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Annual Report and Accounts 2008
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Notes to the accounts
for the year ended 31 December 2008
Presentation of the financial statements
Financial information for the year ended 31 December 2008 is presented in accordance with IAS 1 Presentation of Financial Statements.
IAS 1 allows an entity to present some of its assets and liabilities using a current/non-current classification and others in order of liquidity when this provides information that is reliable and more relevant.
The Group has adopted a mixed basis of presentation within its consolidated balance sheet which shows the assets and liabilities of the Group’s life company business, Schroder Pension Management Limited, in order of liquidity and the remainder of the Group’s assets and liabilities using a current/non-current classification.
This presentation provides more relevant information in that, if the assets and liabilities of the Group’s life company business, Schroder Pension Management Limited, were to be included within existing captions on the Group’s balance sheet, the effect would be to gross up a number of individual line items to a material extent. By adopting a mixed basis of presentation, the Group is able to provide a more transparent presentation that shows the life company asset and the related unit-linked liability as separate and distinct from the remainder of the Group’s balance sheet items.
Classification changes within the consolidated income statement In prior years, the Group has included charges in respect of the amortisation of intangible assets arising from business combinations within ‘Cost of sales’. It has now reclassified such charges as ‘Administrative expenses’ to be consistent with the classification of other depreciated and amortised assets. The effect of this reclassification is to decrease 2007 cost of sales by £1.7 million, with a corresponding increase in administrative expenses. There is no effect on the Group’s profit before tax or segmental results. Details of the current year amortisation charge can be found in note 11.
Changes to the presentation of the consolidated cash flow statement In prior years, the Group has made a distinction within its cash flow statement (and the accompanying note to that statement) between those current financial assets held for operating purposes and those held for investing purposes. Cash flows from financial assets held within the Group’s ‘liquid funds’ portfolios, together with interest received on such investments, were recorded as arising from investing activities. As the Group holds all its current financial assets with the intention of generating future income and cash flows and no longer uses the terminology ‘liquid funds’ when managing its portfolio of investments, this presentation is no longer appropriate, and the Group now presents the cash flows on all current financial assets, together with the interest received on them, within the ‘Investing activities’ section of the cash flow statement. The effect of this change in presentation is to reduce 2007 net cash from operating activities and increase net cash from investing activities by £114.9 million. There is no change to the Group’s overall net increase in cash and cash equivalents.
1. Summary of accounting policies
(a) Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’), which comprise standards and interpretations approved by either the International Accounting Standards Board or the International Financial Reporting Interpretations Committee or their predecessors, as adopted by the European Union, and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS.
At the balance sheet date, the Group had adopted all Standards and Interpretations that were either issued, or which had become effective, during the year, with the exception of the following Standards which were issued during the year, but were not effective at the balance sheet date:
| IAS 1 (Amended) | Presentation of Financial Statements |
|---|---|
| IAS 27 (Amended) | Consolidation and Separate Financial Statements |
| IFRS 3 (Amended) | Business Combinations |
| IFRS 8 | Operating Segments |
In addition, a number of other existing Standards and Interpretations have also been revised to ensure consistency with the amended Standards listed above. The Directors do not anticipate that the adoption of any of these new or revised Standards and Interpretations in future periods will have a material impact on the financial statements of the Group.
Apart from the adoption of the amendment to IAS 39 Financial Instruments: Recognition and Measurement detailed below, none of the Standards and Interpretations adopted had any impact on the Group’s financial statements.
During the year, the Group adopted the amendments to IAS 39 Financial Instruments: Recognition and Measurement and reclassified all financial assets previously classified as held for trading as available-for-sale where such assets were eligible for reclassification. The application of the amendments to the Standard was made in accordance with its transitional provisions. Where financial assets and economic conditions met the criteria specified within the Standard, these provisions allowed an entity to reclassify a financial asset retrospectively to 1 July 2008 if the reclassification took place before 1 November 2008. The Group did reclassify before this date and opted to apply the reclassification retrospectively to 1 July 2008.
As a result of this adoption, the Group is required to make certain disclosures under IFRS 7 Financial Instruments: Disclosures which are included within notes 4, 15 and 17.
