Standard Life Aberdeen plc
Full Year Results 2019
Part 5 of 8
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6. Independent auditors' report to the members of Standard Life Aberdeen plc
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1. Our opinion is unmodified
We have audited the financial statements of Standard Life Aberdeen plc (the Company) for the year ended 31 December 2019 which comprise the Consolidated income statement; Consolidated statement of comprehensive income; Consolidated statement of financial position; Consolidated statement of changes in equity; Consolidated statement of cash flows; Company statement of financial position; Company statement of changes in equity and the related notes, including the reconciliation of consolidated adjusted profit before tax to IFRS profit for the year and the accounting policies in the Basis of preparation.
�� The financial statements give a true and fair view of the state of the Group's and of the parent company's affairs as at 31 December 2019 and of the Group's profit for the year then ended
�� The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union
�� The parent company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework
�� The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee.
We were first appointed as auditor by the shareholders on 16 May 2017. The period of total uninterrupted engagement is for the three financial years ended 31 December 2019. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.
| Overview | | |
| Materiality: Group financial statements as a whole | � �31m (2018: �32m) 4.4% (2018: 4.8%) of normalised profit | |
| Coverage | 97% (2018:78%) of profits and losses that made up Group profit before tax | |
| Key audit matters | | vs 2018 |
| Recurring risk | Recoverability of Group goodwill and of parent's investment in subsidiaries � | � |
| Recurring risk | Provision for separation costs � | � |
| Recurring risk � | Carrying value of investment in Phoenix - share of Phoenix Profit | � |
| Recurring risk | Valuation of defined benefit pension scheme obligation � | � |
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2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and our findings from those procedures in order that the Company's members as a body may better understand the process by which we arrived at our audit opinion. These matters were addressed,and our findings are based on our procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
| � | The risk | Our response |
| Recoverability of Group goodwill and of parent's investment in subsidiaries (Group Goodwill: �1,000m; (2018: �2,532m); Goodwill impairment losses recognised: �1,569m (2018: �891m) (Parent Company: Investments in subsidiaries, Impairment of subsidiaries: �795m (2018: 589m)) Refer to page 67 (Audit Committee Report), page 154 (accounting policy) and page 156 (financial disclosures). � | Subjective estimate: Goodwill in the Group and the carrying amount of certain of the parent company's investments in subsidiaries are significant and at risk of irrecoverability due to reductions in assets under management or a change in the mix of the assets under management which would impact revenues. The estimated recoverable amount of these balances is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows. In the current year, goodwill in the Group was impaired by �1,569m and the parent company's investments in subsidiaries were impaired by �795m. The effect of these matters is that, as part of our risk assessment, we determined that both the carrying amount of goodwill and of certain investments in subsidiaries has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. � | Our procedures included: Our valuation and sector expertise: Sensitivity analysis: We performed our own sensitivity analysis which included assessing the effect of reasonably possible reductions in growth rates, discount rates and forecast cash flows to evaluate the impact on the carrying value of goodwill and the investment in subsidiaries. Assessing transparency: We assessed whether the Group's disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflected the risks inherent in the valuation of goodwill and the recoverability of investment in subsidiaries. Our findings: We found the estimates of the recoverable amount of Group goodwill and of the parent company's investment in subsidiaries to be balanced (2018: balanced) with proportionate (2018: proportionate) disclosures of the related assumptions and sensitivities. |
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| � | The risk | Our response |
