varies depending on the level of
assets on the specific platform. The main platform charges are calculated
either daily or monthly and are collected and recognised monthly. The charges
are collected directly from assets on the platform. There are no significant
payment terms.
Fee income from fund platforms includes revenue passed to the product provider
and included below in other cost of sales.
The revenue from the contracts with customers is reported within the Asset
management, platforms and wealth segment. The following table provides a
reconciliation of Revenue from contracts with customers as presented in the
consolidated income statement to fee based revenue, as presented in the
analysis of adjusted profit before tax for the Asset management, platforms and
wealth segment.
2020 2019
£m £m
Revenue from contracts with customers from continuing operations as presented 1,527 1,743
in the consolidated income statement
Presentation differences
Commission expenses (77) (89)
Other cost of sales (27) (26)
Other differences 2 6
Fee based revenue from continuing operations as presented in the Asset 1,425 1,634
management, platforms and wealth segment
Commission expenses and other costs of sales are netted against fee based
revenue in the segment reporting but are included within expenses in the
consolidated income statement. Other presentation differences relate to
amounts presented in a different income line item of the consolidated income
statement and charges made to third parties for expenses incurred by the
Group.
(b) Contract receivables, assets and liabilities
The Group has recognised the following receivables, assets and liabilities in
relation to contracts with customers.
31 December 2020 31 December 2019 1 January
2019
Notes £m £m £m
Amount receivable from contracts with customers 21 115 130 112
Accrued income from contracts with customers 21 221 227 214
Cost of obtaining customer contracts 15 49 60 80
Deferred acquisition costs 22 4 6 6
Total contract receivables and assets 389 423 412
31 December 2020 31 December 2019 1 January
2019
Notes £m £m £m
Deferred Income 35 73 67 75
Accruals 36 - 3 5
Total contract liabilities 73 70 80
5. Other income
The Group's other income for the year ended 31 December 2020 of £30m (2019:
£178m) includes the £8m gain on the sale of SL Asia (refer Note 1). Other
income for the year ended 31 December 2019 included £140m in relation to the
settlement of arbitration with Lloyds Banking Group.
6. Other administrative expenses
2020 2019
Notes £m £m
Interest expense 2 5
Commission expenses 77 89
Other cost of sales 27 26
Staff costs and other employee-related costs 625 646
Short-term and low value lease rentals 3 2
Auditors' remuneration 8 8 8
Depreciation of property, plant and equipment 17 46 47
Amortisation of intangible assets 15 152 184
Impairment losses on intangible assets(1) 15 149 2
Impairment losses on disposal group classified as held for sale 23 1 -
Impairment losses on property right-of-use assets 17 2 16
Other 514 626
1,606 1,651
Acquisition costs deferred during the year - (2)
Amortisation of deferred acquisition costs 2 2
Total other administrative expenses from continuing operations 1,608 1,651
(1 ) Impairment losses on intangible assets excludes a goodwill
impairment charge of £915m (2019: £1,569m) recognised separately as an
individual item on the consolidated income statement. Refer Note 15.
In addition to interest expense of £2m (2019: £5m) set out above, interest
expense of £24m (2019: £29m) was incurred in respect of subordinated
liabilities and the related cash flow hedge (refer Note 20) and interest
expense of £6m (2019: £7m) in respect of lease liabilities which are
included in Finance costs in the consolidated income statement.
7. Staff costs and other employee-related costs
The following table shows the staff costs and other employee-related costs
aggregated for both continuing and discontinued operations.
2020 2019
Notes £m £m
The aggregate remuneration payable in respect of employees:
Wages and salaries 465 531
Social security costs 55 63
Pension costs
Defined benefit plans (19) (40)
Defined contribution plans 58 58
Employee share-based payments and deferred fund awards 44 66 34
Total staff costs and other employee-related costs 625 646
In addition, wages and salaries of £28m (2019: £40m), social security costs
of £4m (2019: £4m), pension costs - defined benefit plans of less than £1m
(2019: less than £1m), pension costs - defined contribution plans of £1m
(2019: £1m), employee share-based payments and deferred fund awards of £27m
(2019: £19m) and termination benefits of £31m (2019: £67m) have been
included in restructuring and corporate transaction expenses. Refer Note 9.
The average number of staff employed by the Group during the year was 6,029
(2019: 6,268). All staff were employed within the asset management, platforms
and wealth segment.
Information in respect of Directors' remuneration is provided in the
Directors' remuneration report on pages 73 to 95.
8. Auditors' remuneration
The following table shows the auditors' remuneration aggregated for both
continuing and discontinued operations.
2020 2019
£m £m
Fees payable to the Company's auditors for the audit of the Company's 1.1 1.1
individual and consolidated financial statements
Fees payable to the Company's auditors for other services
The audit of the Company's consolidated subsidiaries pursuant to legislation 4.1 3.7
Audit related assurance services 2.3 2.1
Total audit and audit related assurance fees 7.5 6.9
Other assurance services 0.8 1.2
Other non-audit fee services - -
Total non-audit fees 0.8 1.2
Total auditors' remuneration 8.3 8.1
Auditors' remuneration disclosed above excludes audit and non-audit fees
payable to the Group's principal auditor by Group managed funds which are not
controlled by the Group, and therefore not consolidated in the Group's
financial statements.
During the year ended 31 December 2020 no audit fees were payable in respect
of defined benefit plans to the Group's principal auditor (2019: £nil).
For more information on non-audit services, refer to the Audit Committee
report in Section 3 - Corporate governance statement.
9. Restructuring and corporate transaction expenses
Total restructuring and corporate transaction expenses incurred from
continuing operations during the year were £297m (2019: £374m). The expenses
mainly relate to ongoing transformation costs for integration, separation from
Phoenix and implementing our simplified operating model. 2019 expenses also
included £49m in respect of the repurchase of subordinated liabilities (refer
Note 33). Deal costs relating to acquisitions included in restructuring and
corporate transaction expenses for the year ended 31 December 2020 were £1m
(2019: £2m).
The table below reconciles restructuring and corporate transaction expenses in
the consolidated income statement with restructuring and corporate transaction
expenses used to determine adjusted profit before tax.
2020 2019
£m £m
Restructuring and corporate transaction expenses 297 374
Asset management joint venture and insurance associate restructuring and
corporate transaction expenses
39 33
Impairment of internally generated software and right-of-use assets as a -
result of restructuring, which are included in Other administrative expenses
19
Restructuring and corporate transaction expenses used to determine adjusted 355 407
profit before tax
10. Taxation
The Group's tax expense comprises both current tax and deferred tax expense.
Current tax is the expected tax payable on taxable profit for the year and is
calculated using tax rates and laws substantively enacted at the balance sheet
date.
A deferred tax asset represents a tax deduction that is expected to arise in a
future period. It is only recognised to the extent that there is expected to
be future taxable profit or investment return to offset the tax deduction. A
deferred tax liability represents taxes which will become payable in a future
period as a result of a current or prior year transaction. Where local tax law
allows, deferred tax assets and liabilities are netted off on the statement of
financial position. The tax rates used to determine deferred tax are those
enacted or substantively enacted at the balance sheet date that are expected
to apply when the deferred tax asset or liability are realised.
Deferred tax is recognised on temporary differences arising from investments
in subsidiaries and associates unless the timing of the reversal is in our
control and it is expected that the temporary difference will not reverse in
the foreseeable future.
Current tax and deferred tax is recognised in the consolidated income
statement except when it relates to items recognised in other comprehensive
income or directly in equity, in which case it is credited or charged to other
comprehensive income or directly to equity respectively.
The Group operates in a large number of territories and during the normal
course of business will be subject to audit or enquiry by local tax
authorities. At any point in time the Group will also be engaged in commercial
transactions the tax outcome of which may be uncertain due to their complexity
or uncertain application of tax law. Tax provisions, therefore, are subjective
by their nature and require management judgement based on the interpretation
of legislation, management experience and professional advice. As such, this
may result in the Group recognising provisions for uncertain tax positions.
Management will provide for uncertain tax positions where they judge that it
is probable there will be a future outflow of economic benefits from the Group
to settle the obligation. In assessing uncertain tax positions management
considers each issue on its own merits using their judgement as to the
estimate of the most likely outcome. When making estimates, management
considers all available evidence. This may include forecasts of future
profitability, the frequency and severity of any losses, and statutory carry
forward and carry back provisions as well as management experience of tax
attributes expiring without use. Where the final outcome differs from the
amount provided this difference will impact the tax charge in future periods.
Management re-assesses provisions at each reporting date based upon latest
available information.
(a) Tax charge in the consolidated income statement
(a)(i) Current year tax expense
2020 2019
£m £m
Current tax:
UK (1) 6
Overseas 55 49
Adjustment to tax expense in respect of prior years 9 (1)
Total current tax attributable to continuing operations 63 54
Deferred tax:
Deferred tax credit arising from the current year (76) (26)
Adjustment to deferred tax in respect of prior years (2) -
Total deferred tax attributable to continuing operations (78) (26)
Total tax (credit)/expense attributable to continuing operations (15) 28
The share of associates' and joint ventures' tax expense is £17m (2019: £8m)
and is included in profit before tax in the consolidated income statement in
'Share of profit from associates and joint ventures'.
In 2020 unrecognised tax losses from previous years were used to reduce the
current tax expense by £1m (2019: £nil). Unrecognised tax losses and timing
differences were used to reduce the deferred tax expense by £1m (2019: £1m).
Current tax recoverable and current tax liabilities at 31 December 2020 were
£9m (2019: £9m) and £15m (2019: £19m) respectively. In addition current
tax recoverable and current tax liabilities in relation to unit linked
business were £1m (2019: £nil) and £1m (2019: £2m) respectively. Current
tax assets and liabilities at 31 December 2020 and 31 December 2019 are
expected to be recoverable or payable in less than 12 months.
(a)(ii) Reconciliation of tax expense
2020 2019
£m £m
Profit before tax from continuing operations 838 243
Tax at 19% (2019: 19%) 159 46
Remeasurement of deferred tax due to rate changes(1) 9 1
Permanent differences (20) (4)
Tax effect of accounting for share of profit from associates and joint (37) (15)
ventures
Impairment losses on intangible assets 174 298
Impairment/ (reversal of impairment) of investment in associates and joint 9 (46)
ventures
Differences in overseas tax rates(1) (21) (16)
Adjustment to current tax expense in respect of prior years 9 (1)
Recognition of previously unrecognised tax credit (2) (1)
Deferred tax not recognised 7 13
Adjustment to deferred tax expense in respect of prior years (2) -
Write down of deferred tax asset - 6
Non-taxable profit on sale of subsidiaries and associates (303) (254)
Other 3 1
Total tax (credit)/expense from continuing operations for the year (15) 28
(1 ) 2019 figures were previously disclosed as a single line - different
tax rates (£15m).
The standard UK corporation tax rate for the accounting period is 19%. In the
Spring Budget 2020, the government announced that the standard UK corporation
tax rate would remain at 19% from 1 April 2020 rather than reducing to 17% as
previously enacted. This new legislation was substantively enacted on 17 March
2020 to repeal the planned reduction in the standard UK corporation tax rate
and maintain the rate at 19%. This will impact both current tax in the UK
going forward and also the valuation of deferred tax assets and liabilities in
the UK, which have been revalued at the balance sheet date to take account of
this change.
On 3 March 2021, the UK Government announced its intention to increase the
rate of UK corporation tax rate from 19% to 25% with effect from 1 April 2023.
The proposed increase in the rate of UK corporation tax is expected to be
enacted in Finance Act 2021. As the rate change was not substantively enacted
as at 31 December 2020, it has not been taken account of in computing the UK
deferred tax assets and liabilities which are reflected in the statement of
financial position for that date. However, the rate change is expected to be
substantively enacted during 2021. The effect of this change in the rate of UK
corporation tax if it had been substantively enacted at 31 December 2020 would
have been to increase the deferred tax assets and deferred tax liabilities in
the statement of financial position by £19m and £9m respectively and
increase the tax credit in the income statement by £10m.
The accounting for certain items in the consolidated income statement results
in certain reconciling items in the table above, the values of which vary from
year to year depending upon the underlying accounting values.
Details of significant reconciling items are as follows:
· Permanent differences in 2020 include expenses and accounting losses
which are not deductible for tax purposes. It also includes the difference
between the tax basis and accounting value for employee share-based awards.
Notably, within permanent differences, is a (£12m) tax adjustment for
non-taxable fair value movements that arose following reclassification of the
investment in HDFC Life.
· The share of profits from associates and joint ventures is presented net
of tax in the consolidated income statement and therefore gives a reconciling
item
· The impairments of both the goodwill intangible asset and investment in
associates and joint ventures are not tax deductible
· Certain profits are taxed at rates which differ from the UK corporation
tax rate (such as the profit attributable to our Asian business) and, in 2020,
mainly comprises a non-recurring reconciling item associated with the gain
arising on a sale of shares in our associate HDFC Asset Management being taxed
at a rate of less than 19%. This arose because the Indian rate of tax on
long-term capital gains is less than the UK corporate tax rate.
· An additional £9m tax charge arises on the revaluation of deferred tax
assets and liabilities in the UK following the reversal of a proposed tax rate
reduction in the UK
· The ability to value tax losses and other tax assets also affects the tax
charge. We have not recognised a deferred tax asset of £7m on tax losses
arising in the year due to uncertainty as to when these losses will be
utilised. In addition, we have recognised £2m of previously unrecognised
deferred tax assets due to evidence of their current or future utilisation.
· The sales of shares in HDFC Life did not give rise to taxable gains due
to the effect of reliefs available under India's tax legislation and its
international tax treaties
· A deferred tax liability of £10m has been recognised in the period in
relation to our share of the unremitted earnings of HDFC AMC. This results
from a change to the taxation of dividends from Indian companies under Indian
tax law that took effect from 1 April 2020. The corresponding charge forms
part of the tax expense in the consolidated income statement. The change also
gives rise to the release of a deferred tax liability of £18m attributable to
our holdings in HDFC AMC and HDFC Life that related to the taxation of
undistributed reserves under the preceding Indian tax rules. This release
gives rise to the recognition of an £18m credit to the Share of profit from
associates and joint ventures line item in the consolidated income statement.
