REG - Man Group plc - 2017 Full Year Results <Origin Href="QuoteRef">EMG.L</Origin> - Part 3
28/02/2018 07:06
- Part 3: For the preceding part double click ID:nRSb1528Gb
review.
Judgemental areas and accounting estimates
The most significant area of judgement is whether the Group controls certain
funds through its investments in fund products and is required to consolidate
them (Note 13.2), with our key judgements outlined above within Man's
relationship with independent fund entities. In addition, we have used
judgement in assessing the purchase price of the January 2017 acquisition of
Aalto (Note 10) in order to determine whether each component should be
accounted for as purchase consideration or as post-acquisition compensation
costs. In assessing the key criteria as set out in IFRS 3 'Business
Combinations' we have concluded that all of the purchase price, including the
deferred components, should be accounted for as purchased consideration for
the following primary reasons: (i) the sellers will receive all of the
purchase price whether they remain employed by Man or not (subject to certain
industry standard non-compete clauses); and (ii) Aalto management will be
compensated for services at market rates for their services provided to Man as
part of their employment contracts, in addition to deferred purchase
consideration.
Furthermore, the key assumptions concerning the future, and other key sources
of estimation uncertainty at the reporting date that may have a significant
risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year, include the determination of fair
values for contingent consideration in relation to the Numeric and Aalto
acquisitions (Note 21), the valuation of goodwill and acquired intangibles for
CGUs with lower levels of headroom (Note 10) and recognition of deferred tax
assets in relation to US tax assets (Note 7). The key assumptions and range of
possible outcomes are discussed in the relevant notes.
Impact of new accounting standards
A number of new or amendments to existing standards and interpretations have
been issued by the International Accounting Standards Board (IASB), one of
which is mandatory for the year beginning 1 January 2017, with the remainder
becoming effective in future years.
Amendments to IAS 7 Disclosure Initiative was adopted by Man in the current
year, which have not had a significant impact.
The following standards and interpretations relevant to the Group's operations
were issued by the IASB but are not yet mandatory:
- IFRS 9 - Financial Instruments: IFRS 9 is effective for annual
periods beginning on or after 1 January 2018. IFRS 9 replaces the
classification and measurement models for financial instruments in IAS 39
(Financial Instruments: recognition and measurement) with three classification
categories: amortised cost, fair value through profit or loss and fair value
through other comprehensive income. Under IFRS 9, the Group's business model
and the contractual cash flows arising from its investments in financial
instruments will determine the appropriate classification. The Group has
assessed its balance sheet assets in accordance with the new classification
requirements. The $3 million of investments held as Available For Sale (AFS)
is expected to be classified as fair value through profit or loss as the AFS
category will no longer exist (Note 13). The accumulated gain in the AFS
reserve of $2 million is therefore expected be reclassified to retained
earnings on transition, and any future revaluations will be recognised
directly in the income statement (currently these are recorded in the AFS
reserve in equity). There will be no other changes in the classification and
measurement for any of the Group's financial assets or liabilities.
In addition, IFRS 9 introduces an expected loss model for the assessment of
impairment of financial assets. The current (incurred loss) model under IAS 39
requires the Group to recognise impairment losses when there is objective
evidence that an asset is impaired. Under the expected loss model, impairment
losses are recorded if there is an expectation of credit losses, even in the
absence of a default event. This model is not applicable for investments held
at fair value through profit or loss or investments in associates. Therefore
the assets on the Group's balance sheet to which the expected loss model
applies are loans to funds (Note 13.3) and fee receivables (Note 14), which do
not have a history of credit risk or expected future recoverability issues.
Therefore, no change to the carrying values of the Group's assets is expected
as a result of adoption of the new standard.
The new hedging requirements under IFRS 9, which are optional to adopt, are
designed to provide some increased flexibility in relation to hedge
effectiveness in order to better align hedge accounting with a company's risk
management policies. The Group has elected to apply the IFRS 9 hedge
accounting requirements for this reason. IFRS 9 also requires increased
disclosures in relation to the Group's risk management strategy and the impact
of hedge accounting on the financial statements. The Group's IAS 39 cash-flow
and net investment hedge relationships (Note 12) qualify as continuing hedging
relationships under IFRS 9, and there is no material change to existing hedge
effectiveness assessments as a result. No additional hedge relationships are
currently expected to be designated as a result of the adoption of IFRS 9.
The Group does not anticipate that IFRS 9 will have a material impact on its
reported results.
- IFRS 15 - Revenue from Contracts with Customers: IFRS 15 is
effective for annual periods beginning on or after 1 January 2018 and replaces
IAS 18 Revenue and IAS 11 Construction Contracts and related interpretations.
IFRS 15 establishes a single, principles-based revenue recognition model to be
applied to all contracts with customers. The core principle of IFRS 15 is that
an entity should recognise revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which
the entity expects to be entitled to in exchange for those goods or services.
Specifically, IFRS 15 introduces a five-step approach to revenue recognition:
(1) identify the contract with the customer; (2) identify the performance
obligations in the contract; (3) determine the transaction price; (4) allocate
the transaction price to the performance obligations in the contract; and (5)
recognise revenue when or as the entity satisfies a performance obligation.
IFRS 15 is more prescriptive in terms of its recognition criteria, with
certain specific requirements in respect of variable fee income such that it
is only recognised where the amount of revenue would not be subject to
significant future reversals. New disclosure requirements are also
introduced.
The Group has considered these changes in light of the terms of our existing
investment management agreements, and assessed the timing of management and
performance fee recognition. Management fee revenues are recorded on a monthly
basis as the underlying management activity (service) takes place, and do not
include performance or other obligations (excluding standard duty of care
requirements). Performance fee revenues are recognised when they crystallise,
at which time they are payable by the client and cannot be clawed-back. There
are no other performance obligations or services provided which suggest these
have been earned either before or after crystallisation date. As a result of
this assessment the Group has not identified any material changes to current
revenue recognition principles.
The Group does not anticipate that IFRS 15 will have a material impact on its
reported results.
- IFRS 16 - Leases: IFRS 16 is effective for annual periods
beginning on or after 1 January 2019 and replaces IAS 17 Leases and related
interpretations. This introduces a comprehensive model for the identification
of lease arrangements and accounting treatment for both lessors and lessees,
which distinguishes leases and service contracts on the basis of whether an
identified asset is controlled by a customer. There is substantially no change
to the accounting requirements for lessors. IFRS 16 requires operating leases,
where the Group is the lessee, to be included on the Group's balance sheet,
recognising a right-of-use (ROU) asset and a related lease liability
representing the present value obligation to make lease payments. Certain
optional exemptions are available under IFRS 16 for short-term (less than 12
months) and low-value leases. The ROU asset will be assessed for impairment
annually (incorporating any onerous lease assessments) and depreciated on a
straight-line basis, adjusted for any remeasurements of the lease liability.
The lease liability will subsequently be adjusted for lease payments and
interest, as well as the impact of any lease modifications. IFRS 16 also
requires extensive disclosures detailing the impact of leases on the Group's
financial position and results.
The adoption of IFRS 16 will result in a significant gross-up of the Group's
reported assets and liabilities on the balance sheet, in particular as our
sub-lease arrangements (Note 22) are not expected to be eligible for offset
against the ROU asset and related lease liability. The rental expense which is
currently recognised within occupancy costs in the Group's income statement
(Note 5) will no longer be incurred and instead depreciation expense (of the
ROU asset) and interest expense (unwind of the discounted lease liability)
will be recognised. This will also result in a different total annual expense
profile under the new standard (with the expense being front-loaded in the
earlier years of the lease term as the discount unwind on the lease liability
reduces over time). The Group has considered the available transition options,
and has provisionally decided to apply modified retrospective option 1 and
currently estimates that the impact will be a gross-up of up to £200 million
($270 million) for ROU lease assets and associated deferred tax assets and
£260 million ($350 million) in relation to lease liabilities, with up to £60
million ($80 million) deducted from brought-forward reserves on transition
date in 2019. The initial reserves impact will be offset over time by a lower
annual Group income statement charge, as the total charge over the life of
each lease is the same as under the current IAS 17 requirements (Note 22).
No other standards or interpretations issued and not yet effective are
expected to have an impact on the Group's financial statements.
2. Revenue
Fee income is Man's primary source of revenue, which is derived from the
investment management agreements that are in place with the fund entities.
Fees are generally based on an agreed percentage of net asset value (NAV) or
FUM and are typically charged in arrears. Management fees net of rebates,
which include all non-performance related fees, are recognised in the year in
which the services are provided.
Performance fees net of rebates relate to the performance of the funds managed
during the year and are recognised when the fee can be reliably estimated and
has crystallised. This is generally at the end of the performance period or
upon early redemption by a fund investor. Until the performance period ends,
market movements could significantly move the NAV of the fund products. For
AHL, GLG, FRM and GPM strategies, Man will typically only earn performance fee
income on any positive investment returns in excess of the high water mark,
meaning we will not be able to earn performance fee income with respect to
positive investment performance in any year following negative performance
until that loss is recouped, at which point a fund investor's investment
surpasses the high water mark. Numeric performance fees are earned only when
performance is in excess of a predetermined strategy benchmark (positive
alpha), with performance fees being generated for each strategy either based
on achieving positive alpha (which resets at a predetermined interval, i.e.
every one to three years) or, in the case of alternatives, exceeding high
water mark.
