| Tue 3 May 2005, 10:36 | | Transition to International Financial Reporting |
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Nedcor - Transition to International Financial Reporting Standards
NEDCOR LIMITED
(Incorporated in the Republic of South Africa)
Registration number: 1966/010630/06
JSE share code: NED
ISIN code: ZAE000004875
(`Nedcor`)
Transition to International Financial Reporting Standards
Restatement of financial information for the year ended 31 December 2004 and the
six months ended 30 June 2004 under International Financial Reporting Standards
(`IFRS`)
Introduction
For the year ended 31 December 2004 the Nedcor group (`the group`) prepared its
financial statements under South African Statements of Generally Accepted
Accounting Practice (`SA GAAP`) as effective at that date. In accordance with
the JSE Securities Exchange South Africa (`JSE`) Listings Requirements the group
will be required to prepare its consolidated financial statements in accordance
with IFRS (and revised SA GAAP effective for financial periods commencing on or
after 1 January 2005) for the year ending 31 December 2005. IFRS refers to the
application of International Accounting Standards (`IAS`) and IFRSs.
This requirement applies to financial reporting for all listed companies for
financial reporting periods beginning on or after 1 January 2005 and,
consequently, Nedcor`s first published IFRS results will be its interim results
for the six months ending 30 June 2005. The group`s first published financial
statements under IFRS will be for the year ending 31 December 2005. As the group
publishes comparative information for one year in its financial statements, the
date for transition to IFRS is 1 January 2004, which represents the start of the
earliest period of comparative information presented.
In order to explain how Nedcor`s reported performance and financial position are
impacted by IFRS, the group has restated information previously published under
SA GAAP to the equivalent basis under IFRS. This restatement follows the
guidelines set out in IFRS 1, First-time Adoption of International Financial
Reporting Standards (`IFRS 1`).
The effect of IFRS, in particular the changes to the accounting treatment for
goodwill, which is no longer amortised, and share-based payments (including the
BEE deal), which are now expensed through the income statement, make Nedcor`s
published 2007 targets more challenging. These targets will be revisited during
the annual budgeting and three-year forecasting process, which takes place in
the second half of the year.
The adoption of IFRS has resulted in certain income statement adjustments that
may not be repeated in future reporting periods.
It is important to note that this financial information has been prepared in
accordance with IFRS statements that are expected to be effective at 31 December
2005. These are subject to ongoing review and possible amendment by interpretive
guidance from the International Accounting Standards Board (`IASB`) and may
therefore be subject to change. It should further be noted that the ultimate
presentation, and income statement and balance sheet captions, could also
change.
Old Mutual plc, Nedcor`s ultimate holding company, is required to prepare its
financial statements in accordance with IFRS as endorsed by the European Union
(`EU`). The EU has not endorsed the full version of IAS 39, Financial
Instruments: Recognition and Measurement (`IAS 39`) and it has instead endorsed
a `carved out` version. The `carve out` requires financial liabilities
previously designated as fair value through profit or loss to be valued on an
amortised cost basis. The `carve out` does not apply to the South African
reported information and Nedcor has retained the fair value designation for
local reporting, but reports to Old Mutual plc in line with the `carve out`.
Basis of preparation
The group has prepared the consolidated preliminary balance sheet at 31 December
2004 and the consolidated preliminary income statement for the year then ended,
in accordance with IFRS (`the preliminary financial information`) to establish
the financial position and results of operations of the group necessary to
provide the comparative information expected to be included in the group`s first
set of IFRS financial statements for the year ending 31 December 2005.
The board acknowledges its responsibility for the preparation of the preliminary
financial information which has been prepared in accordance with IFRS and
policies expected to be adopted when the board prepares the group`s first set of
IFRS financial statements for the year ending 31 December 2005. The board has
approved the preliminary financial information.
The preliminary financial information does not reflect any changes in respect of
any possible amendments to IAS 39 that restrict the use of the fair value
option. Proposals to restrict the fair value option are being considered by the
IASB and Nedcor will continue to monitor industry developments in this area.
There have been no material adjustments to the cash flow statement in respect of
cash utilised by operating activities before taxation, cash flows from
investment activities and cash flows from financing activities as a result of
the adoption of IFRS.