The consolidated financial information presented within these financial statements has been prepared on the historical cost basis, except for the measurement at fair value of derivative financial instruments and financial assets and liabilities that are available-for-sale or held at fair value through profit or loss and the measurement of long-term employee benefits at present value of the obligation less fair value of any assets held to settle the obligation. The carrying value of recognised assets and liabilities that are hedged is adjusted to record changes in the fair values attributable to the risks that are being hedged. This valuation is in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
(b) Basis of consolidation
The consolidated financial information contained within these financial statements incorporates financial statements of the Company and entities controlled by the Company (its subsidiaries) prepared to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Where the Group controls an entity, but does not own all the share capital of that entity, the interest of minority shareholders is stated within equity at the minority’s proportion of the fair values of the assets and liabilities recognised.
The accounts of subsidiary undertakings and associates, which are prepared using uniform accounting policies, are coterminous with those of the Company apart from those of certain undertakings which have accounting reference dates other than 31 December for commercial reasons. Management accounts made up to 31 December are used for such undertakings.
The results of subsidiary undertakings and associates acquired or sold are included from or to the date control changes.
Employee share ownership trusts have been established for the purposes of satisfying certain share-based awards. These trusts are fully consolidated within the accounts.
The Group has seed capital investments in a number of funds where it is in a position to be able to control those funds. These funds are consolidated unless they meet the criteria set out in the accounting policy in respect of non-current assets held for sale to be categorised as being held for sale, in which case they are classified and accounted for in accordance with that policy. Where the Group consolidates a fund, but does not own all the net assets of that fund, the interests of minority investors are classified as non-equity minority interests and are stated within trade and other payables at the minority’s proportion of the fair values of the assets and liabilities recognised.
All intra-Group transactions, balances, income and expense are eliminated on consolidation.
(c) Business combinations
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.
(d) Goodwill
Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition.
Goodwill arising on the acquisition of subsidiaries is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed.
Goodwill arising on the acquisition of associates or jointly controlled entities is included in the amount of the investments. Gains and losses on the disposal of an entity include the carrying amount of the goodwill relating to the entity sold. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date and annually thereafter. Goodwill written off to equity prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal.
(e) Intangible assets arising from business combinations
The costs of acquiring intangible assets such as fund management contracts and client relationships as part of a business combination are capitalised where it is probable that future economic benefits that are attributable to the assets will flow to the Group and the cost of the assets can be measured reliably.
The fund management contracts are recorded initially at fair value and then amortised over their useful lives on a straight-line basis. The fair value at the date of acquisition is calculated using discounted cash flow methodology and represents the valuation of the net residual income stream arising from the fund management contracts in place at the date of acquisition. The contracts are included in the balance sheet as an intangible asset.
At each reporting date, an assessment is made as to whether there is any indication that an asset in use may be impaired. If any such indication exists and the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. The recoverable amount is the greater of fair value less costs to sell and value in use.
(f) Intangible assets – software
The costs of purchasing and implementing software, together with associated relevant expenditure, are capitalised where it is probable that future economic benefits that are attributable to the assets will flow to the Group and the cost of the assets can be measured reliably.
Software is recorded initially at cost and then amortised over its useful life on a straight-line basis. It is included in the balance sheet as an intangible asset.
At each reporting date, an assessment is made as to whether there is any indication that an asset in use may be impaired. If any such indication exists and the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. The recoverable amount is the greater of fair value less costs to sell and value in use. Where intangible software assets are not yet available for use, an assessment of whether the carrying values exceed the estimated recoverable amount is made irrespective of whether there is any indication of impairment.
(g) Property, plant and equipment
The Group’s assets include leasehold improvements, office equipment, computers and cars. Property, plant and equipment is recorded initially at cost. Depreciation is provided on the depreciable amount over their useful lives on a straight-line basis at rates varying between 20 per cent. and 33 per cent. per annum. The depreciable amount is the gross carrying amount, less the estimated residual value at the end of its economic life. Depreciation rates and methods as well as the residual values underlying the calculation of depreciation of items of property, plant and equipment are kept under review to take account of any change in circumstances.
The carrying values of these assets are reviewed for impairment at each reporting date. An assessment is made as to whether there is any indication that an asset may be impaired; if any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. The recoverable amount is the greater of fair value less costs to sell and value in use. Impairment losses are recognised in the income statement.
(h) Associates and joint ventures
Associates comprise those undertakings, not being subsidiary undertakings, where the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee.
Joint ventures comprise those undertakings, not being subsidiary undertakings, which carry on related activities, and where there is contractually agreed sharing of control over the financial and operating policy decisions of the investee.