Rebates relate to repayments of management and performance fees charged,
typically to institutional investors, and are presented net within gross
management and other fees and performance fees in the Group income statement.
Analysis of FUM, margins and performance is provided in the Chief Financial
Officer's Review on pages 16 to 19.
3. Distribution costs and asset servicing
Distribution costs are paid to external intermediaries for marketing and
investor servicing, largely in relation to retail investors. Distribution
costs are variable with FUM and the associated management fee revenue.
Distribution costs are expensed over the period in which the service is
provided. Distribution costs have decreased, despite growth in FUM, largely as
a result of the continued mix shift towards institutional assets and the
roll-off of guaranteed product FUM.
Asset servicing includes custodial, valuation, fund accounting and registrar
functions performed by third-parties under contract to Man, on behalf of the
funds, and is recognised in the period in which the service is provided. The
cost of these services vary based on transaction volumes, the number of funds,
and fund NAVs.
4. Compensation
$m Year ended Year ended
31 December 31 December
2017 2016
Salaries 148 159
Variable cash compensation 220 141
Share-based payment charge 19 18
Fund product based payment charge 40 37
Social security costs 38 23
Pension costs 9 10
Restructuring costs (adjusting item per page 53) 4 17
Total compensation costs 478 405
Compensation is the Group's largest cost and an important component of Man's
ability to retain and attract talent. In the short term, the variable
component of compensation adjusts with revenues and profitability.
Total compensation costs, excluding restructuring, have increased by 22%
compared to 2016, largely due to the increase in management and performance
fee revenues year on year, as reflected in increased variable cash
compensation and associated social security costs. The compensation ratio, as
outlined on page 57, has decreased to 44% from 48% in 2016 primarily as a
result of the higher level of performance fee revenue.
Salaries have decreased from prior year largely as a result of a more
favourable hedged Sterling to USD rate in 2017 (1.36) compared to the hedged
rate in 2016 (1.51), which had a $12 million impact compared to prior year. As
a result of cost saving initiatives the underlying salaries costs have
remained largely stable despite growth in the business, inflation and an
increase in headcount.
Salaries, variable cash compensation and social security costs are charged to
the group income statement in the period in which the service is provided, and
include partner drawings.
Pension costs relate to Man's defined contribution and defined benefit plans.
Restructuring costs in 2017 of $4 million (2016: $17 million) relate to
termination expenses incurred due to the restructuring of certain areas of the
business which commenced in 2016 and were completed in 2017. Compensation
costs incurred as part of restructuring are accounted for in full at the time
the obligation arises, and include payments in lieu of notice, enhanced
termination costs, and accelerated share-based and fund product based charges.
Average headcount
The table below provides average headcount by function, including directors,
employees, partners and contractors:
Year ended Year ended
31 December 31 December
2017 2016
Investment management 450 402
Sales and marketing 183 198
Support functions 680 650
Average headcount 1,313 1,250
5. Other costs
$m Year ended Year ended
31 December 31 December
2017 2016
Occupancy 33 34
Technology and communications 28 27
Temporary staff, recruitment, consultancy and managed services 20 19
Legal fees and other professional fees 17 18
Benefits 13 15
Travel and entertainment 11 11
Audit, accountancy, actuarial and tax fees 7 8
Insurance 4 6
Marketing and sponsorship 5 6
Other cash costs, including irrecoverable VAT 10 10
Restructuring (adjusting item per page 53) 7 4
Acquisition and disposal related other costs (adjusting item per page 53) - 4
Total other costs before depreciation and amortisation 155 162
Depreciation and amortisation 18 14
Total other costs 173 176
Other costs, before depreciation and amortisation, have decreased to $155
million from $162 million in 2016, which largely reflects a $9 million impact
of the more favourable hedged Sterling to USD rate in 2017. The underlying
cost base has remained stable despite inflation and growth in the business,
reflecting continued efforts to remain disciplined on costs.
Other restructuring costs of $7 million in 2017 largely relate to onerous
property leases arising as a result of finalisation of the 2016 restructuring
plan following the centralisation of our London resources into one location.
Other restructuring costs of $4 million in 2016 largely related to a
reassessment of our onerous property lease provision relating to Riverbank
House, which was recorded as an adjusting item upon initial recognition.
6. Finance expense and finance income
$m Year ended Year ended
31 December 31 December
2017 2016
Finance expense:
Interest payable on borrowings (Note 12) (9) (9)
Revolving credit facility costs and other (Note 12) (3) (4)
Unwind of contingent consideration discount (adjusting item per page 53) (26) (19)
Total finance expense (38) (32)
Finance income:
Interest on cash deposits and US Treasury bills 3 2
Total finance income 3 2
7. Taxation
$m Year ended Year ended
31 December 31 December
2017 2016
Analysis of tax expense/(credit):
Current tax:
UK corporation tax on profits/(losses) 39 18
Foreign tax 5 5
Adjustments to tax charge in respect of previous years (6) (6)
Total current tax 38 17
Deferred tax:
Origination and reversal of temporary differences (4) (17)
Recognition of US deferred tax asset (17) (6)
Total deferred tax (21) (23)
Total tax expense/(credit) 17 (6)
Man is a global business and therefore operates across many different tax
jurisdictions. Income and expenses are allocated to these different
jurisdictions based on transfer pricing methodologies set in accordance with
the laws of the jurisdictions in which Man operates and international
guidelines as laid out by the OECD. The effective tax rate results from the
combination of taxes paid on earnings attributable to the tax jurisdictions in
which they arise. The majority of the Group's profit was earned in the UK,
Switzerland and the US. The Group's US tax rate is effectively nil as a result
of accumulated US tax assets, as detailed on page 35.
The current effective tax rate of 6% (2016: 2%) differs from the applicable
underlying statutory tax rates principally as a result of the incremental
recognition of the US deferred tax asset of $17 million (2016: $6 million), as
detailed on page 35, the release of a non-taxable litigation provision (Note
16) and the reassessment of tax exposures globally during the year. In 2016
the 2% effective tax rate differed to the applicable underlying statutory tax
rates principally as a result of the impairment of the GLG and FRM goodwill
and intangibles being largely non-deductible for tax purposes, which was
partially offset by the incremental recognition of the US deferred tax asset
of $6 million, and the reassessment of tax exposures in Europe and
Asia-Pacific during the year. The effective tax rate is otherwise consistent
with this earnings profile.
Accounting for tax involves a level of estimation uncertainty given the
application of tax law requires a degree of judgement, which tax authorities
may dispute. Tax liabilities are recognised based on the best estimates of
probable outcomes, with regard to external advice where appropriate. The
principal factors which may influence our future tax rate are changes to tax
regulation in the territories in which we operate, the mix of income and
expense by jurisdiction, and the timing of recognition of available tax
assets.
The current tax liabilities of $21 million (2016: $6 million), as shown on the
Group balance sheet, comprise a gross current tax liability of $24 million
(2016: $9 million) net of a current tax asset of $3 million (2016: $3
million).
The tax on Man's total profit before tax is lower (2016: credit on loss before
tax is lower) than the amount that would arise using the theoretical effective
tax rate applicable to the profits/(losses) of the consolidated companies as
follows:
$m Year ended Year ended
31 December 31 December
2017 2016
Profit/(loss) before tax 272 (272)
Theoretical tax expense/(credit) at UK rate: 19.25% (2016: 20.00%) 52 (54)
Effect of:
Overseas tax rates compared to UK (10) 11
Adjustments to tax charge in respect of previous periods (9) (7)
Recognition of US deferred tax asset (17) (6)
Impairment of goodwill and other adjusting items (page 53) - 43
Share-based payments - 2
Other 1 5
Tax expense/(credit) 17 (6)
The effect of overseas tax rates compared to the UK includes the impact of the
0% effective tax rate of our US business.
In the current year the adjustments to the tax charge in respect of previous
periods primarily relates to a $7 million credit mainly due to reassessment of
tax exposures globally. In 2016, adjustments in respect of previous periods
primarily related to a $6 million credit following the reassessment of tax
exposures in Europe and Asia-Pacific.
The impairment of goodwill and other adjusting items in 2016 reflects that
there is no tax relief for the impairment of goodwill recognised in
jurisdictions outside the US.
Deferred tax liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary
differences can be utilised. Deferred tax is calculated at the rates expected
to be applied when the deferred tax asset or liability is realised.
Movements in deferred tax are as follows:
$m Year ended Year ended
31 December 31 December
2017 2016
Deferred tax liability
At 1 January (47) (69)
Acquisition of Aalto balance sheet (2) -
(Charge)/credit to the Group income statement 1 22
Deferred tax liability at 31 December (48) (47)
Deferred tax asset
At 1 January 63 59
Credit to the Group income statement 20 1
(Charge)/credit to other comprehensive income and equity (2) 3
Deferred tax asset at 31 December 81 63
The deferred tax liability of $48 million (2016: $47 million) largely relates
to deferred tax arising on acquired intangible assets.