(b) Tax relating to components of other comprehensive income
Tax relating to components of other comprehensive income is as follows:
2020 2019
£m £m
Tax relating to defined benefit pension plan deficits (2) -
Equity holder tax effect relating to items that will not be reclassified (2) -
subsequently to profit or loss
Tax relating to fair value losses recognised on cash flow hedges (1) (2)
Tax relating to cash flow hedge losses transferred to consolidated income 3 4
statement
Equity holder tax effect relating to items that may be reclassified 2 2
subsequently to profit or loss
Tax relating to other comprehensive income from continuing operations - 2
All of the amounts presented above are in respect of equity holders of
Standard Life Aberdeen plc.
(c) Deferred tax assets and liabilities
(c)(i) Movements in net deferred tax asset/(liability)
2020 2019
£m £m
Opening balance carried forward (13) (39)
Effect of change in accounting policy to IFRS 9(1) - 1
Effect of change in accounting policy to IFRS 16(1) - 1
Opening balance at 1 January (13) (37)
Reclassified as held for sale during the year - -
Acquired through business combinations - (2)
Amounts credited to the consolidated income statement 78 26
Amounts credited directly to equity in respect of employee share-based - -
payments
Tax on defined benefit pension plan deficits 2 -
Tax on cash flow hedge (2) (2)
Other - 2
Net deferred tax asset/(liability) at 31 December 65 (13)
(1 ) The Group has initially applied IFRS 9 and IFRS 16 at 1 January
2019. Under the transition methods chosen, comparative information is not
restated.
(c)(ii) Analysis of recognised deferred tax
2020 2019
£m £m
Deferred tax assets comprise:
Losses carried forward 89 40
Depreciable assets 12 12
Employee benefits 28 22
Provisions and other temporary timing differences 2 1
Gross deferred tax assets 131 75
Less: Offset against deferred tax liabilities - (1)
Deferred tax assets 131 74
Deferred tax liabilities comprise:
Unrealised gains on investments 4 2
Employee benefits - 3
Temporary timing differences - 2
Deferred tax on intangible assets acquired through business combinations 52 78
Other 10 3
Gross deferred tax liabilities 66 88
Less: Offset against deferred tax assets - (1)
Deferred tax liabilities 66 87
Net deferred tax asset/(liability) at 31 December 65 (13)
A deferred tax asset of £89m (2019: £40m) for the Group has been recognised
in respect of losses of various subsidiaries. Deferred tax assets are
recognised to the extent that it is probable that the losses will be capable
of being offset against taxable profits and gains in future periods. The value
attributed to them takes into account the certainty or otherwise of their
recoverability. Their recoverability is measured against the reversal of
deferred tax liabilities and anticipated taxable profits and gains based on
business plans. The deferred tax asset recognised on losses primarily relates
to UK entities where there is currently no restriction on the period of time
over which losses can be utilised. Recognition of this deferred tax asset
requires that management must consider if it is more likely than not that this
asset will be recoverable in future periods against future profits arising in
the UK. In making this assessment management have considered future operating
plans and forecast taxable profits and are satisfied that, following
completion of transformation activities, forecast taxable profits will be
sufficient to enable recovery of the UK tax losses. Based upon the level of
forecast taxable profits management do not consider there is significant risk
of a material adjustment to the carrying amount of the deferred tax asset on
UK tax losses within the next financial year.
Deferred tax assets and liabilities are expected to be recovered or settled
after more than 12 months.
(d) Unrecognised deferred tax
Due to uncertainty regarding recoverability, deferred tax assets have not been
recognised in respect of the following:
· Cumulative losses carried forward of £80m in the UK and £287m overseas
(2019: £80m, £301m respectively)
Of these unrecognised deferred tax assets, certain losses have expiry dates as
follows:
· US losses of £164m with expiry dates between 2027-2037 (2019: £164m)
· Other overseas losses of £26m with expiry dates before 2024 (2019:
£19m)
· Other overseas losses of £22m with expiry dates between 2025 and 2030
(2019: £9m)
11. Discontinued operations
The Group classifies as discontinued operations areas of business which have
been disposed of or are classified as held for sale at the year end and which
either, represent a separate major line of business or geographical area, or
are part of a plan to dispose of one. The results of discontinued operations
are shown separately on the face of the consolidated income statement from the
results of the remaining (continuing) parts of the Group's business.
The consolidated income statement loss and cash flows from discontinued
operations relate solely to the UK and European insurance business which was
sold in 2018 to Phoenix. For the year ended 31 December 2020, the loss from
discontinued operations was £15m (2019: profit of £56m) which reflected
changes in the value of contingent consideration relating to the sale. The
2020 loss includes the impact of the resolution of certain legacy issues with
Phoenix, refer Note 47. For the year ended 31 December 2020, net cash flows
from discontinued operations of (£42m) (2019: £63m) are included in net cash
flows from investing activities. There was no other comprehensive income from
discontinued operations for the year ended 31 December 2020 (2019: £nil).
12. Earnings per share
Basic earnings per share is calculated by dividing profit attributable to
ordinary equity holders by the weighted average number of ordinary shares in
issue during the year excluding shares owned by the employee trusts that have
not vested unconditionally to employees.
Diluted earnings per share is calculated by adjusting the weighted average
number of ordinary shares in issue during the year to assume the conversion of
all dilutive potential ordinary shares, such as share options granted to
employees.
Adjusted earnings per share is calculated on adjusted profit after tax
attributable to ordinary equity holders of the Company i.e. adjusted profit
net of dividends paid on preference shares.
Basic earnings per share was 37.8p (2019: 11.2p) and diluted earnings per
share was 37.2p (2019: 11.1p) for the year ended 31 December 2020. The
following table shows details of basic, diluted and adjusted earnings per
share.
2020 2019
Continuing operations Discontinued operations Total Continuing operations Discontinued operations Total
£m £m £m £m £m £m
Adjusted profit before tax 487 - 487 584 - 584
Tax on adjusted profit (38) - (38) (69) - (69)
Share of associates' and joint ventures' tax expense (38) - (38) (46) - (46)
Adjusted profit after tax 411 - 411 469 - 469
Dividend paid on preference shares (5) - (5) (5) - (5)
Adjusted profit after tax attributable to equity shareholders of the Company 406 - 406 464 - 464
Adjusting items 368 (15) 353 (333) 56 (277)
Tax on adjusting items 53 - 53 41 - 41
Share of associates' and joint ventures' tax expense on adjusting items 21 - 21 38 - 38
Profit attributable to equity shareholders of the Company 848 (15) 833 210 56 266
Millions Millions
Weighted average number of ordinary shares outstanding 2,202 2,374
Dilutive effect of share options and awards 37 32
Weighted average number of diluted ordinary shares outstanding 2,239 2,406
Pence Pence Pence Pence Pence Pence
Basic earnings per share 38.5 (0.7) 37.8 8.9 2.3 11.2
Diluted earnings per share 37.9 (0.7) 37.2 8.8 2.3 11.1
Adjusted earnings per share 18.4 - 18.4 19.5 - 19.5
Adjusted diluted earnings per share 18.1 - 18.1 19.3 - 19.3
13. Adjusted profit and adjusting items
Adjusted profit before tax is the Group's key alternative performance measure.
Adjusted profit excludes the impact of the following items:
· Restructuring costs and corporate transaction expenses. Restructuring
includes the impact of major regulatory change.
· Amortisation and impairment of intangible assets acquired in business
combinations and through the purchase of customer contracts
· Profit or loss arising on the disposal of a subsidiary, joint venture or
associate accounted for using the equity method
· Impairment loss/reversal of impairment loss recognised on investments in
associates and joint ventures accounted for using the equity method
· Change in fair value of significant listed investments
· Fair value movements in contingent consideration
· Items which are one-off and, due to their size or nature, are not
indicative of the long-term operating performance of the Group
Adjusted profit also excludes impacts arising from investment return variances
and economic assumption changes in the Group's insurance entities as described
further below.
Dividends payable on preference shares classified as non-controlling interests
are excluded from adjusted profit in line with the treatment of ordinary
shares. Similarly to preference shares, coupons paid on perpetual debt
instruments classified as equity for which interest is only accounted for when
paid is excluded from adjusted profit. This includes our share of interest
payable on Tier 1 debt instruments held by associates. Coupons payable on
perpetual debt instruments classified as equity for which interest is accrued
are included in adjusted profit before tax.
(a) Investment return variances and economic assumptions changes - insurance entities
Associates and joint ventures insurance entities
Where associates and joint ventures have a policy for determining investment
return variances and economic assumption changes, the Group uses the policy of
the associate or joint venture for including their results in the Group's
adjusted profit. This currently applies only to the Group's investment in
Phoenix. The Phoenix policy is described below.
The components of IFRS profit attributable to market movements and interest
rate changes which give rise to variances between actual and expected returns
on investments backing both owner and policyholder funds, with consistent
allowance for the corresponding expected movement in liabilities, as well as
the impact of changes in economic assumptions on liabilities, are excluded
from adjusted profit. The impact of strategic asset allocation activities,
such as investment in higher yielding illiquid assets, is also excluded from
adjusted profit.
The expected return on investments backing both owner and policyholder funds
is based on opening economic assumptions applied to the funds under management
at the beginning of the reporting period. Expected investment return
assumptions are derived actively based on market yields on risk-free fixed
interest assets at the start of each financial year. Investment return
variances, including those relating to owners' funds, also include gains and
losses on derivatives held to hedge life company Solvency II surplus
positions.
Adjusted profit includes the effect of variance in experience for non-economic
items, for example mortality, persistency and expenses, and the effect of
changes in non-economic assumptions. It also incorporates the impacts of
significant management actions where such actions are consistent with
Phoenix's core operating activities (for example, actuarial modelling
enhancements and data reviews).
Wholly owned insurance entities
The Group's wholly owned insurance business, SL Asia, was sold on 30 June 2020
(refer Note 1). The policy applied to wholly owned insurance entities is
similar to that used by Phoenix as described above. The main difference
relevant to SL Asia is that Phoenix recognises charges on unit linked business
based on expected investment returns, whereas wholly owned insurance entities
use actual investment returns.
(b) Significant listed investments
Following the reclassification of HDFC Life from an associate to an equity
security on 3 December 2020 fair value gains of £65m have been included in
investment return in the consolidated income statement but excluded from
adjusted profit (refer Note 16 for further details of the reclassification).
These gains represent the impact of movements in the market value of our
remaining 8.89% holding in HDFC Life from 3 December 2020 to 31 December 2020.
Excluding fair value movements on significant listed investments for the
purposes of adjusted profit is aligned with our treatment of gains on disposal
for these holdings when they were classified as an associate, and reflects
that the fair value movements are not indicative of the long-term operating
performance of the group.
(c) Other
In the reconciliation of consolidated adjusted profit before tax to profit for
the period the other adjusting item sub-total of £71m (2019: £214m) includes
£66m which predominantly relates to our share of Phoenix gains on the
acquisition of ReAssure (Refer Note 16) and the completion of the Part VII
transfer of their Legal and General mature savings business. Also included is
the gain on disposal of SL Asia of £8m. Net fair value movements in
contingent consideration were (£10m) (2019: £61m) including (£15m) (2019:
£56m) relating to discontinued operations.
The other adjusting items in 2019 included £140m relating to the settlement
of arbitration with Lloyds Banking Group.
14. Dividends on ordinary shares
Dividends are distributions of profit to holders of Standard Life Aberdeen
plc's share capital and as a result are recognised as a deduction in equity.
Final dividends are announced with the Annual report and accounts and are
recognised when they have been approved by shareholders. Interim dividends are
announced with the Half year results and are recognised when they are paid.
2020 2019
Pence per share £m(1) Pence per share £m
Prior year's final dividend paid 14.3 320 14.30 345
Interim dividend paid 7.3 159 7.30 173
Total dividends paid on ordinary shares 479 518
Current year final recommended dividend 7.3 154 14.30 320
(1 ) Estimated for current year final recommended dividend.
The final recommended dividend will be paid on 25 May 2021 to shareholders on
the Company's register as at 16 April 2021, subject to approval at the 2021
Annual General Meeting. After the current year final recommended dividend, the
total dividend in respect of the year ended 31 December 2020 is 14.60p (2019:
21.60p).
15. Intangible assets
Goodwill is created when the Group acquires a business and the consideration
exceeds the fair value of the net assets acquired. In determining the net
assets acquired in business combinations, intangible assets are recognised
where they are separable or arise from contractual or legal rights. Intangible
assets acquired by the Group through business combinations consist mainly of
customer relationships, technology and brands. Any remaining value that cannot
be identified as a separate intangible asset on acquisition forms part of
goodwill.
In addition to intangible assets acquired through business combinations, the
Group recognises as intangible assets software which has been developed
internally and other purchased technology which is used in managing and
executing our business. Costs to develop software internally are capitalised
after the research phase and when it has been established that the project is
technically feasible and the Group has both the intention and ability to use
the completed asset.
Intangible assets are recognised at cost and amortisation is charged to the
income statement over the length of time the Group expects to derive benefits
from the asset. The allocation of the income statement charge to each
reporting period is dependent on the expected pattern over which future
benefits are expected to be derived. Where this pattern cannot be determined
reliably the charge is allocated on a straight-line basis.
Goodwill is not charged to the income statement unless it becomes impaired.
The Group also recognises the cost of obtaining customer contracts (refer Note
4) as an intangible asset. These costs primarily relate to the cost of
acquiring existing investment management contracts from other asset managers
and commission costs for initial investors into new closed end funds where
these are borne by the Group. For the cost of obtaining customer contracts,
the intangible asset is amortised on the same basis as the transfer to the
customer of the services to which the intangible asset relates.
