| Tue 25 Oct 2005, 12:33 | | Absa Group Limited - Transition to International F |
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Absa Group Limited - Transition to International Financial Reporting Standards
Absa Group Limited
Incorporated in the Republic of South Africa)
Registration number 1986/003934/06)
JSE Code: ASA)
(Issuer Code: AMAGB)
ISIN: ZAE000067237)
("Absa" or "the Group")
Transition to International Financial Reporting Standards
Introduction
For the year ended 31 March 2005 Absa Group ("Absa" or the "Group") prepared its
financial statements under statements of South African Generally Accepted
Accounting Practice (SA GAAP). In accordance with the listing requirements of
the JSE Limited, Absa is required to prepare its consolidated financial
statements in accordance with International Financial Reporting Standards
("IFRS") from the transition date. The transition date is effectively the
beginning of the earliest comparative period presented. Absa intends disclosing
one year of comparative information in its transition financial results,
therefore its date of transition is 1 April 2004.
Barclays PLC acquired a controlling stake in Absa with effect from 27 July 2005.
At the Absa Annual General Meeting, held on 19 August 2005, the year-end was
changed from 31 March to 31 December with effect from 31 December 2005. This is
to facilitate the alignment of the year-end with that of Barclays PLC.
The information provided in the accompanying tables has been prepared in
accordance with IFRS standards that are expected to be effective on 31 December
2005. These accounting standards are the subject of ongoing review and
interpretative guidance by the International Accounting Standards Board (IASB)
and may therefore be subject to change. Any changes will be reflected in the
first IFRS financial statements presented for the period ending 31 December
2005.
As part of the process of change to IFRS, Absa has also aligned its IFRS
accounting policies to that of its new parent, Barclays PLC. This has in some
instances resulted in a refinement in methodology.
It is important to note that while the change in accounting standards has an
impact on the income statement and balance sheet, there is no change in the
underlying economics or risks of the business. This is evidenced by the
relatively small impact on the restated income statement (1,6% reduction in
headline earnings).
Transitional arrangements
The date of transition to IFRS is 1 April 2004, therefore the balance sheet at
31 March 2004 has been restated on 1 April 2004 to reflect an opening position
that is compliant with all existing IFRS statements and interpretations expected
to be applicable on 31 December 2005.
IFRS 1 - First-time adoption of IFRS
This standard allows a number of exemptions and exceptions from the
retrospective application principle applicable to changes in accounting
standards. Absa has elected the following IFRS exemptions on transition to
IFRS:
- Fair value as deemed cost - Absa has elected, in relation to our owner
occupied property, to adopt the exemption and set the fair value at 1 April
2004 to be the deemed cost;
- Cumulative translation adjustment - Absa has elected to not set the foreign
currency translation reserve to zero at the date of transition;
- Comparatives for financial instruments - Absa will apply IAS 39, IAS 32 -
dealing with financial instruments and the disclosure thereof and IFRS 4 -
insurance contracts, prospectively with effect from 1 April 2005;
- Designation of financial instruments - having adopted AC 133, there was no
requirement to re-designate financial instruments on transition to IFRS;
- Share-based payments - Absa has elected not to apply IFRS 2 to any equity
instruments that were granted before 7 November 2002 or to awards that were
granted after that date but which had vested prior to 1 January 2005.
The impacts of changing from SA GAAP to IFRS, and the restatement of the balance
sheet and income statement, and reconciliations of assets, liabilities and
equity for the periods ended 31 March 2004, 30 September 2004, 31 March 2005,
are presented in the tables below.
Adjustments implemented with effect from 1 April 2004
Note 1. IFRS 2 - Share-based payments
Absa issues share options to employees as part of its remuneration strategy.
Under SA GAAP, the issue of such options, other than the administrative costs of
running the share scheme, was not accounted for in the income statement. Under
IFRS, the fair value of equity-settled share options is now expensed over the
vesting period of such options. The options issued to eligible Absa staff
members, that had not vested prior to 31 December 2004, have been accounted for
under this standard.
In anticipation of the final international interpretation on IFRS 2, Absa has
extended the scope of IFRS 2 to include the Group"s Black Economic Empowerment
transaction.
The options issued to the Batho Bonke consortium have vested prior to that date,
as there were no conditions required, other than the elapse of time, before they
could be exercised and therefore no expense is required. The treatment in the
Group"s annual results for the nine months ending 31 December 2005 will,
however, be based on the final interpretation issued by IFRIC (the
interpretation committee of the international standard setting body).