Investments in associates and joint ventures are accounted for using the equity method. The investments are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate or joint venture.
The income statement includes the Group’s post-tax share of associates’ and joint ventures’ profits less losses for the year. Where a Group company transacts with an associate or joint venture of the Group, profits and losses are eliminated to the extent of the Group’s interest in that associate or joint venture.
Where the Group has investments in funds over which it is able to exert significant influence but not control, the Group has applied the scope exclusion within IAS 28 Investments in Associates for mutual funds, unit trusts and similar entities and has accounted for such holdings at fair value through profit or loss.
(i) Financial assets
Items included within this caption on the face of the balance sheet principally comprise investments in debt securities and equities and derivative instruments. It excludes financial assets that are recorded under the following headings:
- Loans and advances to customers;
- Trade and other receivables;
- Cash and cash equivalents; and
- Non-current assets held for sale.
Separate accounting policies are presented in respect of these excluded items.
Derivative instruments are included within the caption ‘Financial assets’ on the face of the balance sheet, but the accounting policy in respect of such instruments is presented separately below.
During the year, IAS 39 Financial Instruments: Recognition and Measurement was amended to permit the reclassification of certain financial assets in rare circumstances. The Group believes that the deterioration of the world’s financial markets that occurred during the year meets the definition of ‘rare circumstances’ and has therefore reclassified certain financial assets during the year. The Group adopted the amendment with effect from 1 July 2008.
Financial assets held as available-for- sale
Measurement
Where financial assets have been categorised as being available-for-sale, all such investments are initially recognised at fair value, being the consideration given, including, where appropriate, acquisition costs associated with the investment.
After initial recognition, investments which are classified as available-for-sale are measured at fair value. Gains or losses, together with transaction costs, on available-for-sale investments are recognised as a separate component of equity until the investment is sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included within ‘Revenue’ in the income statement. Assets categorised as available-for-sale are reviewed at the end of each reporting period for impairment.
Where investments have been reclassified out of the fair value through profit or loss category and into the available-for-sale category, they were reclassified at their fair value on the date of reclassification. Any gain or loss recognised in profit or loss prior to reclassification is not reversed.
Gains or losses on reclassified investments are recognised after reclassification as a separate component of equity until the investment is sold or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included within ‘Revenue’ in the income statement.
For investments that are actively traded in organised financial markets, fair value is determined by reference to official quoted market bid prices at the close of business on the balance sheet date. For investments that are not actively traded in organised financial markets, fair value is determined by using quoted prices from third parties such as brokers, market makers and pricing agencies. For private equity investments where there is no quoted market price, fair value is determined with reference to International Private Equity and Venture Capital Valuation Guidelines or by independent professional valuers. In such circumstances, fair values are derived using the most appropriate technique, examples of which include the use of earnings multiples (applying an appropriate earnings multiple to the earnings of individual businesses being valued in order to derive a value) and the values assigned to recent similar transactions.
All regular way purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace.
Financial assets held at fair value through profit or loss
With effect from 1 July 2008, the Group reclassified its ‘held for trading’ financial assets as ‘available-for-sale’ wherever this was allowable. As a result, the Group currently only holds financial assets at fair value through profit or loss where it intends to hold those financial instruments for a very short period of time, where it has applied the scope exclusion within IAS 28 Investments in Associates for mutual funds, unit trusts and similar entities (see note h above), or where those financial assets provide either a hedge against liabilities for long-term employee benefits that are recorded at present value (in accordance with IAS 19 Employee Benefits) or they provide a hedge against financial liabilities held at fair value (in accordance with IAS 39). Such assets are therefore categorised in the same way as the hedged item in order to avoid a recognition or measurement inconsistency and principally comprise investments purchased by the Group to hedge against compensation awards such as fund awards and against deferred consideration payable on the acquisition of NewFinance Holdings Limited (‘NFC’) that derives its underlying value from specified hedge funds managed by the Group. The Group holds a small number of assets classified as ‘Held for trading’.
Measurement
All investments are initially recognised at fair value, being the consideration given.
After initial recognition, investments which are classified as held at fair value through profit or loss are measured at fair value. Gains or losses, together with transaction costs, on investments are recognised within ‘Revenue’ in the income statement. Such gains or losses, where they arise on seed capital investments, include distributions from funds.