Acquired through business combinations
Goodwill Brand Customer relationships and investment management contracts Technology Internally developed software(1) Purchased software Cost of obtaining customer contracts Total
and other
Notes £m £m £m £m £m £m £m £m
Gross amount
At 1 January 2019 3,438 93 1,019 67 121 4 96 4,838
Additions 37 - 13 - 10 3 2 65
Other - - (1) - - (4) (2) (7)
At 31 December 2019 3,475 93 1,031 67 131 3 96 4,896
Reclassified as held for sale during the year - - - (3) (2) - - (5)
Additions - - - - 2 2 8 12
At 31 December 2020 3,475 93 1,031 64 131 5 104 4,903
Accumulated amortisation and impairment
At 1 January 2019 (906) (26) (386) (41) (59) - (16) (1,434)
Amortisation charge for the year - (19) (111) (13) (20) (1) (20) (184)
Impairment losses recognised(2) (1,569) - - (1) (1) - - (1,571)
At 31 December 2019 (2,475) (45) (497) (55) (80) (1) (36) (3,189)
Reclassified as held for sale during the year - - - 2 1 - - 3
Amortisation charge for the year 6 - (18) (86) (7) (21) (1) (19) (152)
Impairment losses recognised(2) 6 (915) - (134) (1) (14) - - (1,064)
At 31 December 2020 (3,390) (63) (717) (61) (114) (2) (55) (4,402)
Carrying amount
At 1 January 2019 2,532 67 633 26 62 4 80 3,404
At 31 December 2019 1,000 48 534 12 51 2 60 1,707
At 31 December 2020 85 30 314 3 17 3 49 501
(1 ) Included in the internally developed software of £17m (2019: £51m)
is £8m (2019: £6m) relating to intangible assets not yet ready for use.
(2 ) For the year ended 31 December 2020, goodwill impairment losses of
£915m (2019: £1,569m) were recognised on asset management goodwill and
presented separately in the consolidated income statement.
At 31 December 2020 £85m of goodwill (2019: £85m) is attributable to a
number of smaller cash-generating units in the Asset management, platforms and
wealth segment. At 31 December 2020, there was no goodwill (2019: £915m)
attributable to the asset management group of cash-generating units, which
comprises the Group's asset management business excluding HDFC Asset
Management, in the Asset management, platforms and wealth segment.
On the acquisition of Aberdeen Asset Management PLC (AAM PLC) in 2017, we
identified intangible assets in relation to customer relationships, brand and
technology as being separable from goodwill. Identification and valuation of
intangible assets acquired in business combinations is a key judgement.
The customer relationships acquired through AAM PLC were grouped where the
customer groups have similar economic characteristics and similar useful
economic lives. This gave rise to three separate intangible assets which we
have termed Lloyds Banking Group, open ended funds, and segregated and
similar.
In relation to the open ended funds we considered that it was most appropriate
to recognise an intangible asset relating to customer relationships between
AAM PLC and open ended fund customers, rather than an intangible asset
relating to investment management agreements between AAM PLC and AAM PLC's
open ended funds. Our judgement was that the value associated with the open
ended fund assets under management was predominantly derived from the
underlying customer relationships, taking into account that a significant
proportion of these assets under management are from institutional clients.
The intangible asset for Lloyds Banking Group had a carrying value of £nil at
the end of 2019. The description of the remaining two separate intangible
assets including their estimated useful life at the acquisition date of 14
August 2017 was as follows:
Customer relationship intangible asset Description Useful life at acquisition date Fair value on acquisition date Carrying Carrying
value
value
2020 2019
£m £m £m
Open ended funds Separate vehicle group - open ended investment vehicles 11 years 223 87 111
Segregated and similar All other vehicle groups dominated by segregated mandates which represent 75% 12 years 427 107 280
of this group
Measuring the fair value of intangible assets acquired in business
combinations required further assumptions and judgements. Customer
relationships were valued using discounted cash flow projections. The key
assumptions in measuring the fair value of the customer relationships at the
acquisition date were as follows:
· Net attrition - net attrition represents the expected rate of outflows of
assets under management net of inflows from existing customers. This
assumption was primarily based on recent experience.
· Market growth - a market growth adjustment was applied based on the asset
class
· Operating margin - this assumption was consistent with forecast margins
and included the impact of synergies that would be expected by any market
participant and impacted the Aberdeen customer relationship cash flows
· Discount rate - this assumption was based on the internal rate of return
(IRR) of the transaction and is consistent with a market participant discount
rate
The above assumptions, and in particular the net attrition assumption, were
also used to determine the useful economic life at the acquisition date of
each asset used for amortisation. The reducing balance method of amortisation
is considered appropriate for these intangibles, consistent with the attrition
pattern on customer relationships which means that the economic benefits
delivered from the existing customer base will reduce disproportionately over
time.
There has been no change to the useful lives of the Open ended funds and
Segregated and similar customer relationship intangible assets. Therefore the
residual useful life of the Open ended funds customer relationship intangible
asset is 7.6 years and the residual life of the Segregated and similar
customer relationship intangible asset is 8.6 years.
Estimates and assumptions
The key estimates and assumptions in relation to intangible assets are:
· Determination of the recoverable amount of goodwill and customer
intangibles
· Determination of useful lives
Determination of the recoverable amount of goodwill and customer intangibles
For all intangible assets including goodwill, an assessment is made at each
reporting date as to whether there is an indication that the goodwill or
intangible asset has become impaired. If any indication of impairment exists
then the recoverable amount of the asset is determined. The recoverable
amounts are defined as the higher of fair value less costs of disposal (FVLCD)
and the value in use (VIU) where the value in use is based on the present
value of future cash flows. Where the carrying value exceeds the recoverable
amount then the carrying value is written down to the recoverable amount.
In assessing value in use, expected future cash flows are discounted to their
present value using a pre-tax discount rate. Judgement is required in
assessing both the expected cash flows and an appropriate discount rate which
is based on current market assessments of the time value of money and the
risks associated with the asset.
In 2020, an impairment of goodwill of £915m (2019: £1,569m) and an
impairment of customer relationships and investment management contracts of
£134m (2019: £nil) have been recognised. Both impairments relate to assets
included in the Asset management, platforms and wealth segment. The
impairments are included within administrative expenses in the consolidated
income statement.
Goodwill
The impairment of £915m was recognised at 30 June 2020 and relates to an
impairment of asset management goodwill, the group of cash-generating units
for which is our asset management business excluding HDFC Asset Management and
VMUTM (2019: £1,569m). The impairment resulted from the impact on reported
revenue and future revenue projections of global equity market falls and a
shift in asset mix towards lower margin assets. Both the fall in equity
markets and the shift in asset mix were global market impacts primarily
resulting from COVID-19. Additional projections were prepared to take into
account these COVID-19 impacts, and uncertainties over future financial
markets, and these projections were a key input to the impairment review
process. The asset management goodwill recognised is now fully impaired.
The recoverable amount of this group of cash-generating units at 30 June 2020
was £1,654m, which is based on FVLCD. This is also the carrying value at 30
June 2020. The FVLCD considered a number of valuation approaches, with the
primary approach being a price to earnings multiple approach. This is a level
3 measurement as it is measured using inputs which are not based on observable
market data. Key assumptions used in the earnings multiples valuation approach
were:
· Projected adjusted profits which were based on management forecasts of
maintainable earnings and market consensus views. Revenues in the management
forecasts reflected past experience and modelling based on assets under
management and fee revenue yields by asset class. Equity markets in 2020 were
assumed to stay broadly in line with 30 June levels. Expenses in the
management forecasts were based on past experience adjusted for planned
expense savings.
· Price to earnings multiples which were determined based on market data on
multiples of a peer group of comparable European asset managers as at 30 June
2020
· Premiums for control and discounts for lack of liquidity which were
determined based on comparable transactions adjusted to remove strategic
control premiums
· The expected cost of disposal, which was based on past experience of
previous transactions
In addition to the price to earnings multiple approach, other valuation
approaches were considered including discounted cash flows and deriving the
valuation from the market capitalisation of the Group, which gave a range of
reasonable outcomes. The primary valuation approach was within this range of
reasonable outcomes and reflected market conditions and uncertainties at 30
June 2020, including significant uncertainties relating to the impact of
COVID-19 at that point. Under IFRS requirements an impairment of goodwill
recognised in an interim period cannot be reversed due to changes in
circumstances during the second half of the financial year.
The recoverable amount of this group of cash-generating units at 31 December
2019 was £2,603m based on VIU, which was assessed by management as being
higher than the FVLCD. The VIU continues to be significantly reduced by the
IFRS requirement to add back certain expense savings to management's
expectation of the level of future operating expenses, as was also the case at
31 December 2019. Considering this, and as a result of the increased market
uncertainty in the COVID-19 environment and the impact of reduced reported
revenue and future revenue projections, management has now assessed that the
FVLCD is higher.
For the remaining goodwill of £85m (2019: £85m), which is attributable to a
number of smaller cash-generating units in the Asset management, platforms and
wealth segment, we concluded that no impairment was required.
Customer relationship and investment management contract intangibles
The recoverable amount for customer relationship intangible assets for which there were indicators of impairment is VIU. In assessing VIU, expected future cash flows are discounted to their present value using a pre-tax discount rate. Judgement is required in assessing both the expected cash flows and an appropriate discount rate which is based on current market assessments of the time value of money and the risks associated with the asset.
The impairment of £134m (2019: £nil) relates to the Segregated and similar
customer relationship intangible asset which was recognised on the acquisition
of AAM PLC. The impairment resulted from the impact of markets, net outflows
and a fall in revenue yield on future earnings expectations. The impairment
was recognised at 30 June 2020. The recoverable amount of this asset which is
its VIU at 30 June 2020 was £119m and was calculated using a pre-tax discount
rate of 14.8%.
The other key assumptions in the VIU were:
· Future assets under management which were modelled based on past
experience of attrition rates and assumed market growth rates tapered to 2% in
the longer term
· Fee revenue yields based on past experience adjusted to assume a decline
due to changes in asset mix over the projection period
· Operating expense margins based on past experience and management
forecasts
At 31 December 2020, there is no indication that the Segregated and similar
customer relationship intangible asset has become further impaired. The
following table shows the consequence of illustrative downside sensitivities
of key assumptions on the carrying amount of the Segregated and similar
customer relationship intangible balance at 31 December 2020. An increase in
the discount rate of two percentage points would not lead to a further
impairment loss.
£m
30% increase in attrition (2)
25% one-off decrease in AUM at 1 January 2021 (12)
Operating expense margin decreased by five percentage points (11)
Determination of useful lives
The determination of useful lives requires judgement in respect of the length
of time that the Group expects to derive benefits from the asset and considers
for example expected duration of customer relationships and when technology is
expected to become obsolete for technology based assets. The amortisation
period and method for each of the Group's intangible asset categories is as
follows:
· Customer relationships acquired through business combinations - generally
between 7 and 12 years, generally reducing balance method
· Investment management contracts acquired through business combinations -
between 10 and 17 years, straight-line
· Brand acquired through business combinations - 5 years, straight-line
· Technology acquired through business combinations - between 3 and 6
years, straight line
· Internally developed software - between 2 and 6 years. Amortisation is on
a straight-line basis and commences once the asset is available for use.
· Purchased software - between 2 and 6 years, straight-line
· Costs of obtaining customer contracts - between 3 and 12 years, generally
reducing balance method
Internally developed software
The determination of amounts to be recognised as internally developed software requires judgement and assumptions in respect of whether assets are capable of being separated and the extent to which development costs form part of the separable asset. Additionally judgement is required to determine which costs have been incurred in relation to the research phase, which are not capitalised, and which have been incurred in relation to the development phase of a project, which can be capitalised. We consider that costs are directly attributable to the software asset and can therefore be capitalised, where they would not have been incurred if the software development had not taken place.
The impairment of internally developed software of £14m recognised during the
year to 31 December 2020 related to software made obsolete as a result of the
development of the new investment platform in the Asset management, platforms
and wealth segment.
16. Investments in associates and joint ventures
Associates are entities where the Group can significantly influence decisions
made relating to the financial and operating policies of the entity but does
not control the entity. For entities where voting rights exist, significant
influence is presumed where the Group holds between 20% and 50% of the voting
rights. Where the Group holds less than 20% of voting rights, consideration is
given to other indicators and entities are classified as associates where it
is judged that these other indicators result in significant influence.
Joint ventures are strategic investments where the Group has agreed to share
control of an entity's financial and operating policies through a
shareholders' agreement and decisions can only be taken with unanimous
consent.
Associates, other than those accounted for at fair value through profit or
loss, and joint ventures are accounted for using the equity method from the
date that significant influence or shared control, respectively, commences
until the date this ceases with consistent accounting policies applied
throughout.
Under the equity method, investments in associates and joint ventures are
initially recognised at cost. When an interest is acquired at fair value from
a third party, the value of the Group's share of the investee's identifiable
assets and liabilities is determined applying the same valuation criteria as
for a business combination at the acquisition date. This is compared to the
cost of the investment in the investee. Where cost is higher the difference is
identified as goodwill and the investee is initially recognised at cost which
includes this component of goodwill. Where cost is lower a bargain purchase
has arisen and the investee is initially recognised at the Group's share of
the investee's identifiable assets and liabilities unless the recoverable
amount for the purpose of assessing impairment is lower, in which case the
investee is initially recognised at the recoverable amount.
Subsequently the carrying value is adjusted for the Group's share of
post-acquisition profit or loss and other comprehensive income of the
associate or joint venture, which are recognised in the consolidated income
statement and other comprehensive income respectively. The Group's share of
post-acquisition profit or loss includes amortisation charges based on the
valuation exercise at acquisition. The carrying value is also adjusted for any
impairment losses.