The deferred tax asset comprises:
$m 31 December 31 December
2017 2016
US tax assets 42 25
Defined benefit pension schemes 12 11
Employee share schemes 14 10
Tax allowances over depreciation 9 9
Other 4 8
Deferred tax asset at 31 December 81 63
The deferred tax asset income statement credit of $20 million (2016: $1
million) relates to the recognition of the US deferred tax asset of $17
million (2016: $6 million), an increase in the deferred tax asset on employee
share schemes of $2 million (2016: $3 million decrease), no change in the
deferred tax asset arising on tax allowances over depreciation (2016: decrease
of $2 million) and an increase in the deferred tax asset on other temporary
differences of $1 million (2016: $nil). The debit to other comprehensive
income and equity of $2 million (2016: $3 million credit) relates to movements
in the pension accrual, unrealised cash flow hedge balances and employee share
schemes.
The Group has accumulated deferred tax assets in the US of $124 million (2016:
$192 million). The decrease of $68 million is principally as a result of the
reduction in future tax rates in the US arising from the enactment of the 2017
Tax Cuts and Jobs Act, which reduced the US federal tax rate from 35% to 21%,
effective from 1 January 2018. These assets principally comprise accumulated
operating losses from existing operations of $61 million (2016: $103 million)
and future amortisation of goodwill and intangibles assets generated from
acquisitions of $48 million (2016: $72 million) that will be available to
offset future taxable profits in the US. From the maximum available deferred
tax assets of $124 million (2016: $192 million), a deferred tax asset of $42
million has been recognised on the Group balance sheet (2016: $25 million),
representing amounts which can be offset against probable future taxable
profits. The increase of $17 million from that recognised at 31 December 2016
represents projected year on year growth in our US business, partially offset
by the reduction in the US federal tax rate from 1 January 2018. Probable
future taxable profits are considered to be forecast profits for the next
three years only, consistent with the Group's business planning horizon. As a
result of the recognised deferred tax asset and the remaining unrecognised
available US deferred tax assets of $82 million (2016: $167 million), Man does
not expect to pay federal tax on any taxable profits it may earn in the US for
a number of years. Accordingly, any movements in this US tax asset are
classified as an adjusting item (page 53). The gross amount of losses for
which a deferred tax asset has not been recognised is $48 million (2016: $160
million), which will expire over a period of 11 to 19 years.
8. Earnings per ordinary share (EPS)
The calculation of basic EPS is based on post-tax profit of $255 million
(2016: loss of $266 million), and ordinary shares of 1,640,137,392 (2016:
1,679,099,266), being the weighted average number of ordinary shares in issue
during the period after excluding the shares owned by the Man Employee Trusts.
For diluted EPS, the weighted average number of ordinary shares in issue is
adjusted to assume conversion of all dilutive potential ordinary shares, being
ordinary shares of 1,659,830,089 (2016: 1,695,995,147).
The details of movements in the number of shares used in the basic and
dilutive EPS calculation are provided below.
Year ended 31 December 2017 Year ended 31 December 2016
Total Weighted Total Weighted
number average number average
(million) (million) (million) (million)
Number of shares at beginning of year 1,679.9 1,679.9 1,700.8 1,700.8
Issues of shares 10.1 8.4 2.6 1.9
Repurchase of own shares (46.4) (28.3) (23.5) (2.3)
Number of shares at period end 1,643.6 1,660.0 1,679.9 1,700.4
Shares owned by Employee Trusts (20.3) (19.9) (19.6) (21.3)
Basic number of shares 1,623.3 1,640.1 1,660.3 1,679.1
Share awards under incentive schemes 17.8 15.9
Employee share options 1.9 1.0
Diluted number of shares 1,659.8 1,696.0
The basic and diluted earnings per share figures are provided below.
Year ended Year ended
31 December 31 December
$m 2017 2016
Basic and diluted post-tax earnings 255 (266)
Basic earnings per share cents 15.5 (15.8)
Diluted earnings per share cents 15.3 (15.8)
9. Dividends
Year ended Year ended
31 December 31 December
$m 2017 2016
Ordinary shares
Final dividend paid for the year to 31 December 2016 - 4.5 cents (2015: 4.8 77 83
cents)
Interim dividend paid for the six months to 30 June 2017 - 5.0 cents (2016: 81 75
4.5 cents)
Dividends paid 158 158
Proposed final dividend for the year to 31 December 2017 - 5.8 cents 94 75
(2016: 4.5 cents)
Dividend distribution to the Company's shareholders is recognised directly in
equity in Man's financial statements in the period in which the dividend is
paid or, if required, approved by the Company's shareholders. Details of the
Group's dividend policy are included in the Chief Financial Officer's Review.
10. Goodwill and acquired intangibles
Year ended 31 December 2017 Year ended 31 December 2016
$m Goodwill Investment Distribution Brand Total Goodwill Investment Distribution Brand Total
management channels names management channels names
agreements agreements
Net book value at beginning of the year 588 405 16 15 1,024 907 545 23 22 1,497
Acquisition of business(1) 55 10 14 - 79 - - - - -
Amortisation - (75) (6) (3) (84) - (86) (4) (4) (94)
Impairment expense(2) - - - - - (319) (54) (3) (3) (379)
Currency translation 5 - - - 5 - - - - -
Net book value at year end 648 340 24 12 1,024 588 405 16 15 1,024
Allocated to cash generating
units as follows:
AHL 459 - - - 459 454 - - - 454
GLG - 188 12 8 208 - 238 16 11 265
FRM - 22 - 1 23 - 28 - 1 29
Numeric 134 121 - 3 258 134 139 - 3 276
GPM 55 9 12 - 76 - - - - -
Notes:
1 Acquisition of business relates to the acquisition of
Aalto on 1 January 2017.
2 The 2016 impairment of $379 million relates to GLG ($281
million) and FRM ($98 million).
Goodwill
Goodwill represents the excess of consideration transferred over the fair
value of identifiable net assets of the acquired business at the date of
acquisition. Goodwill is carried on the Group balance sheet at cost less
accumulated impairment, has an indefinite useful life, is not subject to
amortisation and is tested for impairment annually, or whenever events or
circumstances indicate that the carrying amount may not be recoverable.
Investment management agreements (IMAs), distribution channels and brand
names
IMAs, distribution channels and brand names are recognised at the present
value of the expected future cash flows and are amortised on a straight-line
basis over their expected useful lives, which are between three and 13 years
(IMAs and brands), and six and 12 years (distribution channels).
Amortisation of acquired intangible assets of $84 million (2016: $94 million)
primarily relates to the investment management agreements recognised on the
acquisition of GLG and Numeric.
Allocation of goodwill to cash generating units
For statutory accounting impairment review purposes, the Group has identified
five cash generating units (CGUs): AHL, GLG, FRM, Numeric and GPM. As a result
of the acquisition of Aalto in 2017, the Group formally identified a new CGU,
Global Private Markets (GPM). Details of the Aalto acquisition are provided on
page 39.
Calculation of recoverable amounts for cash generating units
An impairment expense is recognised for the amount by which the asset's
carrying value exceeds its recoverable amount. The recoverable amount is the
higher of an asset's fair value less costs to sell and value in use. For the
purposes of assessing impairment, assets are grouped at the lowest levels for
which there are separately identifiable cash flows (CGUs). The recoverable
amounts of the Group's CGUs are assessed each year using a value in use
calculation. The value in use calculation gives a higher valuation compared to
a fair value less cost to sell approach, as this would exclude some of the
revenue synergies available to Man through its ability to distribute products
using its well established distribution channels, which may not be fully
available to other market participants.
The value in use calculations at 31 December 2017 use cash flow projections
based on the Board approved financial plan for the year to 31 December 2018
and a further two years of projections (2019 and 2020), plus a terminal value.
The valuation analysis is based on best practice guidance whereby a terminal
value is calculated at the end of a short discrete budget period and assumes,
after this three year budget period, no growth in asset flows above the
long-term growth rate. In order to determine the value in use of each CGU, it
is necessary to notionally allocate the majority of the Group's cost base
relating to operations, product structuring, distribution and support
functions, which are managed on a centralised basis.
The value in use calculations for AHL, GLG, FRM, Numeric and GPM (established
as a result of the acquisition of Aalto in January 2017) are presented on a
post-tax basis, consistent with the prior year, given most comparable market
data is available on a post-tax basis. The value in use calculations presented
on a post-tax basis are not significantly different to their pre-tax
equivalent.