| Provision for Separation Costs (Separation costs provision �77m; 2018: �80m) Refer to page 68 (Audit Committee Report), page 194 (accounting policy) and page 195 (financial disclosures). | Subjective estimate - Provision for separation costs The calculation of the provision for separation costs arising out of the disposal of Standard Life Assurance Limited ('SLAL') in 2018 requires the Directors to determine a number of key inputs. The determination of these is judgemental and requires the Directors to consider a range of information connected to the Separation Plan. The most significant input is the costs that are estimated to relate to separating the business and which do not relate to costs related to the Group's ongoing business, including development of new systems. The risk is that the provision is misstated and includes future costs from which the Group will derive ongoing benefit. � The effect of these matters is that, as part of our risk assessment, we determined that the provision for separation costs has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (Note 37) disclose the range estimated by the Group. | Our procedures included: Test of details: We assessed the terms in the Sale and Purchase Agreement ('SPA') and other documents to confirm that the Group has a legal obligation to pay for separation costs. Test of details: We sampled costs included in the Separation Plan and obtained evidence and explanations to validate whether they were appropriately provided for. Personnel interviews: We interviewed relevant managers, including project staff, to validate the current progress of the Separation Plan, including current cost forecasts. Assessing transparency: We assessed whether the Group's disclosures detailing separation costs to be incurred adequately disclose the potential expense for the Group, including the range of costs and potential estimation uncertainty. � Our findings: We found the estimate of the separation cost provision to balanced (2018: balanced) with proportionate (2018: proportionate) disclosures of the related assumptions and sensitivities. |
| Carrying value of investment in Phoenix - share of Phoenix profit ((�5m); 2018 �65m) Refer to page 68 (Audit Committee Report), page 158 (accounting policy) | Subjective estimate The calculation of Phoenix's profit is judgemental and dependent on a�number of management estimates, in particular the actuarial�assumptions underpinning the movements in insurance contract liabilities. In this regard, the assumptions that have the most significant impact over the Phoenix profit are the base and trend longevity and persistency assumptions. The effect of these matters is that, as part of our risk assessment, we determined that the share of Phoenix profit and hence the carrying value of the investment in Phoenix has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole and possibly many times that amount. | Our procedures included: Control design and operation: We tested the design and operating effectiveness of key controls including over management's process �for modelling insurance contract liabilities and for setting and updating actuarial assumptions. � Our actuarial experience: We used our own actuarial specialists to review and challenge the rationale for key assumptions adopted. Our findings: We found the Group's share of the Phoenix profit to be balanced (2018: balanced) with proportionate (2018: proportionate) disclosure of the related assumptions. |
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| � | The risk | Our response |
| Valuation of the UK defined benefit pension scheme present value of funded obligation (�2,852m, 2018: �2,542m) Refer to page 68 (Audit Committee Report), page 187 (accounting policy) and page 189 (financial disclosures). | Subjective Valuation: The present value of the Group's funded obligation for the UK defined benefit pension scheme is an area that involves significant judgement over the uncertain future settlement value. The Group is required to use judgment in the selection of key assumptions covering both operating assumptions and economic assumptions. The key operating assumptions are base mortality and mortality improvement. The key economic assumptions are the discount rate and inflation. The risk is that inappropriate assumptions are used in determining the present value of the funded obligation. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of the pension scheme obligation has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole and possibly many times that amount. The financial statements (Note 34) disclose the range estimated by the Group. | Our procedures included: Our actuarial experience: We used our own actuarial specialists to perform procedures in this area. Test of detail and our sector experience: We considered the appropriateness of the base mortality assumption by reference to scheme and industry data on historical mortality experience. We considered the appropriateness of the mortality improvement assumptions by reference to industry based expectations of future mortality improvements. We considered the appropriateness of the discount rate and inflation assumptions by reference to industry practice. Benchmarking assumptions and our sector experience: We utilised the results of KPMG benchmarking of base mortality, mortality improvement, discount rate and inflation assumptions and our knowledge of industry practice to inform our challenge of the Group's assumptions in these areas. Assessing transparency: We considered whether the Group's disclosures in relation to the assumptions used in the calculation of present value of the funded obligation appropriately represent the sensitivities of the obligation to the use of alternative assumptions. Our findings: We found the estimated valuation of the UK defined benefit pension scheme obligation to be balanced (2018: balanced) with proportionate (2018: proportionate) disclosures of the related assumptions and sensitivities. |
We have summarised below the changes to our key audit matters from the 31 December 2018 year end audit.