Note 2. IFRS 3/IAS 36 - Goodwill
The South African statement dealing with business combinations, AC 140, which is
the same as IFRS3 - Business combinations, was applicable to the accounting for
business combinations and any resultant goodwill, for which the acquisition
agreement date was on or after 31 March 2004. This SA GAAP statement was
therefore applied in the financial year 1 April 2004 to 31 March 2005 and
coincided with our transition date. Accordingly, there is no impact on the
restated transition position or income statement of the Group. Goodwill
amortisation ceased with effect from 1 April 2004 and goodwill is now tested
annually for impairment.
Note 3. IAS 16 - Property, plant & equipment
Absa continues to measure property, plant and equipment at cost less accumulated
depreciation. However, under IFRS 1, the Group has elected, at the transition
date, to set the fair value of property, which is principally owner-occupied, as
the deemed cost. This establishes a new cost base which will be depreciated on
a straight-line basis over their estimated useful lives.
Note 4. IAS 17 - Leases
In August 2005, the South African Institute of Chartered Accountants issued
circular 7/2005 which required South African entities to align their
interpretation in relation to leases with recent guidance issued by IFRIC. This
has resulted in operating lease contracts with fixed escalation clauses having
to be expensed on a straight-line basis as opposed to the practice common in
South Africa of expensing this based on the contractual terms of the agreement.
The impact of this change is that lease revenue and expenses are recognised
earlier than was the case under SA GAAP. This has resulted in higher lease
costs for previously reported periods with a reduction in the opening retained
income at 1 April 2004.
As part of this alignment to a global interpretation of accounting standards,
certain leasing transactions within the Group have been reviewed. The
consequence of this alignment is that certain leases, which were previously
reported as operating leases, have been reclassified as finance leases. This
has resulted in a gross up of the balance sheet with the asset and related
liability being brought on balance sheet with a net adjustment to opening
retained income at 1 April 2004.
Note 5. IAS 18 - Revenue
Previously, certain fees charged and costs incurred in the origination of an
asset were recognised and/or expensed immediately. Under IFRS, fees charged are
required to be recognised as revenue over the period the service is provided,
and certain costs are deferred and recognised when the related revenue is
accounted for. This relates to items such as guarantee fees, commission on the
sale of certain policies and card issuing fees.
Note 6. IAS 27 - Consolidation
6.1 Consolidation of mutual funds
IFRS requires the consolidation of certain mutual funds (unit trusts) where the
Group or an entity within the Group (Absa Life) is considered to have control of
such funds through the size of their investment, voting arrangements and related
management contracts. The consolidation of such funds results in a gross up of
the balance sheet and has no impact on equity. The consolidation of such funds
is the subject of industry debate both locally and internationally, and the
progress in this regard is being monitored. Any changes to currently applied
interpretations will be reflected in the first IFRS financial statements
presented for the period ending 31 December 2005.
6.2 Line-by-line consolidation
Furthermore, IFRS requires that entities be consolidated on a line-by-line
basis. Previously, in South Africa, a number of different treatments of life
insurance operations in consolidated financial statements emerged, as the SA
GAAP statement dealing with long-term insurers was not prescriptive. A line-by-
line consolidation will now be performed, but this has no impact on equity or on
previously reported earnings figures. However, certain ratios, such as cost to
income will be affected. For future reporting, the income in relation to
premiums and the cost in relation to claims will be separately disclosed in the
income statement.
6.3 Cell captives
The Group operates certain arrangements on behalf of third parties. While Absa
is the legal owner of the assets, they are held for the benefit of third
parties. These assets and corresponding liabilities are reflected on the
balance sheet. The treatment of such arrangements is the subject of ongoing
international debate, the progress of which is being monitored. Any adjustment
that may arise from the resolution of this debate, will have no impact on equity
nor on previously reported earnings. Any changes to currently applied
interpretations will be reflected in the first IFRS financial statements
presented for the period ending 31 December 2005.
Adjustments implemented with effect from 1 April 2005
Note 7. IAS 39/IAS 32 - Financial instruments: recognition and measurement and
disclosure and presentation
7.1 Effective interest rate on loans
The previous South African version of IAS 39 (AC 133 - Financial instruments
recognition and measurement) required that fees earned and/or costs incurred in
the origination of an asset, be included in the effective interest rate of that
asset. The most significant item in this regard is the fees paid to mortgage
originators. On adoption of AC 133, Absa applied a prudent approach of
expensing these costs over four years with 55% in the first year. On transition
to IFRS, with the benefit of hindsight in relation to the originators market and
the refinement of methodologies to more closely align with Barclays, an
adjustment was required to opening retained income at 1 April 2005. The outcome
is that originators" costs are now spread over 5 years on a basis that
approximates the effective interest rate on a portfolio approach.