The assumptions applied in the value in use calculation are derived from past
experience and assessment of current market inputs. A bifurcated discount rate
has been applied to the modelled cash flows to reflect the different risk
profile of net management fee income and net performance fee income. The
discount rates are based on the Group's weighted average cost of capital using
a risk free interest rate, together with an equity risk premium and an
appropriate market beta derived from consideration of Man's beta, similar
alternative asset managers, and the asset management sector as a whole. The
terminal value is calculated based on the projected closing FUM at 31 December
2020 and applying a mid-point of a range of historical multiples to the
forecast cash flows associated with management and performance fees.
The recoverable amount of each CGU has been assessed at 31 December 2017. The
key assumptions applied to the value in use calculations for each of the CGUs
are provided below.
Key assumptions: AHL GLG FRM Numeric GPM
Compound average annualised growth in FUM (over three years) 11% 4% 10% 7% 37%
Discount rate
- Management fees(1) 11% 11% 11% 11% 15%
- Performance fees(2) 17% 17% 17% 17% 21%
Terminal value (mid-point of range of historical multiples)(3)
- Management fees 13.0x 13.0x 5.9x 13.0x 13.0x
- Performance fees 5.5x 5.5x 3.9x 5.5x 5.5x
Notes:
1 The pre-tax equivalent of the net management fees discount
rate is 13%, 13%, 13%, 14% and 18% for each of the AHL, GLG, FRM, Numeric and
GPM CGUs, respectively.
2 The pre-tax equivalent of the net performance fees
discount rate is 20%, 20%, 20%, 21% and 25% for each of the AHL, GLG, FRM,
Numeric and GPM CGUs, respectively.
3 The implied terminal growth rates are 3%, 3%, -10%, 3% and
7% for each of the AHL, GLG, FRM, Numeric and GPM CGUs, respectively.
The results of the valuations are further explained in the following sections,
including sensitivity tables which show scenarios whereby the key assumptions
are changed to stressed assumptions, indicating the modelled headroom or
impairment that would result. Each assumption, or set of assumptions, is
stressed in isolation. The results of these sensitivities make no allowance
for actions that management would take if such market conditions persisted.
AHL cash generating unit
The AHL value in use calculation at 31 December 2017 indicates a value of $3.0
billion, with around $2.5 billion of headroom over the carrying value of the
AHL business. Therefore, no impairment charge is deemed necessary at 31
December 2017 (2016: nil). The valuation at 31 December 2017 is around $0.5
billion higher than the value in use calculation at 31 December 2016,
primarily due to higher opening FUM largely as a result of better than
forecast performance in 2017.
Discount rates (post-tax) Multiples
(post-tax)
Sensitivity analysis: Compound average annualised growth in FUM(1) Management fee/ performance fee Management fee/ performance fee
Key assumption stressed to: 13% (18%) 10%/16% 12%/18% 14.0x/6.5x 12.0x/4.5x
Modelled headroom/(impairment) ($m) 2,813 - 2,588(2) 2,452(2) 2,778(3) 2,260(3)
Notes:
1 The compound average annualised growth in FUM has been
stressed in a downside scenario to determine the point at which headroom would
be reduced to nil, after which impairment would arise.
2 An increase/decrease in the value in use calculation of
$68 million.
3 An increase/decrease in the value in use calculation of
$259 million.
GLG cash generating unit
In 2016 the GLG CGU was impaired by $281 million, primarily due to lower
performance and net flows compared to that previously forecast as well as a
weakening of industry growth forecasts during the year. This impaired the
total GLG goodwill balance of $222 million and further impaired the other
acquired intangibles balances relating to investment management agreements,
distribution channels and brands by a total of $59 million.
The GLG value in use calculation at 31 December 2017 indicates a value of $387
million, with around $140 million of headroom over the carrying value of the
GLG business. Therefore, no impairment charge is deemed necessary at 31
December 2017. The valuation at 31 December 2017 is around $100 million higher
than the value in use calculation at 31 December 2016 largely due to a better
than forecast inflows. The headroom has also increased as a result of
amortisation of acquired intangibles of $57 million during the year, which
lowers the carrying value.
Discount rates (post-tax) Multiples
(post-tax)
Sensitivity analysis: Compound average annualised growth in FUM(1) Management fee/ performance fee Management fee/ performance fee
Key assumption stressed to: 6% 0% 10%/16% 12%/18% 14.0x/6.5x 12.0x/4.5x
Modelled headroom/(impairment) ($m) 226 - 150(2) 132(2) 172(3) 110(3)
Notes:
1 The compound average annualised growth in FUM has been
stressed in a downside scenario to determine the point at which headroom would
be reduced to nil, after which impairment would arise.
2 An increase/decrease in the value in use calculation of $9
million.
3 An increase/decrease in the value in use calculation of
$31 million.
FRM cash generating unit
In 2016 the FRM CGU was impaired by $98 million, largely as a result of
acceleration in the FUM mix shift towards lower margin mandates and reduced
prospects for the traditional fund of funds business. This impaired the total
FRM goodwill balance of $97 million, and further impaired the other acquired
intangibles balances relating to investment management agreements and brands
by a total of $1 million.
The FRM value in use calculation at 31 December 2017 indicates a value of $37
million, with $5 million of headroom over the carrying value of the FRM
business. Therefore, no impairment charge is deemed necessary at 31 December
2017. The valuation at 31 December 2017 is largely in line with the value in
use calculation at 31 December 2016. The headroom has increased as a result of
amortisation of acquired intangibles of $6 million during the year, which
lowers the carrying value.
Discount rates (post-tax) Multiples
(post-tax)
Sensitivity analysis: Compound average annualised growth in FUM(1) Management fee/ performance fee Management fee/ performance fee
Key assumption stressed to: 12% 8% 10%/16% 12%/18% 6.9x/4.9x 4.9x/2.9
Modelled headroom/(impairment) ($m) 11 - 5(2) 4(2) 8(3) 2(3)
Notes:
1 The compound average annualised growth in FUM has been
stressed in a downside scenario to determine the point at which headroom would
be reduced to nil, after which impairment would arise.
2 An increase/decrease in the value in use calculation of
less than $1 million.
3 An increase/decrease in the value in use calculation of $3
million.
Numeric cash generating unit
The Numeric value in use calculation at 31 December 2017 indicates a value of
around $600 million, with around $340 million of headroom over the carrying
value of the Numeric business. Therefore, no impairment charge is deemed
necessary at 31 December 2017 (2016: nil). The valuation at 31 December 2017
is around $170 million higher than the value in use calculation at 31 December
2016, primarily as a result of higher opening FUM due to stronger performance
than previously forecast during 2017.
Discount rates (post-tax) Multiples
(post-tax)
Sensitivity analysis: Compound average annualised growth in FUM(1) Management fee/ performance fee Management fee/ performance fee
Key assumption stressed to: 9% (17%) 10%/16% 12%/18% 14.0x/6.5x 12.0x/4.5x
Modelled headroom/(impairment) ($m) 401 - 356(2) 326(2) 382(3) 298(3)
Notes:
1 The compound average annualised growth in FUM has been
stressed in a downside scenario to determine the point at which headroom would
be reduced to nil, after which impairment would arise.
2 An increase/decrease in the value in use calculation of
$15 million.
3 An increase/decrease in the value in use calculation of
$42 million.
GPM cash generating unit
The GPM CGU was established in 2017 as a result of the acquisition of Aalto.
The GPM value in use calculation at 31 December 2017 indicates a value of
around $110 million, with around $40 million of headroom over the carrying
value of the GPM business. Therefore, no impairment charge is deemed necessary
at 31 December 2017.
Discount rates (post-tax) Multiples
(post-tax)
Sensitivity analysis: Compound average annualised growth in FUM(1) Management fee/ performance fee Management fee/ performance fee
Key assumption stressed to: 39% 23% 14%/20% 16%/22% 14.0x/6.5x 12.0x/4.5x
Modelled headroom/(impairment) ($m) 44 - 41(2) 35(2) 45(3) 31(3)
Notes:
1 The compound average annualised growth in FUM has been
stressed in a downside scenario to determine the point at which headroom would
be reduced to nil, after which impairment would arise.
2 An increase/decrease in the value in use calculation of $3
million.
3 An increase/decrease in the value in use calculation of $7
million.
Acquisition of Aalto
On 1 January 2017, Man acquired the entire issued share capital of Aalto, a US
and Europe based real asset focused investment manager with $1.8 billion of
funds under management at the date of acquisition. The acquisition
consideration is structured to align Aalto's interests with those of Man, and
comprises of an initial payment of $18 million in cash, including $1 million
for acquired working capital, and $8 million in shares, and four deferred
payments. The deferred payments are dependent on levels of run rate management
fees measured following one, four, six and eight years from completion and are
capped at $207 million in aggregate. The net present value of the aggregate
deferred payments at completion was $52 million.
The $8 million fair value of the 5.7 million ordinary shares issued as part of
the contingent consideration paid for Aalto was measured on the basis of
quoted prices at the time of issue. The deferred payments are equivalent to an
earn-out (contingent consideration) and deemed to be a financial liability
measured initially at fair value with any subsequent fair value movements
recognised through the Group income statement (Note 21).