For the purposes of our audit for the period ended 31 December 2018, we recognised a key audit matter in association with the accounting for the obligations arising out of the disposal of SLAL and investment in Phoenix. One element of this risk related to a subjective estimate around the provision for separation costs. We continue to recognise this as a key audit matter above. The two other elements of this risk were in relation to the subjective valuation of the initial investment into Phoenix and the subjective estimate of the fair valuation of indemnities within the SPA. The valuation of the initial investment was a one-off and therefore does not recur for the audit for the year to 31 December 2019. The indemnities fair valuation has materially reduced in the period as a result of the finalisation of certain matters which determined the value of these and therefore we no longer recognise it as an element of the key audit matter.
We also previously recognised a key audit matter in relation to the carrying value of the investment in Phoenix. This risk was focused on the year end valuation given the market valuation was significantly below the carrying value. This year, as the market value is above the carrying value, the risk is now focused on the share of Phoenix profit that the Company has recognised within the carrying value of the investment in Phoenix.
We also reported a key audit matter in respect of the impact of uncertainties due to the UK exiting the European Union. As a result of developments since the prior year report, including the Group's own preparation, the relative significance of this matter on our audit work has reduced. Accordingly, we no longer consider this a key audit matter.
Lastly, we previously reported a key audit matter in respect of the valuation of intangible assets. There were no impairment triggers identified during the year to 31 December 2019 and therefore we no longer consider this a key audit matter.
Materiality for the Group financial statements as a whole was set at �31m (2018: �32m), determined as 5% of our estimate of Group profit before tax made at the planning stage, normalised for our expectation of the level of adjusting items including impairment, restructuring costs and the profits arising on disposal of associate shareholdings. This equates to 4.4% of reported Group profit normalised on a consistent basis and to 12.7% of Group profit before tax from continuing operations of �243m. Prior year materiality represented 4.8% of our assessed normalised Group profit before tax.
Materiality for the parent company financial statements as a whole was set at �19m (2018:�19m), determined with reference to a benchmark of normalised profit before tax, of which it represents 1.08% (2018:3.6%).
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding �1.6m, in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the Group's 28 (2018:75) continuing reporting components, we subjected 8 (2018: 6) to full scope audits for Group purposes and 2 (2018:3) to specified risk-focused audit procedures. The latter were not individually financially significant enough to require a full scope audit for Group purposes, but did present specific individual risks that needed to be addressed.
The components within the scope of our work accounted for the percentages illustrated opposite.
The remaining�3% of total Group revenue, 3% of Group profit before tax and 7% of total Group assets is represented by 18 reporting components, none of which individually represented more than 5% of any of total Group revenue, or total Group assets. For these residual components, we performed analysis�at an�aggregated�Group�level to�re-examine�our�assessment�that�there�were no significant risks of material misstatement within�these.
The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, which ranged from �3.1m to �26m, having regard to the mix of size and risk profile of the Group across the components.
The work on 8 of the 10 continuing components (2018: 8 of the 9 components) was performed by component auditors and the rest, including the audit of the parent company, was performed by the Group team.�The�Group�team�performed�procedures�on the items excluded from normalised Group profit before�tax.
The Group team visited 8 (2018: 8) component teams in 5 locations (2018: 5) to assess the audit risk and strategy. Video and telephone conference meetings were also held with these component auditors. At these visits and meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor.
Diagram removed for the purposes of this announcement.� However it can be viewed in full in the pdf document
4. We have nothing to report on going concern
The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations and as they have concluded that the Company's and the Group's financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (the going concern period).
Our responsibility is to conclude on the appropriateness of the Directors' conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor's report is not a guarantee that the Group and the Company will continue in operation.
In our evaluation of the Directors' conclusions, we considered the inherent risks to the Group's and Company's business model and analysed how those risks might affect the Group's and Company's financial resources or ability to continue operations over the going concern period. The risk that we considered most likely to adversely affect the Group's and Company's available financial resources over this period was movements in investment markets and assets under management.
As these were risks that could potentially cast significant doubt on the Group's and the Company's ability to continue as a going concern, we considered sensitivities over the level of available financial resources indicated by the Group's financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively and evaluated the achievability of the actions the Directors consider they would take to improve the position should the risks materialise.