Transitional Arrangements
The date of transition to IFRS for the group is 1 January 2004 and therefore as
required by IFRS 1, the group`s
opening balance sheet at 1 January 2004 has been restated to reflect all
existing IFRS statements expected to be applicable at 31 December 2005. However,
IFRS 1 allows a number of exemptions to this retrospective application principle
upon adoption of IFRS. The group has adopted the following transitional
arrangements on a consistent basis with its ultimate holding company, Old Mutual
plc:
* Cumulative translation differences: the group has elected that the cumulative
translation differences for foreign operations are deemed to be zero at the date
of transition.
* Business combinations: the group has elected not to retrospectively apply the
requirements of IFRS 3, Business Combinations (`IFRS 3`) for business
combinations that occurred prior to 31 March 2004 and consequently no adjustment
has been made for historical business combinations.
* Property, plant and equipment: the group has elected to measure individual
items of property, plant and equipment at fair value at the date of transition
to IFRS, hence fair value is deemed to be cost at that date.
* Employee benefits: the group has elected to recognise all cumulative actuarial
gains and losses on defined benefit post-retirement schemes in equity at the
date of transition.
* Share-based payments: the group has elected not to apply the provisions of
IFRS 2, Share-based payments (`IFRS 2`) to equity-settled awards granted on or
before 7 November 2002, or to awards granted after the date but which had vested
prior to 1 January 2005.
The group has not elected to apply the exemption within IFRS 1 that allows
comparative information presented in the first year of adoption of IFRS not to
comply with IAS 32, Financial Instruments: Disclosure and Presentation (`IAS
32`) and IAS 39.
Where estimates have previously been made under SA GAAP, consistent estimates
(after adjustments to reflect any difference in accounting policies) have been
made for the same date on transition to IFRS.
Material adjustments
The basis of the material adjustments, net of the associated tax impact, as
shown in the tables for Reconciliation of assets, liabilities and equity,
Reconciliation of income statement and Reconciliation of changes in
shareholders` equity are noted below:
Note 1: Credit impairment
Previously the group calculated its impairment losses on loans and advances on
an `expected loss` basis. Credit impairments were calculated using historical
data and trends. The discount rate used to calculate the recoverable amount
included an allowance for a credit spread.
Under IFRS the group has moved to an `incurred loss` basis. Impairment losses
are incurred only if there is objective evidence of impairment as a result of
one or more past events that have occurred since initial recognition. IFRS also
allows for the creation of a credit impairment for incurred but not reported
(`IBNR`) losses in order to provide for latent losses in a portfolio of loans
that have not yet been individually evidenced. The discount rate used to
calculate the recoverable amount now excludes any allowance for a credit spread.
Note 2: Revenue recognition and deferred acquisition costs
Previously fees charged and certain related acquisition costs for originating
loans were recognised immediately in the income statement.
In accordance with IFRS, fees charged for loans are recognised as revenue as the
services are provided. Initial fees, which relate to the future provision of
services, are deferred and amortised over the anticipated period in which the
services will be provided.
Similarly costs that are directly attributable to securing a loan are deferred
as an asset and amortised as the related revenue is recognised.
Note 3: Goodwill
Previously, the group recognised acquired goodwill at cost and amortised it on a
straight-line basis over its expected useful life. Goodwill was subject to
review for indications of impairment and any impairment losses were recognised
in the income statement.
IFRS requires that goodwill is not amortised but is subject to impairment
reviews, both annually and when there are indications that the carrying value
may not be recoverable. Negative goodwill is no longer recognised on the balance
sheet but in the income statement as it arises.
The 2004 goodwill amortisation previously recognised in the income statement has
been reversed, resulting in a corresponding increase in equity. All goodwill has
been tested for impairment at 1 January 2004, 30 June 2004, and 31 December 2004
in accordance with IFRS with no further impairment being recognised on
transition. Negative goodwill that was previously held on the balance sheet at
the transition date was released to reserves.
Note 4: Foreign exchange
Previously the group classified the assets and liabilities of all foreign
subsidiaries and branches as either foreign entities or integrated operations.
The foreign currency adjustments arising from the translation of foreign
entities were recognised directly in equity, in the Foreign Currency Translation
Reserve (`FCTR`), while those of the integrated operations were recognised in
the income statement.