On partial disposal of an associate, a gain or loss is recognised based on the
difference between the proceeds received and the equity accounted value of the
portion disposed of. Indicators of significant influence are reassessed based
on the remaining voting rights. Where significant influence is judged to have
been lost, the investment in associate is reclassified to interests in equity
securities and pooled investment funds measured at fair value. If an entity is
reclassified, the difference between the fair value and the remaining equity
accounted value is accounted for as a reclassification gain or loss on
disposal.
Where the Group has an investment in an associate, a portion of which is held
by, or is held indirectly through, a mutual fund, unit trust or similar
entity, including investment-linked insurance funds, that portion of the
investment is measured at FVTPL. In general, investment vehicles which are not
subsidiaries are considered to be associates where the Group holds more than
20% of the voting rights.
The level of future dividend payments and other transfers of funds to the
Group from associates and joint ventures accounted for using the equity method
could be restricted by the regulatory solvency and capital requirements of the
associate or joint venture, certain local laws or foreign currency transaction
restrictions.
(a) Investments in associates and joint ventures accounted for using the equity method
2020 2019
Associates Joint ventures Total Associates Joint ventures Total
£m £m £m £m £m £m
At 1 January 1,257 252 1,509 1,260 184 1,444
Exchange translation adjustments (11) 8 (3) (16) (11) (27)
Additions - 5 5 - 51 51
Disposals (102) - (102) (178) - (178)
Profit after tax 177 17 194 63 16 79
Other comprehensive income - - - (22) 12 (10)
Dilution gains 4 - 4 - - -
(Impairment)/Reversal of impairment - (45) (45) 243 - 243
Distributions of profit (80) - (80) (93) - (93)
Reclassified to equity securities and interests in pooled investments funds (111) - (111) - - -
At 31 December 1,134 237 1,371 1,257 252 1,509
The following associates and joint ventures are considered to be material to
the Group as at 31 December 2020.
Name of associate Nature of relationship Principal place of business Measurement Method Interest held by Fair value of interest held by the Group at Interest held by Fair value of interest held by the Group at
the Group at 31 December 2020
31 December 2020
the Group at 31 December 2019
31 December 2019
Phoenix Group Holdings plc (Phoenix) Associate United Kingdom Equity Accounted 14.42% 1,010 19.97% 1,079
HDFC Asset Management Company Limited (HDFC Asset Management) Associate India Equity Accounted 21.24% 1,321 26.91% 1,937
Heng An Standard Life Insurance Company Limited (HASL) Joint venture China Equity Accounted 50.00% n/a 50.00% n/a
The country of incorporation or registration is the same as their principal
place of business. The interest held by the Group is the same as the
proportion of voting rights held. The material associates are all listed. HASL
is not listed.
The Group's investment in the following company was considered to be a
material associate at 31 December 2019 but was reclassified to equity
securities and interest in pooled investment funds during 2020. Refer Section
(b) below for further details.
Name of associate Nature of relationship Principal place of business Measurement Method Interest held by Fair value of interest held by the Group at
the Group at 31 December 2019
31 December 2019
HDFC Life Insurance Company Limited (HDFC Life) Associate India Equity Accounted 14.73% 1,968
(b) Investments in associates accounted for using the equity method
The table below provides summarised financial information for those associates
which are considered to be material to the Group. The summarised financial
information reflects the amounts presented in the financial statements or
management accounts of the relevant associates amended to reflect adjustments
made when using the equity method, including fair value adjustments on
acquisition and not the Group's share of those amounts.
2020 2019
Phoenix HDFC Asset Management(1) Phoenix HDFC Life(2) HDFC Asset Management(1)
£m £m £m £m £m
Summarised financial information of associate:
Revenue 4,704 220 4,182 3,617 276
Profit after tax (all from continuing operations) 690 132 28 128 170
Other comprehensive income 25 - (110) - -
Total comprehensive income 715 132 (82) 128 170
Total assets(3) 334,193 474 242,666 14,607 388
Total liabilities(3) 326,441 28 237,043 13,818 27
Net assets 7,752 446 5,623 789 361
Attributable to NCI and other equity holders 835 - 808 - -
Attributable to investee's shareholder 6,917 446 4,815 789 361
Interest held 14.42% 21.24% 19.97% 14.73% 26.91%
Share of net assets 998 95 962 116 97
2020 2019
Phoenix HDFC Asset Management Other(4) Total Phoenix HDFC Life(2) HDFC Asset Management Other Total
£m £m £m £m £m £m £m £m £m
Carrying value of associates accounted for using the equity method 1,008 116 10 1,134 961 167 120 9 1,257
Dividends received 67 13 - 80 67 9 17 - 93
Share of profit/(loss) after tax(4) 110 48 19 177 (5) 26 42 - 63
(1 ) Revenue and profit after tax for HDFC Asset Management are presented
for the 12 months to 31 December 2020 and total assets and total liabilities
are presented as at 31 December 2020. For 2019, revenue and profit after tax
for HDFC Asset Management presented were for the 15 months to 31 December 2019
(refer below for details of accounting period alignment) and total assets and
total liabilities presented were as at 30 September 2019 as the statement of
financial position at 31 December 2019 was not made publicly available.
(2 ) As noted above, the Group's investment in HDFC Life was reclassified
to equity securities and interests in pooled investment funds in 2020 so HDFC
Life was not a material associate at 31 December 2020 (refer below for further
details of the reclassification).
(3 ) As a liquidity presentation is used by insurance companies when
presenting their statement of financial position, an analysis of total assets
and total liabilities between current and non-current has not been provided
for Phoenix and HDFC Life. The majority of HDFC Asset Management's assets and
liabilities are current.
(4 ) For the year ended 31 December 2020 the share of profit/(loss) after
tax of £19m for Other relates to HDFC Life for the period from 1 January 2020
to 3 December 2020 prior to its reclassification to equity securities and
interests in pooled funds (refer below for further details of the
reclassification).
Phoenix
Phoenix is the largest life and pensions consolidator in Europe. Our
investment in Phoenix supports our strategic partnership. On 23 February 2021,
the Group announced a simplification and extension of the strategic
partnership between the Group and Phoenix. Refer Note 47.
Following the completion of the Sale of the Group's UK and European insurance
business in August 2018, as part of the total consideration, the Group was
issued with new Phoenix shares representing 19.98% of the issued share capital
of Phoenix. While our interest was less than 20%, being the threshold where
significant influence is presumed, our judgement was that Phoenix should be
classified as an associate. This judgement took into account other key
indicators of significant influence from the contractual relationships with
Phoenix, including the licensing to Phoenix of the Standard Life brand, and
the Group's representation on the Phoenix Board.
On 22 July 2020 the Group's associate, Phoenix, announced the completion of
its acquisition of ReAssure Group plc. Under the terms of the transaction,
Phoenix issued 277,277,138 new ordinary shares as part consideration for the
acquisition. Phoenix have recognised a gain on acquisition of £372m
reflecting the excess of the fair value of the net assets acquired over the
consideration paid and the Group's share of this gain is recognised in our
share of profit from Phoenix. Completion of the transaction resulted in the
Group's holding in Phoenix becoming 14.4% of the enlarged Phoenix Group. A
dilution gain of £4m was recognised within the Profit on disposal of
interests in associates in the consolidated income statement as a result of
the transaction. Refer Note 1 for further details. Although our interest in
Phoenix has reduced to 14.4%, taking into account our continued representation
on Phoenix's board and, in particular, the contractual relationships with
Phoenix, including the licencing to Phoenix of the Standard Life brand, our
judgement was that Phoenix should continue to be classified as an associate.
At acquisition the value of the Group's share of Phoenix's identifiable assets
and liabilities was determined. This value was determined using the same
valuation bases as required for a business combination under which most of the
identifiable assets and liabilities of the enlarged Phoenix group (including
Standard Life Assurance Limited (SLAL)) were measured at fair value. The most
significant assets that were not measured at fair value were Phoenix's defined
benefit pension schemes which were measured at their IAS 19 value.
A key judgement was the identification, valuation and determination of useful
lives, of the Group's share of Phoenix's intangible assets at the date of
acquisition. The main intangible assets identified were the acquired present
value of in-force business (AVIF) for both SLAL and other Phoenix entities.
AVIF comprised the difference between the fair value and IFRS carrying value
of insurance contracts together with the fair value of future profits expected
to arise on investment contracts. The valuation of the AVIF was determined
using the application of present value techniques to the best estimate cash
flows expected to arise from policies that were in-force at the acquisition
date, adjusted to reflect the price of bearing the uncertainty inherent in
those cash flows. This approach incorporated a number of judgements and
assumptions which impacted the resultant valuation, the most significant of
which were mortality rates, expected policy lapses, the expenses associated
with servicing the policies, future investment returns, the discount rate and
the risk adjustment for uncertainty, determined using a cost of capital
approach. The Group's share of profit after acquisition under the equity
method reflects the amortisation of these intangible assets. This differs from
the amortisation recognised in Phoenix's own IFRS financial statements due to
the revaluation of the existing Phoenix intangible assets at August 2018 for
equity method purposes. The amortisation method reflects the expected
emergence of economic benefits which results in higher amortisation in earlier
periods.
Following the completion of the ReAssure transaction, the Group's current
share of Phoenix's intangible assets recognised at the date of acquisition has
reduced from 19.98% to 14.4%. The notional partial disposal of these
intangible assets results in a reduction in the corresponding amortisation
recognised in the Group's share of profit under the equity method.
Useful life at Fair value at Group's share at
acquisition date
acquisition date
acquisition date(1)
Years £m £m
Intangible asset:
SLAL AVIF 24 2,931 586
Existing Phoenix AVIF 15 1,503 300
(1 ) Based on Group's share at the date of acquisition (19.98%).
There has been no change to the useful lives of the SLAL AVIF and Existing
Phoenix AVIF. Therefore the residual useful lives of these assets at 31
December 2020 are 21.7 years and 12.7 years respectively.
The determination of longevity and persistency actuarial assumptions, and the
determination of the bargain purchase gain in relation to the acquisition of
ReAssure are also key judgements in the determination of the Phoenix profits
for 2020 and therefore the Group's carrying value of Phoenix at 31 December
2020 and share of profits for the year ended 31 December 2020.
Estimates and assumptions
A key area of estimation is determining the recoverable amount of Phoenix on a
value in use basis for the purpose of assessing impairment. We consider that
under IAS 28 the market value of Phoenix represents the best estimate of the
present value of future dividends and therefore this market value is used as
the value in use. As the value in use is based on the market value, a discount
rate is not determined.
At 31 December 2020 the market value of the Group's interest in Phoenix was
£1,010m which was above the carrying value so no impairment was identified.
At 31 December 2019 the market value of the Group's interest in Phoenix was
£1,079m and this was used as the value in use at this date. On this basis, a
reversal of a previously recognised impairment of £243m was recognised in the
consolidated income statement for the year ended 31 December 2019.
The determination that market value should be used as the value in use is an
area of judgement. If the recoverable amount falls below the carrying value in
a future period this will result in a future impairment.
Refer Note 47 for disclosure regarding the reclassification of Phoenix from an
associate to an equity investment subsequent to the year end date of 31
December 2020.
Phoenix has taken advantage of the temporary exemption granted to insurers in
IFRS 4 Insurance Contracts from applying IFRS 9 as a result of meeting the
exemption criteria as at 31 December 2015.
The financial assets with contractual cash flows that are solely payments of
principal and interest (excluding those held for trading or managed on a fair
value basis) are set out below together with all other financial assets,
measured at fair value through profit and loss.
Fair value as at Fair value as at
31 December 2020
31 December 2019
£m £m
Financial assets with contractual cash flows that are solely payments of 13,436 6,197
principal and interest (SPPI) excluding those held for trading or managed on a
fair value basis
Financial assets other than those above(1) 298,176 218,355
Total 311,612 224,552
(1 ) The change in fair value in the year to 31 December 2020 of all
other financial assets that are FVTPL is a gain of £11,087 (2019: gain of
£20,231m).
An analysis of credit ratings of financial assets with contractual cash flows
that are SPPI, excluding those held for trading or managed on a fair value
basis, is provided below:
AAA AA A BBB BB and below Non-rated Unit linked Total
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
Carrying value £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
Loans and deposits - - 6 21 195 47 - 164 - - 368 284 78 - 647 516
Cash and cash equivalents 30 295 1,728 733 7,035 3,105 193 23 - - 4 142 2,008 40 10,998 4,338
Accrued income - - - - - - - - - - 251 160 - - 251 160
Other receivables - - - - - - - - - - 1,540 1,183 - - 1,540 1,183
30 295 1,734 754 7,230 3,152 193 187 - - 2,163 1,769 2,086 40 13,436 6,197
HDFC Asset Management
HDFC Asset Management manages a range of mutual funds and provides portfolio
management and advisory services. The investment in HDFC Asset Management is a
strategic investment in a leading asset manager in India, one of the world's
fastest growing markets.
During 2020 the Group further reduced its interest in HDFC Asset Management to
21.24% (2019:26.91%). Refer Note 1 for further details.
The difference between the carrying value of this associate and the Group's
share of net assets is due primarily to goodwill arising on the buyback of
shares by HDFC Asset Management from employees.
The year end date of HDFC Asset Management is 31 March which is different from
the Group's year end date of 31 December. For the purposes of the preparation
of the Group's consolidated financial statements, financial information for
the period to 31 December is used for HDFC Asset Management. Prior to 2019,
financial information for the 12 months to 30 September was used for HDFC
Asset Management and 2019 included the Group's share of HDFC Asset
Management's profits for the 15 months to 31 December 2019. £42m, which
included £7m relating to the three months to 31 December 2018 (£12m net of
tax of £5m), was recognised in the consolidated income statement for 2019.
Profits for the three months to 31 December 2018 were excluded from 2019
adjusted profit.