Values for the acquired business at the date of acquisition are set out below:
Fair value Fair
$m Book value adjustments value
Intangible assets - 24 24
Cash and receivables 5 - 5
Loans and payables (4) - (4)
Deferred tax liability - (2) (2)
Net assets acquired 1 22 23
Goodwill on acquisition 55
Net assets acquired including goodwill 78
Contingent consideration 52
Cash consideration 18
Value of shares issued 8
Total consideration 78
The fair value adjustments relate to the recognition of investment management
agreements of $10 million and customer relationships of $14 million. These
intangible assets are recognised at the present value of the expected future
cash flows generated from the assets and are amortised on a straight-line
basis over their expected useful lives of eight and six years respectively.
Given the funds are close-ended only the future cash flows from funds existing
at acquisition date are included within the investment management agreements
intangible, and therefore this balance reflects a finite product portfolio and
period.
The high proportion of acquired goodwill in comparison to identified other
intangible assets is due to the nature of the acquired business. The goodwill
balance of $55 million primarily represents direct and efficient access to the
private real estate markets, the highly skilled and experienced Aalto team and
the tailor made infrastructure and strong relationships to expand Man's
current offering to its existing clients. None of the goodwill recognised is
expected to be deductible for tax purposes.
Acquisition related costs included in the Group's income statement for the
year ended 31 December 2017 amounted to less than $1 million. Aalto
contributed $12 million of management fee revenue, $4 million of performance
fee revenue and $3 million to the Group's profit before tax for the year ended
31 December 2017.
11. Other intangibles
Year ended Year ended
31 December 31 December
$m 2017 2016
Net book value beginning of the year 17 14
Additions 14 9
Disposals/redemptions (2) (2)
Amortisation (6) (4)
Net book value at year end 23 17
Other intangibles relate to capitalised computer software. Capitalised
computer software includes costs that are directly associated with the
procurement or development of identifiable and unique software products, which
will generate economic benefits exceeding costs beyond one year and is subject
to regular impairment reviews. Capitalised computer software is amortised on a
straight-line basis over its estimated useful life (three years), which is
included in Other costs in the Group income statement. Additions relate to
investment in software across Man's operating platforms.
12. Cash, liquidity and borrowings
31 December 2017 31 December 2016
Less than Greater than Less than Greater than
$m Total 1 year 3 years Total 1 year 3 years
Borrowings: 2024 fixed rate reset callable guaranteed subordinated notes 150 - 150 149 - 149
Cash and cash equivalents(1) 356 356 - 389 389 -
Undrawn committed revolving loan facility 500 - 500 500 - 500
Total liquidity 856 356 500 889 389 500
Note:
1 Excludes $23 million (2016: $37 million) of restricted
cash held by consolidated fund entities (Note 13.2).
Liquidity resources support ongoing operations and potential liquidity
requirements under stressed scenarios. The amount of potential liquidity
requirements is modelled based on scenarios that assume stressed market and
economic conditions. The funding requirements for Man relating to the
investment management process are discretionary. The liquidity profile of Man
is monitored on a daily basis and the stressed scenarios are updated
regularly. The Board reviews Man's funding resources at each Board meeting and
on an annual basis as part of the strategic planning process. Man's available
liquidity is considered sufficient to cover current requirements and potential
requirements under stressed scenarios.
In September 2014, Man issued $150 million ten-year fixed rate reset callable
guaranteed subordinated notes (Tier 2 notes), with associated issuance costs
of $1 million. The Tier 2 notes were issued with a fixed coupon of 5.875%
until 15 September 2019. The notes may be redeemed in whole at Man's option on
16 September 2019 at their principal amount, subject to FCA approval. If the
notes are not redeemed at this time then the coupon will reset to the
five-year mid-swap rate plus 4.076% and the notes will be redeemed on 16
September 2024 at their principal amount.
Borrowings are initially recorded at fair value net of transaction costs
incurred, and are subsequently measured at amortised cost. The difference
between the amount repayable at maturity on the borrowings and the carrying
value is amortised over the period up to the expected maturity of the
associated debt in accordance with the effective interest rate method.
Cash and cash equivalents at year end comprises cash at bank on hand of $175
million (2016: $222 million), short-term deposits of $181 million (2016: $102
million) and $nil US Treasury bills (2016: $65 million). Cash ring-fenced for
regulated entities totalled $37 million (2016: $28 million). Cash is invested
in accordance with strict limits consistent with the Board's risk appetite,
which consider both the security and availability of liquidity. Accordingly,
cash is held in on-demand deposit bank accounts and short-term bank deposits,
and at times invested in short-term US Treasury bills. At 31 December 2017,
the $356 million cash balance (excluding US Treasury bills and cash held by
consolidated fund entities) is held with 20 banks (2016: $324 million with 18
banks). The single largest counterparty bank exposure of $84 million is held
with an A+ rated bank (2016: $88 million with a BBB+ rated bank). At 31
December 2017, balances with banks in the AA ratings band aggregate to $97
million (2016: $109 million) and balances with banks in the A ratings band
aggregate to $239 million (2016: $127 million).
In October 2016 the Group reduced the previous $1 billion syndicated revolving
loan facility to $500 million. The $500 million facility was undrawn at 31
December 2017 (undrawn at 31 December 2016). The facility was put in place as
a five-year facility and included the option for Man to request the banks to
extend the maturity date by one year on each of the first and second
anniversaries. The participant banks have the option to accept or decline
Man's request. On the first and second anniversaries in 2016 and 2017, the
banks were asked to extend the maturity date of the facility by one year and
banks with participations totalling 98% of the facility accepted the request
on both anniversaries. As a result of the maturity extension, $10 million is
scheduled to mature in June 2020 and the remaining $490 million matures in
June
- More to follow, for following part double click ID:nRSb1528Gd - - - (266)
Other comprehensive income
Revaluation of defined benefit pension scheme (17) - - - - (17)
Current tax credited on pension scheme 4 - - - - 4
Deferred tax credited on pension scheme 3 - - - - 3
Fair value losses on cash flow hedges - - - (35) - (35)
Transfer cash flow hedge to Group income statement - - - 23 - 23
Deferred tax credited on cash flow hedge movements - - - 2 - 2
Currency translation difference - 10 (14) - - (4)
Share-based payments charge 17 - - - - 17
Current tax credited on share-based payments 1 - - - - 1
Deferred tax debited on share-based payments (2) - - - - (2)
Purchase of own shares by the Employee Trusts - (13) - - - (13)
Disposal of own shares by the Employee Trusts (22) 22 - - - -
Share repurchases (101) - - - - (101)
Dividends (158) - - - - (158)
At 31 December 2016 564 (43) (39) (15) 2 469
NOTES TO THE GROUP FINANCIAL STATEMENTS
1. Basis of preparation
While the financial information included in this preliminary announcement has been prepared in accordance with the
recognition and measurement criteria of International Financial Reporting Standards (IFRSs) as adopted by the European
Union, this announcement does not itself contain sufficient information to comply with IFRSs. Details of the Group's
accounting policies can be found in the Group's Annual Report for the year ended 31 December 2016. The financial
information included in this statement does not constitute the Group's statutory accounts within the meaning of Section 434
of the Companies Act 2006. Statutory accounts for the year ended 31 December 2017, upon which the auditors have issued an
unqualified report, will shortly be delivered to the Registrar of Companies.
The Annual Report and the Notice of the Company's 2018 Annual General Meeting (AGM) will be posted to
shareholders on 8 March 2018 and will be available to download from the Company's website on 9 March 2018. The Annual
General Meeting will be held on Friday 11 May 2018 at 10am at Man Group's offices at Riverbank House, 2 Swan Lane, London
EC4R 3AD.
Man's relationship with independent fund entities
Man acts as the investment manager/advisor to fund entities. Man assesses such relationships on an ongoing basis to
determine whether each fund entity is controlled by the Group and therefore consolidated into the Group's results. Having
considered all significant aspects of Man's relationships with fund entities, the directors are of the opinion that,
although Man manages the assets of certain fund entities, where Man does not hold an investment in the fund entity the
characteristics of control are not met, and that for most fund entities: the existence of independent boards of directors
at the fund entities; rights which allow for the removal of the investment manager/advisor; the influence of investors;
limited exposure to variable returns; and the arm's length nature of Man's contracts with the fund entities, indicate that
Man does not control the fund entities and their associated assets, liabilities and results should not be consolidated into
the Group financial statements. Assessment of the control characteristics for all relationships with fund entities led to
the consolidation of nine funds for the year ended 31 December 2017 (2016: 11), as detailed in Note 13. An understanding of
the aggregate funds under management (FUM) and the fees earned from fund entities is relevant to an understanding of Man's
results and earnings sustainability, and this information is provided in the Chief Financial Officer's review.