IFRS requires the group to determine the `functional currency` for all entities
and the distinction between foreign entities and integrated operations has been
removed. An entity, which has a non-rand functional currency, is translated at
the closing exchange rate and the differences arising are reported directly to
equity, whilst all other entities classified as having a rand functional
currency report foreign currency translation differences in the income
statement.
The group has elected to apply the exemption afforded to it by IFRS 1 and reset
the balance of the FCTR to zero at the date of transition to IFRS.
Note 5: Share-based payments
The group grants share options to employees under employee share incentive
schemes. Other than costs incurred in administering the schemes, which were
expensed as incurred, the schemes did not result in any expense to the group,
other than a dilution in earnings per share when the shares were issued.
In accordance with the requirements of IFRS, the group has recognised an expense
in the income statement, with a corresponding credit to equity, representing the
fair value of outstanding employee share options with regard to its equity
settled schemes. The fair value at the date of granting the options is charged
to income over the relevant option vesting periods, adjusted to reflect actual
and expected levels of vesting.
Note 6: Post-employment benefits
Previously the group elected to use the corridor method for the recognition of
actuarial gains and losses. Only cumulative actuarial gains or losses in excess
of 10% of the surplus or deficit in the fund were amortised in the income
statement. Cumulative gains or losses inside this corridor were carried on the
balance sheet and recognised over the expected remaining working lives of the
employees.
Under IFRS 1 the group has applied the option to eliminate its pension fund
corridor against opening retained income at the date of transition. The asset
has been eliminated, and the adjustment taken to retained earnings as at 1
January 2004.
Future actuarial gains or losses will continue to be recognised using the
corridor method.
Note 7: Property, plant and equipment
Previously property, plant and equipment were measured at cost less accumulated
depreciation and impairment losses.
Under IFRS, equipment, (principally computer equipment, motor vehicles, fixtures
and furniture), is still stated at cost less accumulated depreciation and
impairment losses.
Owner-occupied property has been recognised at revalued amounts, being the fair
value at the date of revaluation less subsequent accumulated depreciation and
accumulated impairment losses. Increases in valuation of the properties are
taken to a revaluation reserve. This revaluation reserve is amortised over the
remaining useful life of the property. Land is not depreciated.
Investment properties are stated at revalued amounts, being fair value at the
date of revaluation less accumulated impairment losses. Increases or decreases
in valuation are recognised in the income statement and investment properties
are not depreciated.
REVIEW OPINION
This restatement of financial information for the year ended 31 December 2004
and the six months ended 30 June 2004 has been reviewed by the group`s auditors,
KPMG Inc and Deloitte & Touche, and their review opinion is available for
inspection at the group`s registered office. Their report includes an emphasis
of matter that the scope of their review did not include the presentation and
disclosure aspects of IFRS and was limited to the recognition and measurement
criteria of IFRS only. They further note that amendments to the interpretive
guidance issued by the IASB, between the date of this announcement and the
finalisation of the financial statements for the year ending 31 December 2005,
may result in changes to the restatements published.