HDFC Life
HDFC Life is one of India's leading life insurance companies. The investment
in HDFC Life allows the Group to benefit from the life insurance market in one
of the world's fastest growing economies.
During 2020 the Group further reduced its interest in HDFC Life to 8.89%
(2019:14.73%). Refer Note 1 for further details of the sales during 2020.
While the Group's remaining interest at 31 December 2019 was less than 20%,
being the threshold where significant influence is presumed, our judgement was
that HDFC Life should continue to be classified as an associate. This
judgement took into account other key indicators of significant influence
including the Group's representation on the board of HDFC Life and the Group's
ability to participate in policy-making processes including decisions about
dividends or other distributions that require unanimous board approval under
the articles of association. The final sale on 3 December 2020 reduced the
Group's interest from 10.27% to 8.89% and the Group is no longer entitled to
representation on the board of HDFC Life and, from this date, HDFC Life is no
longer considered to be an associate of the Group.
On 3 December 2020, the Group's investment in HDFC Life was reclassified to
equity securities and interests in pooled investment funds measured at fair
value. The equity accounted value of the investment at this date was £111m.
The fair value of the Group investment in HDFC Life at this date was £1,168m
based on the HDFC Life share price on the date of the reclassification and a
reclassification gain of £1,051m has been recognised in the consolidated
income statement. On reclassification a loss of £6m was recycled from the
translation reserve and was included in determining the gain.
The year end date for HDFC Life is 31 March which is different from the
Group's year end date of 31 December. For the purposes of the preparation of
the Group's consolidated financial statements, financial information for the
period from 1 January 2020 to 3 December 2020 was used for HDFC Life (2019: as
at and for the 12 months ended 31 December 2019) for equity accounting
purposes. The difference between the carrying value of this associate and the
Group's share of net assets at 31 December 2019 was due primarily to goodwill
of £49m arising from additional investments being made at fair value rather
than book value.
At 31 March 2016 HDFC Life had significant insurance liabilities and its
liabilities arising from contracts within the scope of IFRS 4 and liabilities
connected with insurance were over 90% of its total liabilities. Therefore
HDFC Life was eligible to defer the implementation of IFRS 9 for equity
accounting purposes.
As the Group's investment in HDFC Life is now measured at fair value, we are
no longer applying the temporary exemption from IFRS 9 in relation to HDFC
Life at 31 December 2020. The fair value of HDFC Life's financial assets at 31
December 2019 that remained under IAS 39 for equity accounting purposes and
the change in fair value during the year ended 31 December 2019 were as
follows:
Fair value as at
31 December 2019
£m
Financial assets with contractual cash flows that are solely payments of 6,871
principal and interest (SPPI) excluding those held for trading or managed on a
fair value basis(1,2)
Financial assets other than those above(2) 8,046
Total 14,917
(1 ) Financial assets that were SPPI (excluding those held for trading or
managed on a fair value basis) are predominantly AAA debt instruments
including central and state government securities. Their carrying value at 31
December 2019 was £6,659m. Securities with fair value and carrying value of
£34m were rated below BBB.
(2 ) The change in fair value in the year to 31 December 2019 for
financial assets that are SPPI (excluding those held for trading or managed on
a fair value basis) was a gain of £758m. The change in fair value for all
other financial assets is a gain of £727m.
(c) Investments in joint ventures
HASL Other Total
2020 2019 2020 2019 2020 2019
£m £m £m £m £m £m
Carrying value of joint ventures accounted for using the equity method 236 205 1 47 237 252
Dividends received - - - - - -
Share of profit/(loss) after tax 23 20 (6) (4) 17 16
The Group's share of the profit after tax (all from continuing operations) and
total comprehensive income of other joint ventures was a loss of £6m (2019:
loss of £4m).
HASL
The Group has a 50% share in HASL, one of China's leading life insurance
companies offering life and health insurance products. The investment in HASL
is a strategic investment giving the Group access to one of the world's
largest markets.
On 30 June 2020, HASL completed the acquisition of SL Asia. Refer Note 1 for
further details.
The table below provides summarised financial information for HASL, the joint
venture which is considered to be material to the Group. The summarised
financial information reflects the amounts presented in the financial
statements of HASL amended to reflect adjustments made when using the equity
method.
HASL
2020 2019
£m £m
Summarised financial information of joint venture:
Revenue 481 426
Depreciation and amortisation 3 3
Interest income 57 57
Interest expense 2 2
Income tax (expense)/income (3) 6
Profit after tax (all from continuing operations) 46 41
Other comprehensive income 1 25
Total comprehensive income 47 66
Total assets(1) 3,156 1,957
Total liabilities(1) 2,685 1,547
Cash and cash equivalents 122 67
Net assets 471 410
Attributable to investee's shareholder 471 410
Interest held 50% 50%
Share of net assets 236 205
(1 ) As a liquidity presentation is used by insurance companies when
presenting their statement of financial position, an analysis of total assets
and total liabilities between current and non-current has not been provided
for HASL.
At 31 December 2015 HASL had significant insurance liabilities and its
liabilities arising from contracts within the scope of IFRS 4 and liabilities
connected with insurance were over 90% of its total liabilities. Therefore
HASL was eligible to defer the implementation of IFRS 9 for equity accounting
purposes.
The fair value of HASL's financial assets at 31 December 2020 that remain
under IAS 39 for equity accounting purposes and the change in fair value
during the year ended 31 December 2020 are as follows:
Fair value as at Fair value as at
31 December 2020
31 December 2019
£m £m
Financial assets with contractual cash flows that are solely payments of 1,862 1,344
principal and interest (SPPI) excluding those held for trading or managed on a
fair value basis(1,2)
Financial assets other than those above(2) 431 598
Total 2,293 1,942
(1 ) Financial assets that are SPPI (excluding those held for trading or
managed on a fair value basis) are predominantly AAA debt instruments. Their
carrying value at 31 December 2020 is £1,378m (2019: £1,321m). No securities
are rated below BBB (2019: none).
(2 ) The change in fair value in the year to 31 December 2020 for
financial assets that are SPPI (excluding those held for trading or managed on
a fair value basis) is a gain of £129m (2019: £63m). The change in fair
value for all other financial assets is a gain of £23m (2019: gain of £68m).
VMUTM
Other joint ventures carrying value of £1m (2019: £47m) includes £1m (2019:
£47m) for VMUTM.
In 2020 an impairment loss of £45m has been recognised on the Group's
interest in VMUTM (2019: £nil). The impairment resulted from a reduction in
projected future revenues as a result of a business plan reassessment by the
joint venture which took into account the fall in UK equity markets due to
COVID-19, and an increase in projected costs to develop a new retail customer
proposition. The impairment charge is recognised in the Asset management,
platforms and wealth segment and is included in loss on impairment of
interests in associates and joint ventures in the consolidated income
statement.
The impairment was recognised at 30 June 2020. Following the impairment, the
carrying value of the investment in the VMUTM joint venture at 30 June 2020
was £nil which was the recoverable amount. The recoverable amount was based
on value in use (VIU), the key assumptions for which are the discount rate,
terminal growth rate and forecast cash flows. The pre-tax discount rate used
was 14.9% and the terminal growth rate used was 2%. Cash flow projections for
the five years to 30 June 2025 were based on management approved profit
forecasts, with the terminal growth rate used for subsequent years. Profits
were adjusted to a cash flow basis, e.g. amortisation and depreciation
removed. The VIU cash flow projections at 30 June 2020 took into account
expected future capital contributions to the business.
(d) Investments in associates measured at FVTPL
The aggregate fair value of associates accounted for at FVTPL included in
equity securities and interests in pooled investment funds (refer Note 19) at
31 December 2020 is £54m (2019: £45m) none of which are considered
individually material to the Group.
17. Property, plant and equipment
Property, plant and equipment consists primarily of property owned and
occupied by the Group and the computer equipment used to carry out the Group's
business along with right-of-use assets for leased property and equipment.
Owner occupied property: Owner occupied property is initially recognised at
cost and subsequently revalued to fair value at each reporting date.
Depreciation, being the difference between the carrying amount and the
residual value of each significant part of a building, is charged to the
consolidated income statement over its useful life. The useful life of each
significant part of a building is estimated as being between 30 and 50 years.
A revaluation surplus is recognised in other comprehensive income unless it
reverses a revaluation deficit which has been recognised in the consolidated
income statement.
Equipment: Equipment is initially recognised at cost and subsequently measured
at cost less depreciation. Depreciation is charged to the income statement
over 2 to 15 years depending on the length of time the Group expects to derive
benefit from the asset.
Right-of-use asset: Refer Note 18 below for the accounting policies for
right-of-use assets.
Owner occupied property Equipment Right-of-use assets - property Right-of-use assets - equipment Total
Notes £m £m £m £m £m
Cost or valuation
At 31 December 2018 2 101 - - 103
Right-of-use assets recognised on implementation of IFRS 16(1) - - 354 1 355
At 1 January 2019 2 101 354 1 458
Additions - 28 74 1 103
Disposals and adjustments(2) - (3) (9) - (12)
Derecognition of right-of-use assets relating to subleases classified as - - (11) - (11)
finance leases
Foreign exchange adjustment - (1) (4) - (5)
At 31 December 2019 2 125 404 2 533
Reclassified as held for sale during the year - (4) (7) - (11)
Additions - 13 16 1 30
Disposals and adjustments(2) - (26) (38) - (64)
Derecognition of right-of-use assets relating to subleases classified as - - (5) - (5)
finance leases
At 31 December 2020 2 108 370 3 483
Accumulated depreciation and impairment
At 31 December 2018 - (42) - - (42)
Right-of-use assets recognised on implementation of IFRS 16(1) - - (176) - (176)
At 1 January 2019 - (42) (176) - (218)
Depreciation charge for the year 6 - (18) (28) (1) (47)
Disposals and adjustments(2) - 1 3 - 4
Derecognition of right-of-use assets relating to subleases classified as - - 8 - 8
finance leases
Impairment - - (16) - (16)
Foreign exchange adjustment - - 2 - 2
At 31 December 2019 - (59) (207) (1) (267)
Reclassified as held for sale during the year - 2 2 - 4
Depreciation charge for the year 6 - (19) (26) (1) (46)
Disposals and adjustments(2) (1) 27 36 - 62
Derecognition of right-of-use assets relating to subleases classified as - - 3 - 3
finance leases
Impairment - - (2) - (2)
Foreign exchange adjustment - - (1) - (1)
At 31 December 2020 (1) (49) (195) (2) (247)
Carrying amount
At 1 January 2019 2 59 178 1 240
At 31 December 2019 2 66 197 1 266
At 31 December 2020 1 59 175 1 236
(1 ) The Group has initially applied IFRS 16 at 1 January 2019. Under the
transition methods chosen, comparative information is not restated and the
cumulative effect of initially applying these standards is recognised in
retained earnings at the date of initial application.
(2 ) For the year ended 31 December 2020 £26m (2019: £nil) of disposals
and adjustments relates to equipment with net book value of £nil which is no
longer in use.
Included in property right-of-use assets, are right-of-use assets that meet
the definition of investment property. Their carrying amount at 31 December
2020 is £25m (2019: £28m). This is made up a gross carrying value of £47m
(2019: £46m) and accumulated depreciation of £22m (2019: £18m). During the
year to 31 December 2020 there were additions of £nil (2019: £26m),
transfers to investment property of £5m (2019: £nil), depreciation of (£2m)
(2019: (£2m)), derecognitions related to new subleases classified as finance
leases of (£2m) (2019: (£4m)), impairments of (£2m) (2019: (£16m)) and
disposals and adjustments of (£2m) (2019 £nil) related to these assets.
Rental income received and direct operating expenses incurred to generate that
rental income in the year to 31 December 2020 were £3m (2019: £2m) and £2m
(2019: £3m) respectively. In addition, there were direct expenses of £1m
(2019: £nil) in relation to investment properties not currently generating
income.
The fair value of these right-of-use assets at 31 December 2020 is £25m
(2019: £28m). The valuation technique used to determine the fair value
considers the rental income expected to be received under sub-leases during
the term of the lease and the direct expenses expected to be incurred in
managing the leased property, discounted using a discount rate that reflects
the risks inherent in the cash flow estimates. It is not based on valuations
by an independent valuer. This is a Level 3 valuation technique as defined in
Note 40.
If owner occupied property was measured using the cost model, the historical
cost before impairment would be £1m (2019: £2m). As the expected residual
value of owner occupied property is in line with the current fair value, no
depreciation is currently charged.
Further details on the leases under which the Group's right-of-use assets are
recognised are provided in Note 18 below.
18. Leases
A contract is, or contains, a lease if the contract conveys the right to
control the use of an identified asset for a period of time in exchange for
consideration. At inception of a contract, the Group assesses whether a
contract is, or contains, a lease. In 2019, on adoption of IFRS 16 the Group
used the practical expedient permitted to apply the new standard at transition
solely to leases previously identified in accordance with IAS 17 and IFRIC 4
Determining whether an Arrangement Contains a Lease.
Right-of-use assets are measured at cost less accumulated depreciation and
impairment losses and are presented in property, plant and equipment (refer
Note 17). The Group does not revalue its right-of-use assets. This applies to
all right-of-use assets, including those that are assessed as meeting the
definition of investment property. The cost comprises the amount of the
initial measurement of the lease liability plus any initial direct costs and
expected restoration costs not relating to wear and tear. Costs relating to
wear and tear are expensed over the term of the lease. Depreciation is charged
on right-of-use assets on a straight line basis from the lease commencement
date to the earlier of the end of the useful life of the right-of-use asset or
the end of the lease term. The Group assesses right-of-use assets for
impairment when such indicators exist, and where required, reduces the value
of the right-of-use asset accordingly.
The related lease liability (included in other financial liabilities - refer
Note 36) is calculated as the present value of the future lease payments. The
lease payments are discounted using the rate implicit within the lease where
readily available or the Group's incremental borrowing rate where the implicit
rate is not readily available. Interest is calculated on the liability using
the discount rate and is charged to the consolidated income statement under
finance costs.