For investments that are actively traded in organised financial markets, fair value is determined by reference to official quoted market bid prices at the close of business on the balance sheet date. For quoted investments that are not actively traded in organised financial markets, fair value is determined by using appropriate valuation techniques. For Private Equity investments that were classified as at fair value through profit or loss until 1 July 2008, fair value was determined with reference to International Private Equity and Venture Capital Valuation Guidelines or by independent professional valuers.
All regular way purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace.
Financial assets held to maturity
Designation
Where the Group has the positive intention to hold financial assets to maturity, such investments are categorised as held to maturity. Such assets are held exclusively by the Group’s Private Banking operations.
Measurement
All investments are initially recognised at fair value, being the consideration given, including, where appropriate, acquisition charges associated with the investment.
Financial assets held to maturity are measured at amortised cost, being the amount at which they are measured at initial recognition less principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or irrecoverability.
(j) Derivative financial instruments and hedge accounting
Derivative contracts are included at fair value at the balance sheet date within ‘Financial assets’ or ‘Financial liabilities’. Fair value represents the amount at which a derivative could be exchanged in a transaction at the balance sheet date between willing parties.
Where derivatives are held for risk management purposes, the Group formally documents the relationship between the derivative and any hedged item, its risk management objectives, its strategy for undertaking the various hedging transactions and its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value of hedged items.
In relation to fair value hedges which meet the conditions for hedge accounting, any gain or loss from re-measuring the hedging instrument at fair value is recognised immediately in the income statement. Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and recognised in the income statement. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting.
In relation to hedges of a net investment in a foreign operation, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion is recognised within ‘Revenue’ in the income statement. On disposal of the foreign operation, the gain or loss on the hedging instrument recognised directly in equity is transferred to the income statement.
(k) Loans and advances to customers
Loans and advances to banks and customers are initially recorded at fair value and subsequently at amortised cost using the effective interest method.
Impairments for specific bad and doubtful debts are made against loans and advances made by Private Banking subsidiaries to reflect an assessment of irrecoverability and are deducted from the relevant assets. Such impairments are recorded within ‘Administrative expenses’ in the income statement.
(l) Deferred tax
Deferred tax is provided in full, using the liability method, on all taxable and deductible temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
However, if the deferred tax arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither the accounting nor taxable profit or loss, it is not accounted for. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries, branches and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
(m) Trade and other receivables
Trade receivables are recorded initially at fair value and subsequently at amortised cost.
Impairments for specific bad and doubtful debts are made against receivables to reflect an assessment of irrecoverability and are deducted from the relevant assets. Such impairments are recorded within ‘Administrative expenses’ in the income statement.
(n) Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. Where the Group considers that such items are not to be used for settling its liabilities, for example, securities with short maturity dates that will be rolled over as part of an investment portfolio, they are classified as financial assets rather than cash and cash equivalents. For the purposes of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts where such facilities form an integral part of the Group’s cash management.
(o) Non-current assets held for sale
Non-current assets (and disposal groups) acquired exclusively with a view to subsequent disposal through sale or deemed disposal are classified as held for sale and measured at the lower of their carrying amount and fair value less costs to sell.
Non-current assets (and disposal groups) are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification. At date of sale, post-tax gains or losses on such assets are taken to the income statement where they are recorded within ‘Revenue’.
(p) Unit-linked liabilities and assets backing unit-linked liabilities
Investments in authorised unit trusts and other financial assets held by the life company are recognised and measured under IAS 39 which applies to investment contracts that do not meet the insurance contract definition under IFRS 4 Insurance Contracts. Accordingly the life fund assets and liabilities are recorded at fair value, with gains and losses recorded within ‘Revenue’ in the income statement in the year in which they arise.
(q) Financial liabilities
Items included within this caption on the face of the balance sheet principally comprise debt securities in issue, derivative financial instruments and hedge accounting (see note j above) and deferred consideration arising from the acquisition of NFC in 2006. It excludes financial liabilities that are recorded under the following headings:
- Deposits by customers and banks;
- Trade and other payables; and
- Provisions.
Debt securities in issue are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised within ‘Revenue’ in the income statement when the liabilities are derecognised.