Sandton
3 May 2005
Financial highlights
Reviewed Reviewed
As reported under As previously
IFRS reported
as at 31 30 June 31 30
December December June
2004 2004 2004 2004
Share statistics
Number of shares in issue m 394,2 392,9 394,2 392,9
Weighted average number shares m 360,9 327,8 360,9 327,8
Fully diluted weighted average m 361,8 330,1 361,8 330,1
number of shares
Headline earnings per share cents 483 245 401 153
Fully diluted headline earnings cents 481 243 400 151
per share
Attributable earnings per share cents 423 247 270 116
Fully diluted attributable cents 422 245 269 115
earnings per share
Dividends declared per share cents 120 44 120 44
Dividend cover times 4,0 5,6 3,3 3,5
Net asset value per share
(Investments at market value) cents 4 692 4 499 4 590 4 444
Tangible net asset value per
share
(Investments at market value) cents 3 400 3 162 3 357 3 132
Key ratios
Return on ordinary shareholders` % 11,0 11,7 9,2 7,3
equity
Return on total assets % 0,54 0,53 0,45 0,33
Net-interest income to interest- % 3,13 3,06 3,13 3,05
earning assets
Non-interest revenue to total % 50,2 48,6 50,8 48,7
income
Impairments to total advances % 2,9 3,2 2,9 3,3
Efficiency ratio % 74,8 79,0 76,3 79,9
Income statement
Reviewed Reviewed
Prepared in accordance with IFRS 2004 2004
For the For the
year ended six months
ended
Rm 31 December 30 June
2004 2004
Interest and similar income 23 904 11 744
Interest expense and similar charges 16 322 8 149
Net interest income 7 582 3 595
Non-interest revenue 7 936 3 495
Foreign currency translation losses (280) (98)
Total income after foreign currency 15 238 6 992
translation losses
Impairment losses on loans and advances 1 217 409
Income after impairment losses on loans and 14 021 6 583
advances
Total expenses 11 404 5 524
Operating expenses 10 709 5 113
Fees due to alliance partners 70 83
Recovery programme expenses 379 234
Merger expenses 246 94
Profit from operations before non trading and 2 617 1 059
capital items
Non-trading and capital items (254) (9)
Impairment of goodwill (87) (91)
(Loss)/Profit on sale of subsidiaries, (74) 137
investments and property and equipment
Net impairment of investments, property and (93) (55)
equipment and capitalised development costs
Profit from operations 2 363 1 050
Share of profits of associates and joint 147 80
ventures
Profit before taxation 2 510 1 130
Taxation 668 159
Taxation on non-trading and capital items (39) (17)
Profit after taxation 1 881 988
Minority interest income attributable to (125) (68)
ordinary shareholders
Minority interest income attributable to (229) (110)
preference shareholders
Profit attributable to shareholders for the 1 527 810
period
Headline earnings reconciliation
Profit attributable to ordinary shareholders 1 527 810
for the period
Less: non-trading and capital items (215) 8
Impairment of goodwill (87) (91)
(Loss)/Profit on sale of subsidiaries, (74) 137
investments and property and equipment
Net impairment of investments, property and (93) (55)
equipment and capitalised development costs
Taxation on above items 39 17
Headline earnings 1 742 802
Headline earnings excluding foreign currency 2 022 900
translation losses
Reconciliation of income statement
Profit attributable to ordinary
shareholders
Reviewed Reviewed
For the For the six
year ended months ended
31 30 June
December
Rm Note 2004 2004
As previously reported 974 380
Adjustments for:
Credit impairment 1 140 215
Revenue recognition and deferred 2 (31) (14)
acquisition costs
Goodwill 3 281 127
Foreign exchange 4 91 116
Share-based payments 5 (15) (4)
Post-employment benefits 6 131
Property, plant and equipment 7 (44) (10)
As reported under IFRS 1 527 810
Balance sheet
Prepared in accordance with IFRS Reviewed Reviewed Reviewed
as at 31 December 30 June 1 January
Rm 2004 2004 2004
Assets
Cash and balances with central banks 10 050 11 809 12 227
Other short-term securities 16 310 9 549 10 610
Government and other securities 26 224 22 322 21 333
Derivative financial instruments 27 560 21 509 28 496
Loans and advances to customers 221 275 206 553 210 045
Other assets 6 816 8 391 6 669
Current taxation receivable 196 174 256
Investments in associate companies and 1 089 1 464 1 627