In determining the value of the right-of-use assets and lease liabilities, the
Group considers whether any leases contain lease extensions or termination
options that the Group is reasonably certain to exercise.
Where a leased property has been sublet, the Group assesses whether the
sublease has transferred substantially all the risk and rewards of the
right-of-use asset to the lessee under the sublease. Where this is the case,
the right-of-use asset is derecognised and a net investment in finance leases
(included in Receivables and other financial assets - refer Note 21) is
recognised, calculated as the present value of the future lease payments
receivable under the sublease. Where a property is only partially sublet, only
the portion of the right-of-use asset relating to the sublet part of the
property is derecognised and recognised as a net investment in finance leases.
Any difference between the initial value of the net investment in finance
leases and the right-of-use asset derecognised is recognised in the
consolidated income statement (within other income or expenses). Interest is
calculated on the net investment in finance lease using the discount rate and
is recognised in the consolidated income statement as interest income.
Where the sublease does not transfer substantially all the risk and rewards of
the right-of-use assets to the lessee under the sublease, the Group continues
to recognise the right-of-use asset. The sub-lease is accounted for as an
operating lease with the lease payments received recognised as property rental
income in other income in the consolidated income statement. Lease incentives
granted are recognised as an integral part of the property rental income and
are spread over the term of the lease.
The Group does not recognise right-of-use assets and lease liabilities for
short-term leases (less than one year from inception) and leases where the
underlying asset is of low value.
(a) Leases where the Group is lessee
The Group leases various offices and equipment used to carry out its business.
Leases are generally for fixed periods but may be subject to extensions or
early termination clauses. The remaining periods for current leases range from
less than 1 year to 18 years (2019: less than 1 year to 19 years). A number of
leases which are due to end in 2031 contain options that would allow the Group
to extend the lease term. The Group reviews its property use on an ongoing
basis and these extensions have not been included in the right-of-use asset or
lease liability calculations.
The Group has recognised the following assets and liabilities in relation to
these leases where the Group is a lessee:
2020 2019
£m £m
Right-of-use assets:
Property 175 197
Equipment 1 1
Total right-of-use assets 176 198
Lease liabilities (249) (268)
The following table provides a maturity analysis of the contractual
undiscounted cash flows for the lease liabilities:
2020 2019
£m £m
Less than 1 year 30 33
Greater than or equal to 1 year and less than 2 years 30 29
Greater than or equal to 2 years and less than 3 years 28 28
Greater than or equal to 3 years and less than 4 years 24 26
Greater than or equal to 4 years and less than 5 years 22 23
Greater than or equal to 5 years and less than 10 years 98 102
Greater than or equal to 10 years and less than 15 years 44 57
Greater than or equal to 15 years 10 14
Total undiscounted lease liabilities 286 312
Details of the movements in the Group's right-of-use assets including
additions and depreciation are included in Note 17.
The interest on lease liabilities for the year ended 31 December 2020 was £6m
(2019: £7m).
The Group does not recognise right-of-use assets and lease liabilities for
short-term leases and leases where the underlying asset is of low value. The
expenses for these leases for the year ended 31 December 2020 were £3m (2019:
£2m).The Group lease commitment for short-term leases was £nil at 31
December 2020 (2019: £nil).
The total cash outflow for lease liabilities recognised in the consolidated
statement of cash flows for the year ended 31 December 2020 was £35m (2019:
£32m).
(b) Leases where the Group is lessor (subleases)
Where the Group no longer requires a leased property, the property may be
sublet to a third party. The sublease may be for the full remaining term of
the Group's lease or only part of the remaining term.
At 31 December 2020, the Group had a net investment in finance leases asset of
£18m (2019: £15m) for subleases which had transferred substantially all the
risk and rewards of the right-of-use assets to the lessee under the sublease.
All other sub-leases are accounted for as operating leases. Prior to the
implementation of IFRS 16, all the Group's subleases were accounted for as
operating leases. The increase during the year ended 31 December 2020 was
mainly due to one new sublease entered into during the year.
(b)(i) Finance leases
During the year ended 31 December 2020, the Group received finance income on
the net investment in finance leases asset of less than £1m (2019: less than
£1m). The Group recorded an initial gain of £2m in relation to new
sub-leases entered into during the year ended 31 December 2020 (2019: £4m).
The following table provides a maturity analysis of the future contractual
undiscounted cash flows for the net investment in finance leases and a
reconciliation to the net investment in finance leases asset:
2020 2019
£m £m
Less than 1 year 3 2
Greater than or equal to 1 year and less than 2 years 2 2
Greater than or equal to 2 years and less than 3 years 2 2
Greater than or equal to 3 years and less than 4 years 2 1
Greater than or equal to 4 years and less than 5 years 2 1
Greater than or equal to 5 years and less than 10 years 9 7
Greater than or equal to 10 years and less than 15 years - 2
Total contractual undiscounted cash flows under finance leases 20 17
Unearned finance income (2) (2)
Total net investment in finance leases 18 15
(b)(ii) Operating leases
During the year ended 31 December 2020, the Group received property rental
income from operating leases of £3m (2019: £2m).
The following table provides a maturity analysis of the future contractual
undiscounted cash flows for subleases classified as operating leases:
2020 2019
£m £m
Less than 1 year 2 3
Greater than or equal to 1 year and less than 2 years 2 3
Greater than or equal to 2 years and less than 3 years 1 2
Total contractual undiscounted cash flows under operating leases 5 8
19. Financial assets
Financial assets are initially recognised at their fair value. Subsequently
all equity securities and interests in pooled investment funds and derivative
instruments are measured at fair value. All equity securities and interests in
pooled investment funds are classified as FVTPL on a mandatory basis. Changes
in their fair value are recognised in investment return in the consolidated
income statement. The classification of derivatives and the accounting
treatment of derivatives designated as a hedging instrument are set out in
Note 20.
The subsequent measurement of debt instruments depends on whether their cash
flows are solely payments of principal and interest and the nature of the
business model they are held in as follows:
SPPI(1) test satisfied? Business model Classification
Yes A: Objective is to hold to collect contractual cash flows Amortised cost(2)
Yes B: Objective is achieved by both collecting contractual cash flows and selling Fair value through other comprehensive income (FVOCI)(2)
Yes C: Objective is neither A nor B FVTPL
No N/A FVTPL
(1 ) Solely payments of principal and interest.
(2 ) May be classified as FVTPL if doing so eliminates or significantly
reduces a measurement or recognition inconsistency (sometimes referred to as
an 'accounting mismatch') that would otherwise arise from measuring assets or
liabilities or recognising the gains and losses on them on different bases.
The Group has no debt instruments that are managed within a business model
whose objective is achieved both by collecting contractual cash flows and
selling and therefore there are no debt instruments classified as FVOCI. Debt
instruments classified as FVTPL are classified as such due to the business
model they are managed under, predominantly being held in consolidated
investment vehicles.
The methods and assumptions used to determine fair value of financial assets
at FVTPL are discussed in Note 40.
Amortised cost is calculated, and related interest is credited to the
consolidated income statement, using the effective interest method. Impairment
is determined using an expected credit loss impairment model which is applied
to all financial asset measured at amortised cost. Financial assets measured
at amortised cost attract a loss allowance equal to either:
· 12 month expected credit losses (losses resulting from possible default
within the next 12 months)
· Lifetime expected credit losses (losses resulting from possible defaults
over the remaining life of the financial asset)
Financial assets attract a 12 month ECL allowance unless the asset has
suffered a significant deterioration in credit quality or the simplified
approach for calculation of ECL has been applied. As permitted under IFRS 9
Financial Instruments, the Group has applied the simplified approach to
calculate the ECL allowance for trade receivables and contract assets
recognised under IFRS 15 Revenue from Contracts with Customers and lease
receivables recognised under IFRS 16 Leases. Under the simplified approach the
ECL is calculated over the remaining life of the asset.
The table below sets out an analysis of financial assets excluding those
assets backing unit linked liabilities which are set out in Note 25.
At fair value through profit or loss(1) Cash flow At amortised cost Total
hedge
2020 2019 2020 2019 2020 2019 2020 2019
Notes £m £m £m £m £m £m £m £m
Derivative financial assets 20 18 16 - 3 - - 18 19
Equity securities and interests in pooled investment funds 40 1,980 725 - - - - 1,980 725
Debt securities 40 787 769 - - 325 602 1,112 1,371
Financial investments 2,785 1,510 - 3 325 602 3,110 2,115
Receivables and other financial assets 21 28 1 - - 593 559 621 560
Cash and cash equivalents 24 - - - - 1,519 1,615 1,519 1,615
Total 2,813 1,511 - 3 2,437 2,776 5,250 4,290
(1 ) All financial assets measured at fair value through profit or loss
have been classified at FVTPL on a mandatory basis. The Group has not
designated any financial assets as FVTPL.
The amount of debt securities expected to be recovered or settled after more
than 12 months is £231m (2019: £273m). Due to the nature of equity
securities and interests in pooled investment funds, there is no fixed term
associated with these securities.
20. Derivative financial instruments
A derivative is a financial instrument that is typically used to manage risk
and whose value moves in response to an underlying variable such as interest
or foreign exchange rates. The Group uses derivative financial instruments in
order to match subordinated debt liabilities and to reduce the risk from
potential movements in foreign exchange rates on seed capital and
co-investments and potential movements in market rates on seed capital.
Certain consolidated investment vehicles may also use derivatives to take and
alter market exposure, with the objective of enhancing performance and
controlling risk.
Management determines the classification of derivatives at initial
recognition. All derivative instruments are classified as at FVTPL except
those designated as part of a cash flow hedge or net investment hedge.
Derivatives at FVTPL are measured at fair value with changes in fair value
recognised in the consolidated income statement.
On adoption of IFRS 9 Financial instruments in 2019, the Group has elected to
continue applying the hedge accounting requirements of IAS 39. The accounting
treatment below applies to derivatives designated as part of a hedging
relationship.
Using derivatives to manage a particular exposure is referred to as hedging.
For a derivative to be considered as part of a hedging relationship its
purpose must be formally documented at inception. In addition, the
effectiveness of the hedge must be initially high and be able to be reliably
measured on a regular basis. Derivatives used to hedge variability in future
cash flows such as coupons payable on subordinated liabilities or revenue
receivable in a foreign currency are designated as cash flow hedges, while
derivatives used to hedge currency risk on investments in foreign operations
are designated as net investment hedges.
Where a derivative qualifies as a cash flow or net investment hedge, hedge
accounting is applied. The effective part of any gain or loss resulting from
the change in fair value is recognised in other comprehensive income, and in
the cash flow or net investment hedge reserve in equity, while any ineffective
part is recognised immediately in the consolidated income statement. If a
derivative ceases to meet the relevant hedging criteria, hedge accounting is
discontinued.
For cash flow hedges, the amount recognised in the cash flow hedge reserve is
transferred to the consolidated income statement (recycled) in the same period
or periods during which the hedged item affects profit or loss and is
transferred immediately if the cash flow is no longer expected to occur. For
net investment hedges, the amount recognised in the net investment hedge
reserve is transferred to the consolidated income statement on disposal of the
investment.
2020 2019
Contract amount Fair value assets Fair value liabilities Contract amount Fair value assets Fair value liabilities
Notes £m £m £m £m £m £m
Cash flow hedges 19,32 549 - 6 566 3 -
FVTPL/Held for trading 19,32 687 18 7 534 16 3
Derivative financial instruments 40 1,236 18 13 1,100 19 3
Derivative financial instruments backing unit linked liabilities 25 463 6 9 669 5 6
Total derivative financial instruments 1,699 24 22 1,769 24 9
Derivative assets of £nil (2019: £4m) are expected to be recovered after
more than 12 months. Derivative liabilities of £5m (2019: £1m) are expected
to be settled after more than 12 months.
(a) Hedging strategy
The Group generally does not hedge the currency exposure relating to revenue
and expenditure, nor does it hedge translation of overseas profits in the
income statement. Where appropriate, the Group may use derivative contracts to
reduce or eliminate currency risk arising from individual transactions or seed
capital and co-investment activity.
(a)(i) Cash flow hedges
On 18 October 2017, the Group issued subordinated notes with a principal
amount of US$750m. In order to manage its foreign exchange risk relating to
the principal and coupons payable on these notes the Group entered into a
cross-currency swap which is designated as a cash flow hedge. The cash flow
hedge was fully effective during the year. The cross-currency swap has the
effect of swapping the 4.25% US Dollar fixed rate subordinated notes into 3.2%
Sterling fixed rate subordinated notes with a principal amount of £569m. The
cross-currency swap has a fair value liability position of £6m (2019: £3m
asset). During the year ended 31 December 2020 fair value losses of £3m
(2019: losses of £10m) were recognised in other comprehensive income in
relation to the cross-currency swap. Losses of £19m (2019: losses of £28m)
and forward points/gains of £6m (2019: gains of £6m) were transferred from
other comprehensive income to investment return and finance costs respectively
in the consolidated income statement in relation to the cross-currency swap
during the year.
(a)(ii) FVTPL/Held for trading
Derivative financial instruments classified as FVTPL/held for trading include
those that the Group holds as economic hedges of financial instruments that
are measured at fair value. FVTPL/held for trading derivative financial
instruments are also held by the Group to match contractual liabilities that
are measured at fair value or to achieve efficient portfolio management in
respect of instruments measured at fair value.