Based on this work, we are required to report to you if:
�� We have anything material to add or draw attention to in relation to the directors' statement in Note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company's use of that basis for a period of at least 12 months from the date of approval of the financial statements
�� The related statement under the Listing Rules set out on page 110 is materially inconsistent with our audit knowledge
We have nothing to report in these respects, and we did not identify going concern as a key audit matter.
5. We have nothing to report on the other information in the Annual Report
The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge.
Based solely on that work we have not identified material misstatements in the other information.
Based solely on our work on the other information:
�� We have not identified material misstatements in the strategic report and the directors' report
�� In our opinion the information given in those reports for the financial year is consistent with the financial statements
�� In our opinion those reports have been prepared in accordance with the Companies Act 2006
In our opinion the part of the Directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:
�� The Directors' confirmation within the viability statement page 43 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity
�� The Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated
�� The Directors' explanation in the Viability Statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions
Under the Listing Rules we are required to review the Viability Statement. We have nothing to report in this respect.
Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group's and Company's longer-term viability.
We are required to report to you if:
�� We have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors' statement that they consider that the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy
�� The section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
6. We have nothing to report on the other matters on which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if, in our opinion:
�� Adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us
�� The parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns
�� Certain disclosures of directors' remuneration specified by law are not made
�� We have not received all the information and explanations we require for our audit
We have nothing to report in these respects.
7. Respective responsibilities
As explained more fully in their statement set out on page 111, the Directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor's report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC's website at: www.frc.org.uk/auditorsresponsibilities
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussion with the directors and other management (as required by auditing standards), and from inspection of the Group's regulatory and legal correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the Group to component audit teams of relevant laws and regulations identified at Group level.
The potential effect of these laws and regulations on the financial statements varies considerably.
Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation, taxation legislation and pension's regulations and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.
Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an effect: specific areas of regulatory capital and liquidity, conduct including Client Assets, money laundering, market abuse regulations and certain aspects of company legislation recognising the financial and regulated nature of the Group's activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. Through these procedures, we became aware of actual or suspected non-compliance and considered the effect as part of our procedures on the related financial statement items. The identified actual or suspected non-compliance was not sufficiently significant to our audit to result in our response being identified as a key audit matter.
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further rem oved non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and the terms of our engagement by the Company. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report, and the further matters we are required to state to them in accordance with the terms agreed with the Company, and for no other purpose, and the further matters we are required to state to them in accordance with terms agreed with the Company, and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.
Jonathan Mills (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
Saltire Court
20 Castle Terrace Edinburgh
EH1 2EG
10 March 2020
7. Group financial statements
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Consolidated income statement
For the year ended 31 December 2019
| � | � | 2019 | 20181 |
| � | Notes | �m | �m |
| Income | � | � | � |
| Investment return | 3 | 464 | (116) |
