| Mon 3 Apr 2006, 10:00 | | Alexander Forbes Limited - Update on IFRS Announce |
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AFB
AFB
Alexander Forbes Limited - Update on IFRS Announcement
Alexander Forbes Limited
("Alexander Forbes")
Registration number: 1958/001974/06
ISIN: ZAE000018230
JSE Code: AFB
Update on IFRS Announcement: Additional accounting change resulting from the
adoption of IFRS
On 14 November 2005, Alexander Forbes issued an announcement to shareholders
detailing the changes resulting from the implementation of International
Financial Reporting Standards (IFRS) which became effective for the group from 1
April 2005. In this announcement, it was explained that IFRS statements are
subject to ongoing global developments and possible amendments by interpretative
guidance. Shareholders were further advised that:
*Investment Solutions is the group"s multi-manager investment subsidiary
operating under a long-term insurance licence with all investments directly
matched by linked obligations to policyholders;
*Policyholders" monies are placed with selected asset managers who are, in terms
of their investment mandate, given full discretion to buy or sell individual
shares. In the course of exercising their mandate, they may, from time to time,
hold Alexander Forbes shares within their investment portfolios;
*Given these specific circumstances, there was uncertainty as to whether these
shares should be classified and accounted for as treasury shares in Alexander
Forbes" consolidated financial statements.
After time-consuming research, both locally and internationally, and after
extensive consultation with the group"s external auditors, it has been concluded
that in terms of IFRS as presently constituted, Alexander Forbes shares held by
the group"s multi-manager investment subsidiary for policyholders ("the shares")
are required to be accounted for in Alexander Forbes" consolidated financial
statements as follows:
*The shares are required to be classified as treasury shares under IAS32 and, as
such, are required to be reclassified from policyholder assets to an equity
deduction from share capital in Alexander Forbes" consolidated balance sheet.
Consequently, movements in the value of the shares resulting from changes in the
Alexander Forbes share price are not permitted to be accounted for as expenses
or gains in Alexander Forbes" consolidated income statement;
*Notwithstanding the change in classification of the shares from policyholder
assets to an equity deduction, the corresponding obligation to policyholders in
respect of the shares remains in Alexander Forbes" consolidated balance sheet as
a liability. Any movements in the liability resulting from changes in the
Alexander Forbes share price are accounted for as expenses or gains in Alexander
Forbes" consolidated income statement;
The above accounting treatment resulting from this application of IFRS results
in a mismatch between the asset and liability movement, which does not reflect
the economic substance of the transactions. The result of this mismatch is that
an accounting expense or gain will be reported in Alexander Forbes" consolidated
income statement, whereas no actual economic loss or gain will ever be realised
by the group. In addition, the resulting mismatch is counter-intuitive. For
example:
*If the share price of Alexander Forbes decreases, the resulting decrease in
policyholder assets will not be accounted for in the group"s consolidated
balance sheet and income statement however the corresponding decrease in
policyholder liabilities will remain, resulting in a net increase in the
consolidated profit and net assets of the group;
*Conversely, if the share price of Alexander Forbes increases, there will be a
net decrease in the consolidated profit and net assets of the group.
This additional accounting change resulting from the adoption of IFRS is
required to be adopted with full retrospective effect. The unaudited effects on
equity and headline earnings per share as previously reported under IFRS for the
six months ended 30 September 2004, year ended 31 March 2005 and six months
ended 30 September 2005 are shown in the tables below.
Unaudited restatement of total equity as
previously reported under IFRS:
30 31 30 1
Sept March Sept April
2005 2005 2004 2004
Rm Rm Rm Rm
Total equity as previously 2,206 2,267 2,045 817
reported under IFRS
Effect of accounting for (279) (181) (194) (151)
policyholder assets as treasury
shares
Restated total equity as 1,927 2,086 1,851 666
reported under IFRS
Unaudited restatement of headline earnings per share as
previously reported under IFRS:
Six Year Six
months ended 31 months
ended 30 March ended 30
Sept 2005 Sept
2005 2004
Rm Rm Rm
Headline earnings as previously 321 466 269
reported under IFRS
Effect of accounting for policyholder
assets as treasury shares:
- increase in value of the shares held (54) (20) (19)
on behalf of policyholders
- dividends received on the shares (12) (10) (10)
held on behalf of policyholders
Restated headline earnings as reported 255 436 240
under IFRS
Millions Millions Millions
Weighted ave. no. of shares as 461 409 359
previously reported under IFRS
Effect of accounting for policyholder (17) (15) (15)
assets as treasury shares
Restated weighted ave. no. of shares as 444 394 344
reported under IFRS
Cents Cents Cents
Headline earnings per share as 70 114 75
previously reported under IFRS
Effect of accounting for policyholder (13) (3) (5)
assets as treasury shares
Restated headline earnings per share as 57 111 70
reported under IFRS
The estimated effect for the full year ended 31 March 2006 of this additional
accounting change as a result of the adoption of IFRS is a reduction in headline
earnings of R81 million and a reduction in the weighted average number of
Alexander Forbes shares in issue of 18.5 million shares. These 18.5 million
shares represent 4% of the weighted average number of Alexander Forbes shares in
issue, however the effect of the mismatch on reported headline earnings is
amplified by the 31% increase in share price over the year.
It is of concern that the mismatch resulting from this application of IFRS
results in reporting which does not reflect the economic substance of the
transactions. In order to provide meaningful reporting to shareholders,
Alexander Forbes will publish its financial statements in full compliance with
IFRS (including reporting headline earnings per share and net asset value per
share in conformity with IFRS), but will also provide an adjusted measure of
headline earnings per share and net asset value per share which exclude the
effects of the mismatch detailed above and so accurately reflect the underlying
economic substance of the transactions.
This SENS statement is separate and unrelated to the Cautionary Announcement by
the company released earlier today.
Johannesburg
3 April 2006
Sponsors to Alexander Forbes: JP Morgan
Date: 03/04/2006 10:00:46 AM Produced by the JSE SENS Department