2020 2019
Contract amount Fair value assets Fair value liabilities Contract Fair value assets Fair value liabilities
amount
£m £m £m £m £m £m
Equity derivatives:
Futures 100 1 9 177 2 1
Variance swaps 6 6 - 5 6 -
Total return swaps - - - 29 - 1
Bond derivatives:
Futures - - - 1 - -
Interest rate derivatives:
Swaps 52 - 4 153 - 2
Futures 34 - - - - -
Foreign exchange derivatives:
Forwards 859 15 2 718 10 5
Other derivatives:
Inflation rate swaps 18 2 - 14 1 -
Credit default swaps 81 - 1 106 2 -
Derivative financial instruments at FVTPL/ held for trading 1,150 24 16 1,203 21 9
(b) Maturity profile
The maturity profile of the contractual undiscounted cash flows in relation to
derivative financial instruments is as follows:
Within 1 1-5 5-10 10-15 15-20 Greater than 20 years Total
year
years
years
years
years
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
£m £m £m £m £m £m £m £m £m £m £m £m £m £m
Cash inflows
Derivative financial assets 367 411 - 99 - 651 - - - - - 1 367 1,162
Derivative financial liabilities 183 281 93 - 607 - - - - - - - 883 281
Total 550 692 93 99 607 651 - - - - - 1 1,250 1,443
Cash outflows
Derivative financial assets (360) (386) - (73) - (633) - - - - - - (360) (1,092)
Derivative financial liabilities (187) (287) (73) (1) (614) (1) - - - - - (1) (874) (290)
Total (547) (673) (73) (74) (614) (634) - - - - - (1) (1,234) (1,382)
Net derivative financial instruments cash inflows 3 19 20 25 (7) 17 - - - - - - 16 61
Included in the above maturity profile are the following cash flows in
relation to cash flow hedge assets:
Within 1 1-5 5-10 10-15 15-20 Greater than 20 years Total
year
years
years
years
years
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
£m £m £m £m £m £m £m £m £m £m £m £m £m £m
Cash inflows 23 24 93 96 607 650 - - - - - - 723 770
Cash outflows (18) (18) (73) (73) (614) (632) - - - - - - (705) (723)
Net cash flow hedge cash inflows 5 6 20 23 (7) 18 - - - - - - 18 47
Cash inflows and outflows are presented on a net basis where the Group is
required to settle cash flows net.
21. Receivables and other financial assets
2020 2019
Notes £m £m
Amounts receivable from contracts with customers 4(b) 115 130
Accrued income 227 231
Cancellations of units awaiting settlement 126 111
Net investment in finance leases 18 15
Collateral pledged in respect of derivative contracts 38 28 18
Contingent consideration asset 40 28 1
Other 79 54
Receivables and other financial assets 621 560
The carrying amounts disclosed above reasonably approximate the fair values as
at the year end.
The amount of receivables and other financial assets expected to be recovered
after more than 12 months is £33m (2019: £25m).
Accrued income includes £221m (2019: £227m) of accrued income from contracts
with customers (refer Note 4(b)).
22. Other assets
2020 2019
£m £m
Prepayments 40 48
Deferred acquisition costs 4 6
Other 2 1
Other assets 46 55
The amount of other assets expected to be recovered after more than 12 months
is £4m (2019: £6m).
All deferred acquisition costs above are costs deferred on investment
contracts (deferred origination costs) which relate to contracts with
customers (refer Note 4(b)). The amortisation charge for deferred origination
costs relating to contracts with customers from continuing operations for the
year was £2m (2019: £2m).
23. Assets and liabilities held for sale
Assets and liabilities held for sale are presented separately in the
consolidated statement of financial position and consist of operations and
individual non-current assets whose carrying amount will be recovered
principally through a sale transaction (expected within one year) and not
through continuing use.
Operations held for sale, being disposal groups, and investments in associates
accounted for using the equity method are measured at the lower of their
carrying amount and their fair value less disposal costs. No depreciation or
amortisation is charged on assets in a disposal group once it has been
classified as held for sale.
Operations held for sale include newly established investment vehicles which
the Group has seeded but is actively seeking to divest from. For these
investment funds, which do not have significant liabilities or non-financial
assets, financial assets continue to be measured based on the accounting
policies that applied before they were classified as held for sale. The Group
classifies seeded operations as held for sale where the intention is to
dispose of the investment vehicle in a single transaction. Where disposal of a
seeded investment vehicle will be in more than one tranche the operations are
not classified as held for sale in the consolidated statement of financial
position.
Certain amounts seeded into funds are classified as interests in pooled
investment funds. Investment property and owner occupied property held for
sale relates to property for which contracts have been exchanged but the sale
had not completed during the current financial year. Interests in pooled
investment funds and investment property held for sale continue to be measured
based on the accounting policies that applied before they were classified as
held for sale.
2020 2019
£m £m
Assets of operations held for sale
Parmenion Capital Partners LLP 18 -
Standard Life (Asia) Limited - 765
Investment vehicles 1 2
Assets held for sale 19 767
Liabilities of operations held for sale
Parmenion Capital Partners LLP 11 -
Standard Life (Asia) Limited - 747
Investment vehicles - -
Liabilities of operations held for sale 11 747
(a)(i) Parmenion Capital Partners LLP
On 30 November 2020, the Group confirmed its exploration of the potential sale
of Parmenion Capital Partners LLP (Parmenion) and has subsequently classified
these operations as held for sale. Parmenion is reported in the asset
management, platforms and wealth segment.
At 31 December 2020, this disposal group was measured at its carrying amount
and comprised the following assets and liabilities:
2020
£m
Assets of operations held for sale
Intangible assets 2
Property, plant and equipment 7
Receivables and other financial assets 5
Other assets 1
Cash and cash equivalents 3
Total assets of operations held for sale 18
Liabilities of operations held for sale
Other financial liabilities 11
Total liabilities of operations held for sale 11
Net assets of operations held for sale 7
Net assets of operations held for sale are net of intercompany balances
between Parmenion and other group entities, the net assets of Parmenion on a
gross basis as at 31 December 2020 are £12m.
(a)(ii) Standard Life (Asia) Limited
On 30 June 2020, the Group sold its wholly owned Hong Kong insurance business,
SL Asia to the Group's Chinese joint venture business, HASL. Refer Note 1 for
further details. SL Asia was reported in the Asset management, platforms and
wealth segment and HASL is reported within the Insurance associates and joint
ventures segment. Prior to the sale SL Asia was classified as an operation
held for sale.
At 31 December 2019, this disposal group was measured at fair value less cost
to sell and comprised the following assets and liabilities:
2019
£m
Assets of operations held for sale
Equity securities and interests in pooled investment funds 674
Cash and cash equivalents 26
Other assets 65
Total assets of operations held for sale 765
Liabilities of operations held for sale
Non-participating insurance contract liabilities 647
Non-participating investment contract liabilities 49
Other liabilities 51
Total liabilities of operations held for sale 747
Net assets of operations held for sale 18
Net assets of operations held for sale were net of intercompany balances
between SL Asia and the rest of the Group. The net assets of SL Asia on a
gross basis as at 31 December 2019 were £18m.
Following the remeasurement of the disposal group to the lower of its carrying
amount and its fair value less costs to sell prior to the sale, an impairment
loss of £1m (2019: £nil) is included in Other administrative expenses in the
consolidated income statement. Fair value was determined by reference to the
sale price.
24. Cash and cash equivalents
Cash and cash equivalents include cash at bank, money at call and short notice
with banks, money market funds and any highly liquid investments with less
than three months to maturity from the date of acquisition. For the purposes
of the consolidated statement of cash flows, cash and cash equivalents also
include bank overdrafts which are included in other financial liabilities on
the consolidated statement of financial position.
Where the Group has a legally enforceable right of set off and intention to
settle on a net basis, cash and overdrafts are offset in the consolidated
statement of financial position.
2020 2019
£m £m
Cash at bank and in hand 788 852
Money at call, term deposits, reverse repurchase agreements and debt 615 698
instruments with less than three months to maturity from acquisition
Money market funds 116 65
Cash and cash equivalents 1,519 1,615
2020 2019
Notes £m £m
Cash and cash equivalents 1,519 1,615
Cash and cash equivalents backing unit linked liabilities 25 38 44
Cash and cash equivalents classified as held for sale 23 3 26
Bank overdrafts 36 (202) (338)
Total cash and cash equivalents for consolidated statement of cash flows 1,358 1,347
Cash at bank, money at call and short notice and deposits are subject to
variable interest rates.
Included in cash and cash equivalents and bank overdrafts are £230m (2019:
£592m) and £202m (2019: £338m) respectively relating to balances within a
cash pooling facility in support of which cross guarantees are provided by
certain subsidiary undertakings and interest is paid or received on the net
balance. Cash and cash equivalents includes an offsetting overdraft of £nil
(2019: £219m) where the Group has a legally enforceable right to offset the
recognised amounts, and there is an intention to settle on a net basis.
Cash and cash equivalents in respect of unit linked funds (including third
party interests in consolidated funds) are held in separate bank accounts and
are not available for general use by the Group.
25. Unit linked liabilities and assets backing unit linked liabilities
The Group operates unit linked life assurance businesses through a number of
subsidiaries. These subsidiaries provide investment products through a life
assurance wrapper. These products do not contain any features which transfer
significant insurance risk and therefore are classified as investment
contracts. Unit linked non-participating investment contracts are separated
into two components being an investment management services component and a
financial liability. All fees and related administrative expenses are deemed
to be associated with the investment management services component (refer Note
4). The financial liability component is designated at FVTPL as it is
implicitly managed on a fair value basis as its value is directly linked to
the market value of the underlying portfolio of assets.
Where the Group is deemed to control an investment vehicle as a result of
holdings in that vehicle by subsidiaries to back unit linked non-participating
investment contract liabilities, the assets and liabilities of the vehicle are
consolidated within the Group's statement of financial position. The liability
for third party interest in such consolidated funds is presented as a unit
linked liability.
Unit linked liabilities and assets backing unit linked liabilities are
presented separately in the consolidated statement of financial position
except for those held in operations held for sale, which are presented in
assets and liabilities held for sale in the consolidated statement of
financial position.
Contributions received on non-participating investment contracts and from
third party interest in consolidated funds are treated as deposits and not
reported as revenue in the consolidated income statement.
Withdrawals paid out to policyholders on non-participating investment
contracts and to third party interest in consolidated funds are treated as a
reduction to deposits and not recognised as expenses in the consolidated
income statement.
Investment return and related benefits credited in respect of
non-participating investment contracts and third party interest in
consolidated funds are recognised in the consolidated income statement as
changes in investment contract liabilities and changes in liability for third
party interest in consolidated funds respectively. Investment returns relating
to unit linked business are for the account of policyholders and have an equal
and opposite effect on income and expenses in the consolidated income
statement with no impact on profit after tax.
Assets backing unit linked liabilities comprise financial investments, which
are all classified as FVTPL on a mandatory basis, and receivables and other
financial assets and cash and cash equivalents which are measured at amortised
cost.
(a) Financial instrument risk management
The shareholder is not directly exposed to market risk or credit risk in
relation to the financial assets backing unit linked liabilities. The
shareholder's exposure to market risk on these assets is limited to variations
in the value of future fee based revenue as fees are based on a percentage of
fund value.
The shareholder is exposed to liquidity risk relating to unit linked funds.
For the unit linked business, liquidity risk is primarily managed by holding a
range of diversified instruments which are assessed against cash flow and
funding requirements. A core portfolio of assets is maintained and invested in
accordance with the mandates of the relevant unit linked funds. Given that
unit linked policyholders can usually choose to surrender, in part or in full,
their unit linked contracts at any time, the non-participating investment
contract unit linked liabilities are designated as payable within one year.
Such surrenders would be matched in practice, if necessary, by sales of
underlying assets. Policyholder behaviour and the trading position of asset
classes are actively monitored. The Group can delay settling liabilities to
unit linked policyholders to ensure fairness between those remaining in the
fund and those leaving the fund. The length of any such delay is dependent on
the underlying financial assets.
(b) Fair value measurement of unit linked financial liabilities and financial assets backing unit linked liabilities
Each of the unit linked financial liabilities and the financial assets backing
unit linked liabilities has been categorised below using the fair value
hierarchy as defined in Note 40. Refer Note 40 for details of valuation
techniques used.
Level 1 Level 2 Level 3 Not at fair value Classified as held for sale(1) Total
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
£m £m £m £m £m £m £m £m £m £m £m £m
Financial investments 832 1,991 545 211 18 - - - - (674) 1,395 1,528
Receivables and other financial assets - - - - - - 7 10 - - 7 10
Cash and cash equivalents - - - - - - 38 45 - (1) 38 44
Total financial assets backing unit linked liabilities 832 1,991 545 211 18 - 45 55 - (675) 1,440 1,582
Investment contract liabilities - - 1,024 1,201 18 - - - - (49) 1,042 1,152
Third party interest in consolidated funds - - 388 416 - - - - - - 388 416
Other unit linked financial liabilities 7 - 2 6 - - 1 6 - - 10 12
Total unit linked financial liabilities 7 - 1,414 1,623 18 - 1 6 - (49) 1,440 1,580
(1 ) Financial investments in 2019 include financial assets backing unit
linked liabilities classified as non-participating insurance contracts within
liabilities of operations held for sale. (Refer Note 23).
The financial investments backing unit linked liabilities comprise equity
securities and interests in pooled investment funds of £1,244m (2019:
£1,338m), debt securities of £145m (2019: £185m) and derivative financial
assets of £6m (2019: £5m). In addition to financial assets backing unit
linked liabilities and unit linked financial liabilities shown above there is
a current tax asset of £1m (2019: £nil) included in unit linked assets and a
current tax liability of £1m (2019: £2m) included in unit linked
liabilities.
The fair value of financial instruments not held at fair value approximates to
their carrying value at 31 December 2020 and 31 December 2019.
Transfers from level 1 to level 2 and from level 2 to level 1 during 2020 were
£309m (2019: £nil) and £nil (2019: £nil) respectively. Transfers from
level 1 to level 2 in the period primarily relate to interests in pooled
investment vehicles which are priced daily but where the daily price is only
offered by the fund manager. The Group now considers these investments to be
level 2. All other transfers relate to assets where changes in the frequency
of observable market transactions resulted in a change in whether the market
was considered active. The movements during the period of level 3 unit linked
assets and liabilities held at fair value are analysed below.