joint ventures
Investment securities 6 565 8 167 8 940
Post-employment assets 992 506 529
Deferred taxation asset 1 169 1 245 3 146
Investment property 174 133 175
Property, plant and equipment 2 828 2 704 2 842
Non-current assets held for sale 48 13 13
Computer software and capitalised 1 419 1 558 1 710
development costs
Goodwill 3 676 3 695 3 762
Customers` indebtedness for acceptances 1 509 1 009 835
Total assets 327 900 300 801 313 215
Shareholders` equity and liabilities
Share capital 394 393 275
Share premium 9 892 9 832 4 801
Reserves 8 211 7 452 6 466
Ordinary shareholders` equity 18 497 17 677 11 542
Minority shareholders` equity
Attributable to preference shareholders 2 770 2 770 2 802
Attributable to ordinary shareholders 681 665 622
Shareholders` equity and minority 21 948 21 112 14 966
interests
Derivative financial instruments 28 055 19 856 28 206
Amounts owed to depositors 254 299 236 618 238 404
Other liabilities 9117 8988 11834
Deferred revenue 257 225 194
Current taxation liabilities 193 189 144
Deferred taxation liabilities 1 125 864 2 731
Post-employment liabilities 979 640 663
Investment contract liabilities 3 109 3 803 5 152
Long-term debt instruments 7 309 7 497 10 086
Liabilities under acceptances 1 509 1 009 835
Total liabilities 305 952 279 689 298 249
Total shareholders` equity and 327 900 300 801 313 215
liabilities
Guarantees on behalf of customers 10 770 10 429 12 403
excluded from assets
Cash flow statement
Reviewed Reviewed
Prepared in accordance with IFRS For the For the
year ended six months
ended
31 December 30 June
Rm 2004 2004
Cash and balances with central banks at beginning of 12 227 12 227
period
Cash utilised by operating activities before taxation (6 081) (3 682)
Taxation paid (835) (285)
Cash flows from investment activities 2 836 1 228
Cash flows from financing activities 1 903 2 321
Cash and balances with central banks at end of period 10 050 11 809
Reconciliation of assets, liabilities and equity
Assets
Reviewed 31 December 30 June 1 January
2004 2004 2004
Note Rm Rm Rm
As previously reported 327 238 300 353 313 113
Adjustments for:
Credit impairment 1 107 185 (33)
Revenue recognition and deferred
acquisition costs 2 81 69 59
Goodwill 3 281 127
Share-based payments 5 18 8 7
Post-employment benefits 6 (45) (176) (176)
Property, plant and equipment 7 220 235 245
As reported under IFRS 327 900 300 801 313 215
Reconciliation of assets, liabilities and equity
Liabilities
Reviewed 31 December 30 June 1 January
2004 2004 2004
Note Rm Rm Rm
As previously reported 305 652 279 421 298 012
Adjustments for:
Credit impairment 1
Revenue recognition and deferred
acquisition costs 2 257 225 194
Goodwill 3
Share-based payments 5
Post-employment benefits 6 43 43 43
Property, plant and equipment 7
As reported under IFRS 305 952 279 689 298 249
Reconciliation of assets, liabilities and equity
Equity
Reviewed 31 December 30 June 1 January
2004 2004 2004
Note Rm Rm Rm
As previously reported 21 586 20 932 15 101
Adjustments for:
Credit impairment 1 107 185 (33)
Revenue recognition and deferred
acquisition costs 2 (176) (156) (135)
Goodwill 3 281 127
Share-based payments 5 18 8 7
Post-employment benefits 6 (88) (219) (219)
Property, plant and equipment 7 220 235 245
As reported under IFRS 21 948 21 112 14 966
Reconciliation of changes in shareholders` equity
Distri-
Reviewed butable
reserves
Share Share brought
capital premium forward
Note Rm Rm Rm
As at 1 January 2004
As previously reported 275 4 801 6 667
Income statement movements:
Credit impairment 1 (28)
Revenue recognition and deferred
acquisition costs 2 (115)
Foreign exchange 4 (209)
Share-based payments 5 (2)
Post-employment benefits 6 (216)
Property, plant and equipment 7 (49)
As reported under IFRS 275 4 801 6 048
As at 30 June 2004
As previously reported 393 9 832 6 667
Income statement movements:
Credit impairment 1 (28)
Revenue recognition and deferred
acquisition costs 2 (115)
Goodwill 3
Foreign exchange 4 (209)
Share-based payments 5 (2)
Post-employment benefits 6 (216)
Property, plant and equipment 7 (49)
Transfer of reserves
As reported under IFRS 393 9 832 6 048
As at 31 December 2004
As previously reported 394 9 892 6 667