The deferred consideration arising from the acquisition of NFC is categorised as at fair value through profit or loss. The liability represents the obligation the Group has to the former owners of NFC in respect of amounts linked to the performance of certain of the Group’s hedge funds. Such amounts are categorised as at fair value through profit or loss to avoid a measurement inconsistency with corresponding assets held by the Group.
(r) Deposits by customers and banks
Deposits by banks are initially recognised at cost, being the fair value of the consideration received net of any directly attributable transaction costs incurred. After initial recognition, the liabilities are accounted for at amortised cost using the effective interest method taking into account any attributable transaction costs.
(s) Trade and other payables
Trade payables, other than long-term employee benefits (see note t below), are recorded initially at fair value and subsequently at amortised cost.
(t) Long-term employee benefits
Long-term employee benefits consist of surpluses/deficits in defined benefit pension schemes and deferred cash awards under the Equity Compensation Plan. They are recorded at the present value of the defined benefit obligation at the balance sheet date less the fair value at the balance sheet date of plan assets out of which the obligations are to be settled directly.
For further details on the accounting policy in respect of defined benefit schemes, see note z below.
The Group makes deferred cash awards to key employees under the Equity Compensation Plan in the form of a notional investment in funds operated by the Group. Such awards do not constitute share-based payments, but are accounted for in accordance with IAS 19. These awards are charged to ‘Administrative expenses’ within the income statement in the performance year. Awards that lapse are credited to the income statement, again within ‘Administrative expenses’, in the year in which they lapse.
(u) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
Where the existence of an obligation is possible, dependent on uncertain events not wholly within the control of the Group, or a present obligation cannot be measured reliably, or it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the Group discloses, but does not recognise, a contingent liability.
Where the Group expects to recover amounts provided, for example under an insurance contract, the recovery is recognised as a separate asset but only when the recovery is virtually certain.
For provisions for surplus space, where the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense.
(v) Own shares
Employee trusts have been established for the purposes of satisfying certain equity-based awards. The holdings of these trusts include shares that have not vested unconditionally in employees of the Group (own shares).
Own shares are held for the short term to meet future award requirements and are recorded, at cost, as a deduction from equity.
(w) Revenue
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Unless otherwise stated, the types of revenue listed below are all reported within ‘Revenue’ in the income statement. The following specific recognition criteria must also be met before revenue is recognised:
Interest – non-banking
Interest on non-banking activities comprises amounts due on the Group’s investment capital and temporary surpluses or deficits in the Group’s cash accounts held with banks. Interest receivable and payable not arising from the Group’s Private Banking activities is recognised using the effective interest method and is recorded in the income statement within ‘Interest receivable and similar income’ or ‘Interest payable and similar charges’, as appropriate.
Interest – banking
Interest receivable on the Group’s Private Banking activities comprises interest receivable on debt securities and other fixed income securities, loans, advances and deposits placed, guarantee and commitment commissions, and is recognised using the effective interest method. Interest payable on banking activities comprises interest payable on deposits taken and debt securities in issue, and is recognised using the effective interest method.
Fees and commissions
Asset management fees, investment advisory fees, ad hoc advisory fees, custody fees, stock lending commission, commitment fees, arrangement fees, guarantor fees, and Directors’ fees are accrued over the period for which the service is provided.
Private Banking transaction and loanrelated fees, together with fees from structured client facilitation transactions are accrued over the period for which the service is provided.
Asset management fees received in advance are taken to the balance sheet and amortised on a straight-line basis over the period of the provision of the asset management service. The period of provision of asset management service is estimated based on experience of average holding periods for investments in the separate geographical locations where such fees are earned. Redemptions are reviewed on an annual basis and the amortisation rate adjusted where there has been a significant and lasting change in redemption levels.
Asset management fees received in advance in respect of structured product funds and the reimbursement of any marketing and distribution fees paid to the distributor as agent of the fund are deferred and spread over the life of the fund on a straight-line basis. Such deferred fees are released to the income statement on redemption.
The Group is entitled to earn performance fees from a number of clients where the performance of the clients’ assets exceeds defined benchmarks by an agreed level of outperformance over a set time period. Performance fees are recognised when the fee amount can be estimated reliably and it is probable that the fee will be received. Fees are normally recognised at the end of a performance period.
Dividends receivable
Revenue is recognised when the shareholders’ right to receive the payment is established.
Returns from Private Equity investments
Prior to 1 July 2008, a small proportion of the Group’s Private Equity investments were classified as held at fair value through profit or loss. On this date, all such investments were reclassified as available-for-sale (see note i above).