7.2 Credit impairments
Previously the Group determined its portfolio impairment applying an `expected
loss" methodology which entailed estimating the expected future cash flows over
the expected remaining maturity of the loans and present valuing these at the
original contract rate, modified for a credit spread.
Under IAS 39, an `incurred loss" methodology is required. Under this
methodology, impairment losses are only incurred if there is objective evidence
that a loss event has occurred after the initial recognition of the asset but
before the balance sheet date. IFRS also allows for the creation of a credit
impairment for incurred but not yet reported losses in order to provide for
latent losses in a loan portfolio that have not yet been identified
individually. The effect of this change in methodology has resulted in a
reduction in the `portfolio" provision with a corresponding increase in retained
earnings at 1 April 2005.
7.3 Remeasurement of client liabilities
The application of IFRS has resulted in certain client obligations being
remeasured to reflect the entire legal obligation. This differs from the
previous approach, which only reflected management"s best estimate of the
expected obligation that would realise. This also facilitates alignment to
Barclays policy in this regard.
7.4 Elimination of treasury shares in policyholder funds
To date, in SA life insurance accounting, assets held on behalf of policyholders
were considered to be `ring-fenced" for their benefit. Under IFRS any shares
held by the life fund in Group companies are required to be eliminated as
treasury shares, notwithstanding the fact that the risks and rewards of these
shares accrue to the policyholders.
As a result of the issuance of IFRS4 - the standard dealing with insurance
contracts, the SA GAAP statement dealing with long-term insurance was withdrawn.
Assets are now subject to IAS 39 and IAS 32, and are accounted for as equity
instruments and under IAS 32 the cost of such shares is now eliminated against
equity and any fair value movements are eliminated from the income statement.
This treatment results in a mismatch arising between the policyholder
liabilities and the policyholder assets (which are now reduced under this
treatment) which is charged against equity.
Note 8. IFRS 4 - Accounting for insurance contracts
On adoption of AC 133, Absa was required to separate insurance from investment
contracts. Investment contracts fall within the scope of AC 133 (IAS 39)
whereas insurance contracts now fall within the ambit of IFRS 4 which allows for
existing measurement principles to continue to be applied, however, with
expanded disclosure requirements. These new disclosure requirements, which
include the gross up of reinsurance assets, will be applied prospectively as
allowed under IFRS 1.
Future developments in financial reporting
The information has been prepared on the basis of the Group"s expectation of the
standards that will be applicable as at 31 December 2005. IFRS information may
differ at that time from the information contained herein as further standards
and interpretations may be issued. In addition, IFRS is currently being applied
in Europe and other countries for the first time and contains many new and
revised standards therefore practice on which to draw in applying these
standards may develop. The Group"s first financial statements prepared under
IFRS for the period ending 31 December 2005 may, therefore, be prepared in
accordance with different accounting policies or applying different
interpretations to those applied in the preparation of the financial information
in this document.
Auditors" opinion
The restatement of the financial information in respect of the opening IFRS
balance sheet as at 1 April 2004, the IFRS balance sheet and income statement as
at and for the year ended 31 March 2005 and opening IFRS balance sheet at 1
April 2005, have been audited by the Group"s auditors Ernst & Young and
PricewaterhouseCoopers Inc. Their audit report is available for inspection at
the Group"s registered office. Their report includes an emphasis of matter that
amendments to the interpretative guidance issued by the IASB, between the date
of their report and the finalisation of the financial statements for the period
ending 31 December 2005, may result in changes to the statements published.
Their report further emphasises that the scope of the audit engagement did not
include the presentation and disclosure of the IFRS financial information in a
set of consolidated annual financial statements and was limited to the
recognition and measurement requirements of IFRS and the disclosure of the
convention information as required by IFRS 1.
We draw readers" attention to the fact that the interim results were not
audited, reviewed or any other procedures performed by the joint auditors and
consequently they do not express any assurance on the interim results for the
period ended 30 September 2004 reflected in the accompanying tables.