Judgemental areas and accounting estimates
The most significant area of judgement is whether the Group controls certain funds through its investments in fund products
and is required to consolidate them (Note 13.2), with our key judgements outlined above within Man's relationship with
independent fund entities. In addition, we have used judgement in assessing the purchase price of the January 2017
acquisition of Aalto (Note 10) in order to determine whether each component should be accounted for as purchase
consideration or as post-acquisition compensation costs. In assessing the key criteria as set out in IFRS 3 'Business
Combinations' we have concluded that all of the purchase price, including the deferred components, should be accounted for
as purchased consideration for the following primary reasons: (i) the sellers will receive all of the purchase price
whether they remain employed by Man or not (subject to certain industry standard non-compete clauses); and (ii) Aalto
management will be compensated for services at market rates for their services provided to Man as part of their employment
contracts, in addition to deferred purchase consideration.
Furthermore, the key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting
date that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year, include the determination of fair values for contingent consideration in relation to the
Numeric and Aalto acquisitions (Note 21), the valuation of goodwill and acquired intangibles for CGUs with lower levels of
headroom (Note 10) and recognition of deferred tax assets in relation to US tax assets (Note 7). The key assumptions and
range of possible outcomes are discussed in the relevant notes.
Impact of new accounting standards
A number of new or amendments to existing standards and interpretations have been issued by the International Accounting
Standards Board (IASB), one of which is mandatory for the year beginning 1 January 2017, with the remainder becoming
effective in future years.
Amendments to IAS 7 Disclosure Initiative was adopted by Man in the current year, which have not had a significant impact.
The following standards and interpretations relevant to the Group's operations were issued by the IASB but are not yet
mandatory:
- IFRS 9 - Financial Instruments: IFRS 9 is effective for annual periods beginning on or after 1 January 2018. IFRS 9
replaces the classification and measurement models for financial instruments in IAS 39 (Financial Instruments: recognition
and measurement) with three classification categories: amortised cost, fair value through profit or loss and fair value
through other comprehensive income. Under IFRS 9, the Group's business model and the contractual cash flows arising from
its investments in financial instruments will determine the appropriate classification. The Group has assessed its balance
sheet assets in accordance with the new classification requirements. The $3 million of investments held as Available For
Sale (AFS) is expected to be classified as fair value through profit or loss as the AFS category will no longer exist (Note
13). The accumulated gain in the AFS reserve of $2 million is therefore expected be reclassified to retained earnings on
transition, and any future revaluations will be recognised directly in the income statement (currently these are recorded
in the AFS reserve in equity). There will be no other changes in the classification and measurement for any of the Group's
financial assets or liabilities.
In addition, IFRS 9 introduces an expected loss model for the assessment of impairment of financial assets. The current
(incurred loss) model under IAS 39 requires the Group to recognise impairment losses when there is objective evidence that
an asset is impaired. Under the expected loss model, impairment losses are recorded if there is an expectation of credit
losses, even in the absence of a default event. This model is not applicable for investments held at fair value through
profit or loss or investments in associates. Therefore the assets on the Group's balance sheet to which the expected loss
model applies are loans to funds (Note 13.3) and fee receivables (Note 14), which do not have a history of credit risk or
expected future recoverability issues. Therefore, no change to the carrying values of the Group's assets is expected as a
result of adoption of the new standard.
The new hedging requirements under IFRS 9, which are optional to adopt, are designed to provide some increased flexibility
in relation to hedge effectiveness in order to better align hedge accounting with a company's risk management policies. The
Group has elected to apply the IFRS 9 hedge accounting requirements for this reason. IFRS 9 also requires increased
disclosures in relation to the Group's risk management strategy and the impact of hedge accounting on the financial
statements. The Group's IAS 39 cash-flow and net investment hedge relationships (Note 12) qualify as continuing hedging
relationships under IFRS 9, and there is no material change to existing hedge effectiveness assessments as a result. No
additional hedge relationships are currently expected to be designated as a result of the adoption of IFRS 9.
The Group does not anticipate that IFRS 9 will have a material impact on its reported results.
- IFRS 15 - Revenue from Contracts with Customers: IFRS 15 is effective for annual periods beginning on or after 1
January 2018 and replaces IAS 18 Revenue and IAS 11 Construction Contracts and related interpretations. IFRS 15 establishes
a single, principles-based revenue recognition model to be applied to all contracts with customers. The core principle of
IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or
services. Specifically, IFRS 15 introduces a five-step approach to revenue recognition: (1) identify the contract with the
customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the
transaction price to the performance obligations in the contract; and (5) recognise revenue when or as the entity satisfies
a performance obligation. IFRS 15 is more prescriptive in terms of its recognition criteria, with certain specific
requirements in respect of variable fee income such that it is only recognised where the amount of revenue would not be
subject to significant future reversals. New disclosure requirements are also introduced.
The Group has considered these changes in light of the terms of our existing investment management agreements, and assessed
the timing of management and performance fee recognition. Management fee revenues are recorded on a monthly basis as the
underlying management activity (service) takes place, and do not include performance or other obligations (excluding
standard duty of care requirements). Performance fee revenues are recognised when they crystallise, at which time they are
payable by the client and cannot be clawed-back. There are no other performance obligations or services provided which
suggest these have been earned either before or after crystallisation date. As a result of this assessment the Group has
not identified any material changes to current revenue recognition principles.
The Group does not anticipate that IFRS 15 will have a material impact on its reported results.
- IFRS 16 - Leases: IFRS 16 is effective for annual periods beginning on or after 1 January 2019 and replaces IAS 17
Leases and related interpretations. This introduces a comprehensive model for the identification of lease arrangements and
accounting treatment for both lessors and lessees, which distinguishes leases and service contracts on the basis of whether
an identified asset is controlled by a customer. There is substantially no change to the accounting requirements for
lessors. IFRS 16 requires operating leases, where the Group is the lessee, to be included on the Group's balance sheet,
recognising a right-of-use (ROU) asset and a related lease liability representing the present value obligation to make
lease payments. Certain optional exemptions are available under IFRS 16 for short-term (less than 12 months) and low-value
leases. The ROU asset will be assessed for impairment annually (incorporating any onerous lease assessments) and
depreciated on a straight-line basis, adjusted for any remeasurements of the lease liability. The lease liability will
subsequently be adjusted for lease payments and interest, as well as the impact of any lease modifications. IFRS 16 also
requires extensive disclosures detailing the impact of leases on the Group's financial position and results.
The adoption of IFRS 16 will result in a significant gross-up of the Group's reported assets and liabilities on the balance
sheet, in particular as our sub-lease arrangements (Note 22) are not expected to be eligible for offset against the ROU
asset and related lease liability. The rental expense which is currently recognised within occupancy costs in the Group's
income statement (Note 5) will no longer be incurred and instead depreciation expense (of the ROU asset) and interest
expense (unwind of the discounted lease liability) will be recognised. This will also result in a different total annual
expense profile under the new standard (with the expense being front-loaded in the earlier years of the lease term as the
discount unwind on the lease liability reduces over time). The Group has considered the available transition options, and
has provisionally decided to apply modified retrospective option 1 and currently estimates that the impact will be a
gross-up of up to £200 million ($270 million) for ROU lease assets and associated deferred tax assets and £260 million
($350 million) in relation to lease liabilities, with up to £60 million ($80 million) deducted from brought-forward
reserves on transition date in 2019. The initial reserves impact will be offset over time by a lower annual Group income
statement charge, as the total charge over the life of each lease is the same as under the current IAS 17 requirements
(Note 22).
No other standards or interpretations issued and not yet effective are expected to have an impact on the Group's financial
statements.
2. Revenue
Fee income is Man's primary source of revenue, which is derived from the investment management agreements that are in place
with the fund entities. Fees are generally based on an agreed percentage of net asset value (NAV) or FUM and are typically
charged in arrears. Management fees net of rebates, which include all non-performance related fees, are recognised in the
year in which the services are provided.
Performance fees net of rebates relate to the performance of the funds managed during the year and are recognised when the
fee can be reliably estimated and has crystallised. This is generally at the end of the performance period or upon early
redemption by a fund investor. Until the performance period ends, market movements could significantly move the NAV of the
fund products. For AHL, GLG, FRM and GPM strategies, Man will typically only earn performance fee income on any positive
investment returns in excess of the high water mark, meaning we will not be able to earn performance fee income with
respect to positive investment performance in any year following negative performance until that loss is recouped, at which
point a fund investor's investment surpasses the high water mark. Numeric performance fees are earned only when performance
is in excess of a predetermined strategy benchmark (positive alpha), with performance fees being generated for each
strategy either based on achieving positive alpha (which resets at a predetermined interval, i.e. every one to three years)
or, in the case of alternatives, exceeding high water mark.
Rebates relate to repayments of management and performance fees charged, typically to institutional investors, and are
presented net within gross management and other fees and performance fees in the Group income statement.
Analysis of FUM, margins and performance is provided in the Chief Financial Officer's Review on pages 16 to 19.
3. Distribution costs and asset servicing
Distribution costs are paid to external intermediaries for marketing and investor servicing, largely in relation to retail
investors. Distribution costs are variable with FUM and the associated management fee revenue. Distribution costs are
expensed over the period in which the service is provided. Distribution costs have decreased, despite growth in FUM,
largely as a result of the continued mix shift towards institutional assets and the roll-off of guaranteed product FUM.