Income statement movements:
Credit impairment 1 (28)
Revenue recognition and deferred
acquisition costs 2 (115)
Goodwill 3
Foreign exchange 4 (209)
Share-based payments 5 (2)
Post-employment benefits 6 (216)
Property, plant and equipment 7 (49)
Transfer of reserves
As reported under IFRS 394 9 892 6 048
Reconciliation of changes in shareholders` equity
Current
distrib
utable
Reviewed reserve Share- Foreign
movemen based Property currency
ts
after payments revaluat translat
ion ion
dividen reserve reserve reserve
ds
Note Rm Rm Rm Rm
As at 1 January 2004
As previously reported - - - (209)
Income statement movements:
Credit impairment 1
Revenue recognition and deferred
acquisition costs 2
Foreign exchange 4 209
Share-based payments 5 9
Post-employment benefits 6
Property, plant and equipment 7 296
As reported under IFRS - 9 296 -
As at 30 June 2004
As previously reported (299) - - (210)
Income statement movements:
Credit impairment 1 215
Revenue recognition and deferred
acquisition costs 2 (14)
Goodwill 3 127
Foreign exchange 4 116 93
Share-based payments 5 (4) 14
Post-employment benefits 6
Property, plant and equipment 7 (10) 296
Transfer of reserves 13 (13)
As reported under IFRS 144 14 283 (117)
As at 31 December 2004
As previously reported 563 - - (266)
Income statement movements:
Credit impairment 1 140
Revenue recognition and deferred
acquisition costs 2 (31)
Goodwill 3 281
Foreign exchange 4 91 118
Share-based payments 5 (15) 35
Post-employment benefits 6 131
Property, plant and equipment 7 (44) 315
Transfer of reserves 53 (53)
As reported under IFRS 1 169 35 262 (148)
Reconciliation of changes in shareholders` equity
Reviewed Available Total Preference
ordinary
for share- share
sale Other holders` holders`
reserves reserves equity equity
Note Rm Rm Rm Rm
As at 1 January 2004
As previously reported - 113 11 647 2 802
Income statement movements:
Credit impairment 1 (28)
Revenue recognition and deferred
acquisition costs 2 (115)
Foreign exchange 4 -
Share-based payments 5 7
Post-employment benefits 6 (216)
Property, plant and equipment 7 247
As reported under IFRS - 113 11 542 2 802
As at 30 June 2004
As previously reported 416 664 17 463 2 770
Income statement movements:
Credit impairment 1 187
Revenue recognition and deferred
acquisition costs 2 (129)
Goodwill 3 127
Foreign exchange 4 -
Share-based payments 5 8
Post-employment benefits 6 (216)
Property, plant and equipment 7 237
Transfer of reserves -
As reported under IFRS 416 664 17 677 2 770
As at 31 December 2004
As previously reported 621 224 18 095 2 770
Income statement movements:
Credit impairment 1 112
Revenue recognition and deferred
acquisition costs 2 (146)
Goodwill 3 281
Foreign exchange 4 -
Share-based payments 5 18
Post-employment benefits 6 (85)
Property, plant and equipment 7 222
Transfer of reserves -
As reported under IFRS 621 224 18 497 2 770
Reconciliation of changes in shareholders` equity
Reviewed Minority
share-
holders`
equity Total
Note Rm Rm
As at 1 January 2004
As previously reported 652 15 101
Income statement movements:
Credit impairment 1 (5) (33)
Revenue recognition and deferred
acquisition costs 2 (20) (135)
Foreign exchange 4 -
Share-based payments 5 7
Post-employment benefits 6 (3) (219)
Property, plant and equipment 7 (2) 245
As reported under IFRS 622 14 966
As at 30 June 2004
As previously reported 699 20 932
Income statement movements:
Credit impairment 1 (2) 185
Revenue recognition and deferred
acquisition costs 2 (27) (156)
Goodwill 3 127
Foreign exchange 4 -
Share-based payments 5 8
Post-employment benefits 6 (3) (219)
Property, plant and equipment 7 (2) 235
Transfer of reserves -
As reported under IFRS 665 21 112
As at 31 December 2004
As previously reported 721 21 586
Income statement movements:
Credit impairment 1 (5) 107
Revenue recognition and deferred
acquisition costs 2 (30) (176)
Goodwill 3 281
Foreign exchange 4 -
Share-based payments 5 18
Post-employment benefits 6 (3) (88)
Property, plant and equipment 7 (2) 220
Transfer of reserves -
As reported under IFRS 681 21 948
www.nedcor.com
Lead sponsor to Nedcor
Merrill Lynch
Sponsor to Nedcor
Nedbank Capital
Date: 03/05/2005 01:00:57 PM
Produced by the JSE SENS Department