Absa Group Limited
Headline earnings reconcilation
31 March 30
September
2005 2004
Notes Rm Rm
Headline earnings as 5,484 2,453
previously reported
Adjusted for:
IFRS 2 - Share-based 1 (40) (13)
payments
IAS 16 - Property, 3 (4) 1
Plant & Equipment
IAS 17 - Finance 4 (28) (14)
leases
IAS 17 - Operating 4 (9) (3)
leases
IAS 18 - Revenue 5 (10) (10)
recognition
Other 1 1
Headline earnings in 5,394 2,415
accordance with IFRS
5,375 2,406
Absa Group Limited
Income statement
Prepared in accordance with IFRS
31 30
March September
2005 2004
Rm Rm
Note Audited Unaudited
Interest income 27,132 13,626
Interest expense (16,568) (8,427)
Net interest income 10,564 5,199
Impairment of advances (1,283) (637)
Income from lending activities 9,281 4,562
Non-interest income 11,898 5,448
Net operating income 21,179 10,010
Operating expenditure (12,857) (6,352)
Indirect taxation (780) (364)
Impairment charge (137) (84)
Net income from operations 7,405 3,210
Share of associated and joint venture 118 39
companies" income
Net income before taxation 7,523 3,249
Taxation (2,029) (854)
Net income after taxation 5,494 2,395
Headline earnings 5,394 2,415
Attributable to:
Equity holders of the Company 5,419 2,354
Minority interest 75 41
5,494 2,395
Headline earnings per share (cents) 827.2 371.2
Diluted headline earnings per share 798.1 363.6
(cents)
Earnings per share (cents) 831.5 368.1
Diluted earnings per share (cents) 802.3 360.6
Dividends per share paid during the year
(cents)
Dividends per share relating to income for
the year (cents)
Dividend cover
Absa Group Limited and its subsidiaries
IFRS reconciliation of assets, liabilities and equity
1 April 31 March 30
2005 2005 September
2004
Rm Rm Rm
Notes Audited Audited Unaudited
Assets
Restated/ as previously 350,399 348,686 313,860
reported
IFRS adjustments 281 1,713 943
IAS 16 - Fair value as deemed 3 - 315 319
cost
IAS 18 - Revenue recognition 5 - 51 42
IAS 17 - Finance leases 4 - 485 496
IAS 17 - Operating leases 4 - 89 84
IAS 27 - Consolidation of 6.1 - 770 -
unit trust
IAS 39 - Effective interest 7.1 (19) - -
rate
IAS 39 - Impairments 7.2 132 - -
IAS 32 - Treasury shares in 7.4 (62) - -
life company
IFRS 4 - Gross up of 8 230 - -
reinsurance assets
Other - 3 2
Restated under IFRS 350,680 350,399 314,803
Liabilities
Restated/ as previously 326,894 324,721 292,569
reported
IFRS adjustments 625 2,173 1,379
IAS 16 - Fair value as deemed 3 - 86 85
cost
IAS 18 - Revenue recognition 5 - 104 96
IAS 17 - Finance leases 4 - 976 973
IAS 17 - Operating leases 4 - 236 225
IAS 27 - Consolidation of 6.1 - 770 -
unit trust
IAS 39 - Effective interest 7.1 73 - -
rate
IAS 39 - Impairments 7.2 39 - -
IAS 39 - Remeasurement of 7.3 283 - -
financial liabilities
IFRS 4 - Gross up of 8 230
reinsurance assets
- 1 -
Restated under IFRS 327,519 326,894 293,948
Equity
Restated/ as previously 23,505 23,965 21,291
reported
IFRS adjustments (344) (460) (436)
IAS 16 - Fair value as deemed 3 - 229 234
cost
IAS 18 - Revenue recognition 5 - (53) (54)
IAS 17 - Finance leases 4 - (491) (477)
IAS 17 - Operating leases 4 - (147) (141)
IAS 39 - Effective interest 7.1 (92) - -
rate
IAS 39 - Impairments 7.2 93 - -
IAS 39 - Remeasurement of 7.3 (283) - -
financial liabilities
IAS 32 - Treasury shares in 7.4 (62) - -
Life company
Other - 2 2
Restated under IFRS 23,161 23,505 20,855
Absa Group Limited and its subsidiaries
Balance sheet
IFRS IFRS As
previously
reported
1 April 31 March 31 March
2005 2005 2005
Rm Rm Rm
Audited Audited Audited
Assets
Cash and short-term assets 15,250 15,250 15,184
Money market assets 5,002 5,002 5,002
Capital market assets 5,940 5,940 5,940
Statutory liquid asset portfolio 14,384 14,384 14,384
Advances 268,242 268,240 268,240
Derivative and trading assets 18,534 18,534 18,534
Other assets 8,472 8,243 8,157