After initial recognition, investments which are classified as available-for-sale are measured at fair value.
Gains or losses on investments held at fair value through profit or loss prior to their reclassification as available-for-sale on 1 July 2008 were recognised in the income statement. Gains or losses on available-for-sale investments are recognised as a separate component of equity until the investment is sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is in the income statement.
Carried interests are recognised in the income statement on an accruals basis in accordance with the substance of the relevant contractual agreement. Where there is a contractual agreement to receive such amounts subject to the fulfilment of specified conditions, capital gains receivable are recognised in the income statement on an accruals basis in accordance with the substance of the relevant contractual agreement. Where there is no such agreement, capital gains receivable are recognised when the right to receive the payment is established.
(x) Cost of sales
Commissions and distribution fees payable to third parties are recognised over the period for which the service is provided.
Asset management fees paid in advance in respect of structured product funds and the reimbursement of any marketing and distribution fees paid to the distributor as agent of the fund are deferred and spread over the life of the fund. Fees paid to the distributor but not yet charged that relate to deferred fees received are released to the income statement on redemption.
(y) Leases
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. Income from operating leases is recognised within ‘Revenue’ on a straightline basis over the period of the lease. Incentives given to enter into leases are amortised over the period of the lease.
As lessee, costs under operating leases are charged to the income statement as ‘Administrative expenses’ in equal amounts over the periods of the leases. Incentives received to enter into leases are amortised over the period of the lease.
(z) Pensions and other postemployment benefits
The Group operates a number of pension schemes around the world. For defined contribution schemes, pension contributions payable in respect of the accounting period are charged as ‘Administrative expenses’ to the income statement. For funded defined benefit schemes, the cost of providing benefits is determined separately for each plan using the projected unit credit actuarial valuation method. The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date, together with adjustments for unvested past service cost, is recognised as an asset or liability, as appropriate, in the balance sheet. An asset arising, for example, as a result of past over-funding or the performance of the plan investments is recognised to the extent that it is recoverable either in that it does not exceed the present value of future contribution holidays or through refunds of contributions.
All actuarial gains and losses are recognised in full in the statement of recognised income and expense.
(aa) Share-based payments
The Group makes equity-settled sharebased payments to key employees through awards over ordinary and nonvoting ordinary shares and by the grant of market value share options over non-voting ordinary shares.
Awards over ordinary and non-voting ordinary shares made under the Group’s Equity Compensation Plan are charged at fair value as ‘Administrative expenses’ in the income statement. The fair value of an award is calculated using the market value of the shares on the date of grant, discounted for the dividends forgone over the average holding period of the award. The fair value charges, adjusted to reflect actual and expected levels of vesting, are spread over the performance period and the vesting period of the awards.
Awards over ordinary shares made under the Group’s Equity Incentive Plan are charged at fair value to the income statement over a five year vesting period.
Fair value is determined at the date of grant and is equal to the market value at that time.
Options granted over non-voting ordinary shares under the Group’s Share Option Plan are measured at fair value at the date of grant. The fair value determined is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value is measured by use of a stochastic option valuation model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of nontransferability, exercise restrictions, and behavioural considerations.
Awards that lapse are credited to the income statement in the year in which they lapse.
(ab) Foreign currency translation
The results of subsidiary undertakings, branches and associates drawn up in currencies other than sterling are translated at average rates of exchange ruling during the year. The assets and liabilities of these entities are translated at the rate of exchange ruling at the balance sheet date.
Exchange differences arising on the translation of the results of these entities from the average rate used in the income statement to the closing rate used in the balance sheet are taken through equity. In addition, exchange differences arising on the translation of the equity of these undertakings at the beginning of the year, together with hedges of such exposures, are also taken directly to equity.
Foreign currency assets and liabilities are translated at the rates of exchange ruling at the balance sheet date. Any exchange differences arising are taken to the income statement within ‘Revenue’ unless they relate to non-monetary items whose gains or losses are recognised directly in equity. For such non-monetary items, the exchange components of those gains or losses are recognised in equity.
(ac) Dividends payable
Dividends payable are recognised when the dividend is paid or approved by shareholders, whichever is earlier.
(ad) Exceptional items
Exceptional items are those significant items which are required to be separately disclosed by virtue of their size or incidence to enable a better understanding of the Group’s financial performance.