Asset servicing includes custodial, valuation, fund accounting and registrar functions performed by third-parties under
contract to Man, on behalf of the funds, and is recognised in the period in which the service is provided. The cost of
these services vary based on transaction volumes, the number of funds, and fund NAVs.
4. Compensation
$m Year ended31 December2017 Year ended31 December2016
Salaries 148 159
Variable cash compensation 220 141
Share-based payment charge 19 18
Fund product based payment charge 40 37
Social security costs 38 23
Pension costs 9 10
Restructuring costs (adjusting item per page 53) 4 17
Total compensation costs 478 405
Compensation is the Group's largest cost and an important component of Man's ability to retain and attract talent. In the
short term, the variable component of compensation adjusts with revenues and profitability.
Total compensation costs, excluding restructuring, have increased by 22% compared to 2016, largely due to the increase in
management and performance fee revenues year on year, as reflected in increased variable cash compensation and associated
social security costs. The compensation ratio, as outlined on page 57, has decreased to 44% from 48% in 2016 primarily as a
result of the higher level of performance fee revenue.
Salaries have decreased from prior year largely as a result of a more favourable hedged Sterling to USD rate in 2017 (1.36)
compared to the hedged rate in 2016 (1.51), which had a $12 million impact compared to prior year. As a result of cost
saving initiatives the underlying salaries costs have remained largely stable despite growth in the business, inflation and
an increase in headcount.
Salaries, variable cash compensation and social security costs are charged to the group income statement in the period in
which the service is provided, and include partner drawings.
Pension costs relate to Man's defined contribution and defined benefit plans.
Restructuring costs in 2017 of $4 million (2016: $17 million) relate to termination expenses incurred due to the
restructuring of certain areas of the business which commenced in 2016 and were completed in 2017. Compensation costs
incurred as part of restructuring are accounted for in full at the time the obligation arises, and include payments in lieu
of notice, enhanced termination costs, and accelerated share-based and fund product based charges.
Average headcount
The table below provides average headcount by function, including directors, employees, partners and contractors:
Year ended31 December2017 Year ended31 December2016
Investment management 450 402
Sales and marketing 183 198
Support functions 680 650
Average headcount 1,313 1,250
5. Other costs
$m Year ended31 December2017 Year ended31 December2016
Occupancy 33 34
Technology and communications 28 27
Temporary staff, recruitment, consultancy and managed services 20 19
Legal fees and other professional fees 17 18
Benefits 13 15
Travel and entertainment 11 11
Audit, accountancy, actuarial and tax fees 7 8
Insurance 4 6
Marketing and sponsorship 5 6
Other cash costs, including irrecoverable VAT 10 10
Restructuring (adjusting item per page 53) 7 4
Acquisition and disposal related other costs (adjusting item per page 53) - 4
Total other costs before depreciation and amortisation 155 162
Depreciation and amortisation 18 14
Total other costs 173 176
Other costs, before depreciation and amortisation, have decreased to $155 million from $162 million in 2016, which largely
reflects a $9 million impact of the more favourable hedged Sterling to USD rate in 2017. The underlying cost base has
remained stable despite inflation and growth in the business, reflecting continued efforts to remain disciplined on costs.
Other restructuring costs of $7 million in 2017 largely relate to onerous property leases arising as a result of
finalisation of the 2016 restructuring plan following the centralisation of our London resources into one location. Other
restructuring costs of $4 million in 2016 largely related to a reassessment of our onerous property lease provision
relating to Riverbank House, which was recorded as an adjusting item upon initial recognition.
6. Finance expense and finance income
$m Year ended31 December2017 Year ended31 December2016
Finance expense:
Interest payable on borrowings (Note 12) (9) (9)
Revolving credit facility costs and other (Note 12) (3) (4)
Unwind of contingent consideration discount (adjusting item per page 53) (26) (19)
Total finance expense (38) (32)
Finance income:
Interest on cash deposits and US Treasury bills 3 2
Total finance income 3 2
7. Taxation
$m Year ended31 December2017 Year ended31 December2016
Analysis of tax expense/(credit):
Current tax:
UK corporation tax on profits/(losses) 39 18
Foreign tax 5 5
Adjustments to tax charge in respect of previous years (6) (6)
Total current tax 38 17
Deferred tax:
Origination and reversal of temporary differences (4) (17)
Recognition of US deferred tax asset (17) (6)
Total deferred tax (21) (23)
Total tax expense/(credit) 17 (6)
Man is a global business and therefore operates across many different tax jurisdictions. Income and expenses are allocated
to these different jurisdictions based on transfer pricing methodologies set in accordance with the laws of the
jurisdictions in which Man operates and international guidelines as laid out by the OECD. The effective tax rate results
from the combination of taxes paid on earnings attributable to the tax jurisdictions in which they arise. The majority of
the Group's profit was earned in the UK, Switzerland and the US. The Group's US tax rate is effectively nil as a result of
accumulated US tax assets, as detailed on page 35.
The current effective tax rate of 6% (2016: 2%) differs from the applicable underlying statutory tax rates principally as a
result of the incremental recognition of the US deferred tax asset of $17 million (2016: $6 million), as detailed on page
35, the release of a non-taxable litigation provision (Note 16) and the reassessment of tax exposures globally during the
year. In 2016 the 2% effective tax rate differed to the applicable underlying statutory tax rates principally as a result
of the impairment of the GLG and FRM goodwill and intangibles being largely non-deductible for tax purposes, which was
partially offset by the incremental recognition of the US deferred tax asset of $6 million, and the reassessment of tax
exposures in Europe and Asia-Pacific during the year. The effective tax rate is otherwise consistent with this earnings
profile.
Accounting for tax involves a level of estimation uncertainty given the application of tax law requires a degree of
judgement, which tax authorities may dispute. Tax liabilities are recognised based on the best estimates of probable
outcomes, with regard to external advice where appropriate. The principal factors which may influence our future tax rate
are changes to tax regulation in the territories in which we operate, the mix of income and expense by jurisdiction, and
the timing of recognition of available tax assets.
The current tax liabilities of $21 million (2016: $6 million), as shown on the Group balance sheet, comprise a gross
current tax liability of $24 million (2016: $9 million) net of a current tax asset of $3 million (2016: $3 million).
The tax on Man's total profit before tax is lower (2016: credit on loss before tax is lower) than the amount that would
arise using the theoretical effective tax rate applicable to the profits/(losses) of the consolidated companies as
follows:
$m Year ended31 December2017 Year ended31 December2016
Profit/(loss) before tax 272 (272)
Theoretical tax expense/(credit) at UK rate: 19.25% (2016: 20.00%) 52 (54)
Effect of:
Overseas tax rates compared to UK (10) 11
Adjustments to tax charge in respect of previous periods (9) (7)
Recognition of US deferred tax asset (17) (6)
Impairment of goodwill and other adjusting items (page 53) - 43
Share-based payments - 2
Other 1 5
Tax expense/(credit) 17 (6)
The effect of overseas tax rates compared to the UK includes the impact of the 0% effective tax rate of our US business.
In the current year the adjustments to the tax charge in respect of previous periods primarily relates to a $7 million
credit mainly due to reassessment of tax exposures globally. In 2016, adjustments in respect of previous periods primarily
related to a $6 million credit following the reassessment of tax exposures in Europe and Asia-Pacific.
The impairment of goodwill and other adjusting items in 2016 reflects that there is no tax relief for the impairment of
goodwill recognised in jurisdictions outside the US.
Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the
extent that it is probable that taxable profits will be available against which deductible temporary differences can be
utilised. Deferred tax is calculated at the rates expected to be applied when the deferred tax asset or liability is
realised.
Movements in deferred tax are as follows:
$m Year ended31 December2017 Year ended31 December2016
Deferred tax liability
At 1 January (47) (69)
Acquisition of Aalto balance sheet (2) -
(Charge)/credit to the Group income statement 1 22
Deferred tax liability at 31 December (48) (47)
Deferred tax asset
At 1 January 63 59
Credit to the Group income statement 20 1
(Charge)/credit to other comprehensive income and equity (2) 3
Deferred tax asset at 31 December 81 63
The deferred tax liability of $48 million (2016: $47 million) largely relates to deferred tax arising on acquired
intangible assets.
The deferred tax asset comprises:
$m 31 December2017 31 December2016
US tax assets 42 25
Defined benefit pension schemes 12 11
Employee share schemes 14 10
Tax allowances over depreciation 9 9
Other 4 8
Deferred tax asset at 31 December 81 63
The deferred tax asset income statement credit of $20 million (2016: $1 million) relates to the recognition of the US
deferred tax asset of $17 million (2016: $6 million), an increase in the deferred tax asset on employee share schemes of $2
million (2016: $3 million decrease), no change in the deferred tax asset arising on tax allowances over depreciation (2016:
decrease of $2 million) and an increase in the deferred tax asset on other temporary differences of $1 million (2016:
$nil). The debit to other comprehensive income and equity of $2 million (2016: $3 million credit) relates to movements in
the pension accrual, unrealised cash flow hedge balances and employee share schemes.