Deferred taxation 657 546 181
Taxation 5 5 5
Investments 9,019 9,080 8,412
Associated and joint venture 606 606 604
companies
Property and equipment 3,209 3,209 2,683
Intangible assets 58 58 58
Goodwill 139 139 139
Client liabilities under acceptances 1,163 1,163 1,163
Total assets 350,680 350,399 348,686
Shareholders" equity and liabilities
Share capital 1,308 1,310 1,310
Share premium 1,571 1,611 1,611
Reserves 20,050 20,352 20,816
Shareholders" equity 22,929 23,273 23,737
Minority shareholders" equity 232 232 228
Total shareholders" equity and 23,161 23,505 23,965
minority shareholders" equity
Liabilities
Deposits and current accounts 278,865 278,582 278,582
Derivative and trading liabilities 21,638 21,638 21,638
Other liabilities 9,736 9,736 7,723
Deferred taxation 2,324 2,222 2,063
Taxation 499 489 489
Provisions 1,509 1,509 1,509
Insurance funds - - 5,964
Liabilities under insurance contracts 2,027 1,797 -
Liabilities under investment 4,168 4,168 -
contracts
Other borrowed funds 5,590 5,590 5,590
Liabilities to clients under 1,163 1,163 1,163
acceptances
Total liabilities 327,519 326,894 324,721
Total shareholders" equity and 350,680 350,399 348,686
liabilities
Contingent liabilities 16,630 16,630 16,630
Absa Group Limited and its subsidiaries (Contd.)
Balance sheet
IFRS As IFRS As
previously previously
reported reported
30 30 1 April 1 April
September September 2004 2004
2004 2004
Rm Rm Rm Rm
Unaudited Unaudited Audited Audited
Assets
Cash and short-term 15,234 15,234 14,068 14,068
assets
Money market assets 5,198 5,198 3,688 3,688
Capital market assets 6,924 6,924 9,161 9,161
Statutory liquid asset 12,359 12,359 12,598 12,598
portfolio
Advances 242,626 242,626 222,367 222,367
Derivative and trading 14,760 14,760 28,267 28,267
assets
Other assets 6,084 6,047 5,909 5,874
Deferred taxation 520 159 520 167
Taxation 47 47 28 28
Investments 6,671 6,671 5,792 5,792
Associated and joint 643 641 625 624
venture companies
Property and equipment 3,086 2,543 3,153 2,597
Intangible assets 51 51 50 50
Goodwill 140 140 84 84
Client liabilities under 460 460 1,483 1,483
acceptances
Total assets 314,803 313,860 307,793 306,848
Shareholders" equity and
liabilities
Share capital 1,301 1,301 1,291 1,291
Share premium 1,443 1,443 1,309 1,309
Reserves 17,944 18,384 16,336 16,750
Shareholders" equity 20,688 21,128 18,936 19,350
Minority shareholders" 167 163 175 171
equity
Total shareholders" 20,855 21,291 19,111 19,521
equity and minority
shareholders" equity
Liabilities
Deposits and current 252,707 252,707 234,380 234,380
accounts
Derivative and trading 17,354 17,354 30,856 30,856
liabilities
Other liabilities 7,827 6,609 7,445 6,256
Deferred taxation 1,577 1,416 1,497 1,331
Taxation 728 728 567 567
Provisions 1,321 1,321 1,272 1,272
Insurance funds - 4,754 4,115 4,115
Liabilities under 1,686 - - -
insurance contracts
Liabilities under 3,068 - - -
investment contracts
Other borrowed funds 7,220 7,220 7,067 7,067
Liabilities to clients 460 460 1,483 1,483
under acceptances
Total liabilities 293,948 292,569 288,682 287,327
Total shareholders" 314,803 313,860 307,793 306,848
equity and liabilities
Contingent liabilities 20,500 20,500 16,637 16,637
Absa Group Limited and its subsidiaries
Reconciliation of cash flow from SA GAAP to IFRS
31 March 30
2005 September
2004
Cash and cash equivalents as reported under SA 15,184 15,234
GAAP
Consolidation of unit trusts 66 -
Cash and cash equivalents as reported under IFRS 15,250 15,234
Issued by:
Absa Group Finance
Absa Group Limited
4th floor, Absa Towers East, 170 Main Street, Johannesburg.
Contact:
Eric Wasserman - Tel: (011) 350 5887
- email: ericwas@absa.co.za
Grant Lewis - Tel:(011) 350 5386
- email: grantle@absa.co.za
Date: 25/10/2005 12:33:31 PM Produced by the JSE SENS Department