Equity securities and interests in pooled investment funds Investment contract
liabilities
31 Dec 31 Dec 31 Dec 31 Dec
2020 2019 2020 2019
£m £m £m £m
At start of period - - - -
Total gains/(losses) recognised in the consolidated income statement (2) - 2 -
Sales (1) - 1 -
Transfers in to level 3(1) 21 - (21) -
At end of period 18 - (18) -
(1 ) Transfers are deemed to have occurred at the end of the calendar
quarter in which they arose.
Unit linked level 3 assets relate to holdings in real estate funds. No
individual unobservable input is considered significant. Changing unobservable
inputs in the measurement of the fair value of these unit linked level 3
financial assets and liabilities to reasonably possible alternative
assumptions would have no impact on profit attributable to equity holders or
on total assets.
Transfers of unit linked assets and liabilities to level 3 generally arise
when external pricing providers stop providing prices for the underlying
assets and liabilities in the funds or where the price provided is considered
stale.
(c) Change in non-participating investment contract liabilities
The change in non-participating investment contract liabilities was as
follows:
2020 2019
£m £m
At 1 January 1,152 1,468
Contributions 83 158
Account balances paid on surrender and other terminations in the year (249) (729)
Change in non-participating investment contract liabilities recognised in the 58 258
consolidated income statement(1)
Recurring management charges (2) (3)
At 31 December 1,042 1,152
(1 ) Change in non-participating investment contract liabilities
recognised in the consolidated income statement in the table above excludes
(£2m) (2019: £7m) in relation to non-participating investment contract
liabilities classified as held for sale.
(d) Derivatives
The treatment of collateral accepted and pledged in respect of financial
instruments and the Group's approach to offsetting financial assets and
liabilities is described in Note 38. The following table presents the impact
of master netting agreements and similar arrangements for derivatives backing
unit linked liabilities.
Related amounts not offset on the consolidated
statement of financial position
Gross amounts of financial instruments as presented on the consolidated Financial Financial collateral pledged/(received) Net position
statement of financial position
instruments
2020 2019 2020 2019 2020 2019 2020 2019
£m £m £m £m £m £m £m £m
Financial assets
Derivatives(1) 5 3 - (2) - - 5 1
Total financial assets 5 3 - (2) - - 5 1
Financial liabilities
Derivatives(1) (2) (5) - 2 - - (2) (3)
Total financial liabilities (2) (5) - 2 - - (2) (3)
(1 ) Only OTC derivatives subject to master netting agreements have been
included above.
26. Issued share capital and share premium
Shares are classified as equity instruments when there is no contractual
obligation to deliver cash or other assets to another entity on terms that may
be unfavourable. The Company's share capital consists of the number of
ordinary shares in issue multiplied by their nominal value. The difference
between the proceeds received on issue of the shares and the nominal value of
the shares issued is recorded in share premium.
The movement in the issued ordinary share capital and share premium of the
Company was:
2020 2019
Ordinary share capital Share premium Ordinary share capital Share premium
Issued shares fully paid 13 61/63p each £m £m 13 61/63p each £m £m
At 1 January 2,338,723,724 327 640 2,529,412,224 353 640
Shares issued in respect of share incentive plans 2,188 - - 1,114 - -
Share buyback (144,610,296) (21) - (190,689,614) (26) -
At 31 December 2,194,115,616 306 640 2,338,723,724 327 640
All ordinary shares in issue in the Company rank pari passu and carry the same
voting rights and entitlement to receive dividends and other distributions
declared or paid by the Company.
On 7 February 2020, the Company announced a share buyback of up to £400m
through on-market purchases which commenced on 10 February 2020. The previous
buyback of up to £750m through on-market purchases which was approved by
shareholders on 25 June 2018 completed in December 2019. During 2020, the
Company has bought back and cancelled 144,610,296 shares (2019: 190,689,614
shares). The total consideration was £362m (2019: £516m) which includes
transaction costs and any unsettled purchases of shares already transacted. At
31 December 2020, there were unsettled purchases of shares for 507,757 shares
(2019: none). In addition at 31 December 2020 there was an irrevocable
contractual obligation with a third party to purchase the Company's own shares
of £40m (2019: £nil). This obligation has been recognised as a part of the
share buyback reduction to retained earnings for the year of £402m, with a
corresponding £40m liability included within other financial liabilities
(refer Note 36).
The accounting treatment adopted in the Half year results 2020 did not
appropriately recognise a reduction to retained earnings and a corresponding
liability within other financial liabilities for such an irrevocable
contractual obligation. This will be corrected, and the 30 June 2020 retained
earnings and other financial liabilities restated, in the Half year results
2021.The impact will be a reduction to 30 June 2020 retained earnings of
£226m and the recognition of a corresponding other financial
liability. There will be no impact on 30 June 2020 reported profit, earnings
per share, regulatory capital or cash flows. There is no impact of this
correction on any other previous reporting periods.
This share buyback has resulted in a reduction in retained earnings of £402m
(2019: £390m), There was no reduction in the special reserve for the share
buyback in 2020 (2019: £126m). An amount of £21m (2019: £26m) has been
credited to the capital redemption reserve relating to the nominal value of
the shares cancelled.
The Company can issue shares to satisfy awards granted under employee
incentive plans which have been approved by shareholders. Details of the
Group's employee plans are provided in Note 44.
27. Shares held by trusts
Shares held by trusts relates to shares in Standard Life Aberdeen plc that are
held by the Standard Life Aberdeen Employee Benefit Trust (SLA EBT), Standard
Life Employee Trust (ET), the Aberdeen Asset Management Employee Benefit Trust
2003 (AAM EBT) and, prior to SLA plc issuing its closure instruction to the
Trustees on 13 December 2019, the Standard Life Unclaimed Asset Trust (UAT).
The SLA EBT was established on 28 March 2019.
The SLA EBT, ET and AAM EBT purchase shares in the Company for delivery to
employees under employee incentive plans. Purchased shares are recognised as a
deduction from equity at the price paid for them. Where new shares are issued
to the SLA EBT, ET or AAM EBT the price paid is the nominal value of the
shares. When shares are distributed from the trust their corresponding value
is released to retained earnings.
The number of shares held by trusts was as follows:
2020 2019
Number of shares held by trusts
Standard Life Aberdeen Employee Benefit Trust 37,667,681 15,378,831
Standard Life Employee Trust 23,773,359 26,685,390
Aberdeen Asset Management Employee Benefit Trust 2003 6,294,765 10,579,914
28. Retained earnings
The following table shows movements in retained earnings during the year. The
movements are aggregated for both continuing and discontinued operations.
2020 2019
Notes £m £m
Opening balance carried forward 2,886 2,778
Effect of change in accounting policy to IFRS 9(1) - (12)
Effect of change in accounting policy to IFRS 16(1) - (5)
Opening balance at 1 January 2,886 2,761
Recognised in comprehensive income
Recognised in profit for the year attributable to equity holders 833 266
Recognised in other comprehensive income
Remeasurement gains/(losses) on defined benefit pension plans 34 280 (23)
Share of other comprehensive income of associates and joint ventures - (10)
Equity holder tax effect of items that will not be reclassified subsequently 10 2 -
to profit or loss
Total items recognised in comprehensive income 1,115 233
Recognised directly in equity
Dividends paid on ordinary shares (479) (518)
Reclassification of preference shares to liability 30,33 (1) -
Shares buyback 26 (402) (390)
Transfer between reserves on impairment of subsidiaries 29 1,834 780
Transfer for vested employee share-based payments 38 57
Transfer from the Standard Life Unclaimed Asset Trust - 1
Shares distributed by employee and other trusts (21) (38)
Total items recognised directly in equity 969 (108)
At 31 December 4,970 2,886
(1 ) The Group has initially applied IFRS 9 and IFRS 16 at 1 January
2019. Under the transition methods chosen, comparative information is not
restated and the cumulative effect of initially applying these standards is
recognised in retained earnings at the date of initial application.
29. Movements in other reserves
In July 2006 Standard Life Group demutualised and during this process the
merger reserve, the reserve arising on Group reconstruction and the special
reserve were created.
Merger reserve: the merger reserve consists of two components. Firstly at
demutualisation in July 2006 the Company issued shares to former members of
the mutual company. The difference between the nominal value of these shares
and their issue value was recognised in the merger reserve. The reserve
includes components attaching to each subsidiary that was transferred to the
Company at demutualisation based on their fair value at that date. Secondly
following the completion of the merger of Standard Life plc and AAM PLC on 14
August 2017, an additional amount was recognised in the merger reserve
representing the difference between the nominal value of shares issued to
shareholders of AAM PLC and their fair value at that date. On disposal or
impairment of a subsidiary any related component of the merger reserve is
released to retained earnings.
Reserve arising on Group reconstruction: The value of the shares issued at
demutualisation was equal to the fair value of the business at that date. The
business's assets and liabilities were recognised at their book value at the
time of demutualisation. The difference between the book value of the
business's net assets and its fair value was recognised in the reserve arising
on Group reconstruction. The reserve comprises components attaching to each
subsidiary that was transferred to the Company at demutualisation. On disposal
of such a subsidiary any related component of the reserve arising on Group
reconstruction is released to retained earnings.
Special reserve: Immediately following demutualisation and the related initial
public offering, the Company reduced its share premium reserve by court order
giving rise to the special reserve. Dividends can be paid out of this reserve.
Capital redemption reserve: In August 2018, as part of the return of capital
and share buyback (refer Note 26) the capital redemption reserve was created.
The following tables show the movements in other reserves during the year. The
movements are aggregated for both continuing and discontinued operations.
Cash flow hedges Foreign currency translation Merger reserve Equity compensation reserve Special reserve Reserve arising on Group reconstruction Capital redemption reserve Total
Notes £m £m £m £m £m £m £m £m
1 January 2020 4 3 2,317 54 115 (685) 1,037 2,845
Recognised in other comprehensive income
Fair value losses on cash flow hedges (3) - - - - - - (3)
Exchange differences on translating foreign operations - (8) - - - - - (8)
Items transferred to profit or loss from continuing operations 13 6 - - - - - 19
Aggregate tax effect of items recognised in other comprehensive income (2) - - - - - - (2)
Total items recognised in other comprehensive income 8 (2) - - - - - 6
Recognised directly in equity
Share buyback 26 - - - - - - 21 21
Reserves credit for employee share-based payments - - - 64 - - - 64
Transfer to retained earnings for vested employee share-based payments - - - (38) - - - (38)
Transfer between reserves on impairment of subsidiaries - - (1,834) - - - - (1,834)
Total items recognised directly within equity - - (1,834) 26 - - 21 (1,787)
At 31 December 2020 12 1 483 80 115 (685) 1,058 1,064
The merger reserve includes £470m (2019: £2,304m) in relation to the Group's
asset management businesses. Following the impairment of the Company's
investments in its asset management entities (refer Section 8), £1,834m
(2019: £780m) was transferred from the merger reserve to retained earnings to
mitigate the impact on distributable reserves.
Cash flow hedges Foreign currency translation Available-for-sale financial assets Merger reserve Equity compensation reserve Special reserve Reserve arising on Group reconstruction Capital redemption reserve Total
Notes £m £m £m £m £m £m £m £m £m
31 December 2018 (6) 49 7 3,097 68 241 (685) 1,011 3,782
Effect of change in accounting policy to - - (7) - - - - - (7)
IFRS 9(1)
1 January 2019 (6) 49 - 3,097 68 241 (685) 1,011 3,775
Recognised in other comprehensive income
Fair value losses on cash flow hedges (10) - - - - - - - (10)
Exchange differences on translating foreign operations - (46) - - - - - - (46)
Items transferred to profit or loss from continuing operations 22 - - - - - - - 22
Aggregate tax effect of items recognised in other comprehensive income (2) - - - - - - - (2)
Total items recognised in other comprehensive income 10 (46) - - - - - - (36)
Recognised directly in equity
Share buyback 26 - - - - - (126) - 26 (100)
Reserves credit for employee share-based payments - - - - 43 - - - 43
Transfer to retained earnings for vested employee share-based payments - - - - (57) - - - (57)
Transfer between reserves on impairment of subsidiaries - - - (780) - - - - (780)
Total items recognised directly within equity - - - (780) (14) (126) - 26 (894)
At 31 December 2019 4 3 - 2,317 54 115 (685) 1,037 2,845
(1 ) The Group has initially applied IFRS 9 at 1 January 2019. Under the
transition method chosen, comparative information is not restated and the
cumulative effect of initially applying this standard is recognised in
retained earnings at the date of initial application.
30. Non-controlling interests
Non-controlling interests included preference shares.
(a) Non-controlling interests - ordinary shares
Non-controlling interests - ordinary shares of £3m were held at 31 December
2020 (2019: £3m).
(b) Non-controlling interests - preference shares
2020 2019
£m £m
5% 2015 Non-voting perpetual non-cumulative redeemable preference shares - 99
The Group recognised preference shares issued by AAM PLC as non-controlling
interests. On 4 June 2020, AAM PLC notified the holders of the redeemable
preference shares of its irrevocable intention to redeem the preference
shares. Following notification the preference shares were reclassified as
subordinated liabilities as an obligation to deliver cash was created. Refer
Note 33.
The profit attributable to these non-controlling interests from continuing
operations for the year ended 31 December 2020 was £5m (2019: £5m).
Preference share dividends were discretionary and where declared, were paid in
arrears in two tranches at a rate of 5% per annum and were non-cumulative. No
interest accrued on any cancelled or unpaid dividends. During the year ended
31 December 2020 preference share dividends of £5m (2019: £5m) were paid
including £2m paid as part of the redemption of the preference shares on 8
July 2020. Refer Note 33.
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