The Group has accumulated deferred tax assets in the US of $124 million (2016: $192 million). The decrease of $68 million
is principally as a result of the reduction in future tax rates in the US arising from the enactment of the 2017 Tax Cuts
and Jobs Act, which reduced the US federal tax rate from 35% to 21%, effective from 1 January 2018. These assets
principally comprise accumulated operating losses from existing operations of $61 million (2016: $103 million) and future
amortisation of goodwill and intangibles assets generated from acquisitions of $48 million (2016: $72 million) that will be
available to offset future taxable profits in the US. From the maximum available deferred tax assets of $124 million (2016:
$192 million), a deferred tax asset of $42 million has been recognised on the Group balance sheet (2016: $25 million),
representing amounts which can be offset against probable future taxable profits. The increase of $17 million from that
recognised at 31 December 2016 represents projected year on year growth in our US business, partially offset by the
reduction in the US federal tax rate from 1 January 2018. Probable future taxable profits are considered to be forecast
profits for the next three years only, consistent with the Group's business planning horizon. As a result of the recognised
deferred tax asset and the remaining unrecognised available US deferred tax assets of $82 million (2016: $167 million), Man
does not expect to pay federal tax on any taxable profits it may earn in the US for a number of years. Accordingly, any
movements in this US tax asset are classified as an adjusting item (page 53). The gross amount of losses for which a
deferred tax asset has not been recognised is $48 million (2016: $160 million), which will expire over a period of 11 to 19
years.
8. Earnings per ordinary share (EPS)
The calculation of basic EPS is based on post-tax profit of $255 million (2016: loss of $266 million), and ordinary shares
of 1,640,137,392 (2016: 1,679,099,266), being the weighted average number of ordinary shares in issue during the period
after excluding the shares owned by the Man Employee Trusts. For diluted EPS, the weighted average number of ordinary
shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, being ordinary shares of
1,659,830,089 (2016: 1,695,995,147).
The details of movements in the number of shares used in the basic and dilutive EPS calculation are provided below.
Year ended 31 December 2017 Year ended 31 December 2016
Totalnumber(million) Weightedaverage(million) Totalnumber(million) Weightedaverage(million)
Number of shares at beginning of year 1,679.9 1,679.9 1,700.8 1,700.8
Issues of shares 10.1 8.4 2.6 1.9
Repurchase of own shares (46.4) (28.3) (23.5) (2.3)
Number of shares at period end 1,643.6 1,660.0 1,679.9 1,700.4
Shares owned by Employee Trusts (20.3) (19.9) (19.6) (21.3)
Basic number of shares 1,623.3 1,640.1 1,660.3 1,679.1
Share awards under incentive schemes 17.8 15.9
Employee share options 1.9 1.0
Diluted number of shares 1,659.8 1,696.0
The basic and diluted earnings per share figures are provided below.
Year ended Year ended
31 December 31 December
$m 2017 2016
Basic and diluted post-tax earnings 255 (266)
Basic earnings per share cents 15.5 (15.8)
Diluted earnings per share cents 15.3 (15.8)
9. Dividends
Year ended Year ended
31 December 31 December
$m 2017 2016
Ordinary shares
Final dividend paid for the year to 31 December 2016 - 4.5 cents (2015: 4.8 cents) 77 83
Interim dividend paid for the six months to 30 June 2017 - 5.0 cents (2016: 4.5 cents) 81 75
Dividends paid 158 158
Proposed final dividend for the year to 31 December 2017 - 5.8 cents (2016: 4.5 cents) 94 75
Dividend distribution to the Company's shareholders is recognised directly in equity in Man's financial statements in the
period in which the dividend is paid or, if required, approved by the Company's shareholders. Details of the Group's
dividend policy are included in the Chief Financial Officer's Review.
10. Goodwill and acquired intangibles
Year ended 31 December 2017 Year ended 31 December 2016
$m Goodwill Investmentmanagementagreements Distributionchannels Brandnames Total Goodwill Investmentmanagementagreements Distributionchannels Brandnames Total
Net book value at beginning of the year 588 405 16 15 1,024 907 545 23 22 1,497
Acquisition of business1 55 10 14 - 79 - - - - -
Amortisation - (75) (6) (3) (84) - (86) (4) (4) (94)
Impairment expense2 - - - - - (319) (54) (3) (3) (379)
Currency translation 5 - - - 5 - - - - -
Net book value at year end 648 340 24 12 1,024 588 405 16 15 1,024
Allocated to cash generating
units as follows:
AHL 459 - - - 459 454 - - - 454
GLG - 188 12 8 208 - 238 16 11 265
FRM - 22 - 1 23 - 28 - 1 29
Numeric 134 121 - 3 258 134 139 - 3 276
GPM 55 9 12 - 76 - - - - -
Notes:
1 Acquisition of business relates to the acquisition of Aalto on 1 January 2017.
2 The 2016 impairment of $379 million relates to GLG ($281 million) and FRM ($98 million).
Goodwill
Goodwill represents the excess of consideration transferred over the fair value of identifiable net assets of the acquired
business at the date of acquisition. Goodwill is carried on the Group balance sheet at cost less accumulated impairment,
has an indefinite useful life, is not subject to amortisation and is tested for impairment annually, or whenever events or
circumstances indicate that the carrying amount may not be recoverable.
Investment management agreements (IMAs), distribution channels and brand names
IMAs, distribution channels and brand names are recognised at the present value of the expected future cash flows and are
amortised on a straight-line basis over their expected useful lives, which are between three and 13 years (IMAs and
brands), and six and 12 years (distribution channels).
Amortisation of acquired intangible assets of $84 million (2016: $94 million) primarily relates to the investment
management agreements recognised on the acquisition of GLG and Numeric.
Allocation of goodwill to cash generating units
For statutory accounting impairment review purposes, the Group has identified five cash generating units (CGUs): AHL, GLG,
FRM, Numeric and GPM. As a result of the acquisition of Aalto in 2017, the Group formally identified a new CGU, Global
Private Markets (GPM). Details of the Aalto acquisition are provided on page 39.
Calculation of recoverable amounts for cash generating units
An impairment expense is recognised for the amount by which the asset's carrying value exceeds its recoverable amount. The
recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of
assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows
(CGUs). The recoverable amounts of the Group's CGUs are assessed each year using a value in use calculation. The value in
use calculation gives a higher valuation compared to a fair value less cost to sell approach, as this would exclude some of
the revenue synergies available to Man through its ability to distribute products using its well established distribution
channels, which may not be fully available to other market participants.
The value in use calculations at 31 December 2017 use cash flow projections based on the Board approved financial plan for
the year to 31 December 2018 and a further two years of projections (2019 and 2020), plus a terminal value. The valuation
analysis is based on best practice guidance whereby a terminal value is calculated at the end of a short discrete budget
period and assumes, after this three year budget period, no growth in asset flows above the long-term growth rate. In order
to determine the value in use of each CGU, it is necessary to notionally allocate the majority of the Group's cost base
relating to operations, product structuring, distribution and support functions, which are managed on a centralised basis.
The value in use calculations for AHL, GLG, FRM, Numeric and GPM (established as a result of the acquisition of Aalto in
January 2017) are presented on a post-tax basis, consistent with the prior year, given most comparable market data is
available on a post-tax basis. The value in use calculations presented on a post-tax basis are not significantly different
to their pre-tax equivalent.
The assumptions applied in the value in use calculation are derived from past experience and assessment of current market
inputs. A bifurcated discount rate has been applied to the modelled cash flows to reflect the different risk profile of net
management fee income and net performance fee income. The discount rates are based on the Group's weighted average cost of
capital using a risk free interest rate, together with an equity risk premium and an appropriate market beta derived from
consideration of Man's beta, similar alternative asset managers, and the asset management sector as a whole. The terminal
value is calculated based on the projected closing FUM at 31 December 2020 and applying a mid-point of a range of
historical multiples to the forecast cash flows associated with management and performance fees.
The recoverable amount of each CGU has been assessed at 31 December 2017. The key assumptions applied to the value in use
calculations for each of the CGUs are provided below.
Key assumptions: AHL GLG FRM Numeric GPM
Compound average annualised growth in FUM (over three years) 11% 4% 10% 7% 37%
Discount rate
- Management fees1 11% 11% 11% 11% 15%
- Performance fees2 17% 17% 17% 17% 21%
Terminal value (mid-point of range of historical multiples)3
- Management fees 13.0x 13.0x 5.9x 13.0x 13.0x
- Performance fees 5.5x 5.5x 3.9x 5.5x 5.5x
Notes:
1 The pre-tax equivalent of the net management fees discount rate is 13%, 13%, 13%, 14% and 18% for each of the
AHL, GLG, FRM, Numeric and GPM CGUs, respectively.
2 The pre-tax equivalent of the net performance fees discount rate is 20%, 20%, 20%, 21% and 25% for each of the
AHL, GLG, FRM, Numeric and GPM CGUs, respectively.
3 The implied terminal growth rates
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