| Revenue from contracts with customers | 4 | 1,743 | 1,955 |
| Insurance contract premium income | 31 | 66 | 73 |
| Profit on disposal of interests in associates | 1 | 1,542 | 185 |
| Other income | 5 | 178 | 34 |
| Total income from continuing operations | � | 3,993 | 2,131 |
| � | � | � | � |
| Expenses | � | � | � |
| Insurance contract claims and change in liabilities | 31 | 156 | 1 |
| Change in non-participating investment contract liabilities | 25 | 265 | (78) |
| Administrative expenses | � | � | � |
| Restructuring and corporate transaction expenses | 9 | 374 | 231 |
| Impairment of goodwill - asset management | 15 | 1,569 | 880 |
| Other administrative expenses | 6 | 1,651 | 1,746 |
| Total administrative expenses | � | 3,594 | 2,857 |
| Change in liability for third party interest in consolidated funds | � | 21 | (5) |
| Finance costs | � | 36 | 45 |
| Total expenses from continuing operations | � | 4,072 | 2,820 |
| � | � | � | � |
| Share of profit from associates and joint ventures | 16 | 79 | 130 |
| Reversal of/(loss on) impairment of interest in associates | 16 | 243 | (228) |
| � | � | � | � |
| Profit/(loss) before tax from continuing operations | � | 243 | (787) |
| Tax expense attributable to continuing operations | 10 | 28 | 43 |
| Profit/(loss) for the year from continuing operations | � | 215 | (830) |
| Profit for the year from discontinued operations | 11 | 56 | 1,698 |
| Profit for the year | � | 271 | 868 |
| � | � | � | � |
| Attributable to: | � | � | � |
| Equity shareholders of Standard Life Aberdeen plc | � | � | � |
| From continuing operations | � | 210 | (835) |
| From discontinued operations | � | 56 | 1,665 |
| Equity shareholders of Standard Life Aberdeen plc | � | 266 | 830 |
| Other equity holders | � | � | � |
| From discontinued operations - perpetual notes2 | 30 | - | 28 |
| Non-controlling interests | � | � | � |
| From continuing operations - preference shares | 30 | 5 | 5 |
| From discontinued operations - ordinary shares | 30 | - | 5 |
| � | � | 271 | 868 |
| Earnings per share from continuing operations | � | � | � |
| Basic (pence per share) | 12 | 8.9 | (29.3) |
| Diluted (pence per share) | 12 | 8.8 | (29.3) |
| Earnings per share | � | � | � |
| Basic (pence per share) | 12 | 11.2 | 29.1 |
| Diluted (pence per share) | 12 | 11.1 | 29.1 |
1. The Group has initially applied IFRS 9 and IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated. Refer Basis of preparation.
2. The presentation of amounts attributable to certain perpetual debt instruments in 2018 has been restated to show these amounts separately as related to other equity holders rather than as part of non-controlling interests. Refer Note 30.
The Notes on pages 129 to 231 are an integral part of these consolidated financial statements.
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Consolidated statement of comprehensive income
For the year ended 31 December 2019
| � | � | 2019 | 20181 |
| � | Notes | �m | �m |
| Profit for the year | � | 271 | 868 |
| Less: profit from discontinued operations | 11 | (56) | (1,698) |
| Profit/(loss) from continuing operations | � | 215 | (830) |
| Items that will not be reclassified subsequently to profit or loss: | � | � | � |
| Remeasurement losses on defined benefit pension plans | 34 | (23) | (29) |
| Share of other comprehensive income of associates and joint ventures | 16 | (17) | (15) |
| Equity holder tax effect of items that will not be reclassified subsequently to profit or loss | 10 | - | - |
| Total items that will not be reclassified subsequently to profit or loss | � | (40) | (44) |
| � | � | � | � |
| Items that may be reclassified subsequently to profit or loss: | � | � | � |
| Fair value (losses)/gains on cash flow hedges | 20 | (10) | 54 |
| Fair value losses on available-for-sale financial assets | 29 | - | (9) |
| Exchange differences on translating foreign operations | � | (46) | 14 |
| Share of other comprehensive income of associates and joint ventures | 16 | 7 | - |
| Items transferred to the consolidated income statement | � | � | � |
| Fair value losses/(gains) on cash flow hedges | 20 | 22 | (41) |
| Realised foreign exchange gains | � | - | (2) |
| Equity holder tax effect of items that may be reclassified subsequently to profit or loss | 10 | (2) | (1) |
| Total items that may be reclassified subsequently to profit or loss | � | (29) | 15 |
| Other comprehensive income for the year from continuing operations | � | (69) | (29) |
| Total comprehensive income for the year from continuing operations | � | 146 | (859) |
| � | � | � | � |
| Profit from discontinued operations | 11 | 56 | 1,698 |
| Other comprehensive income from discontinued operations | 11 | - | (43) |
| Total comprehensive income for the year from discontinued operations | � | 56 | 1,655 |
| Total comprehensive income for the year | � | 202 | 796 |
| | � | � | � |
| Attributable to: | � | � | � |
| Equity shareholders of Standard Life Aberdeen plc | � | � | � |
| From continuing operations | � | 141 | (864) |
| From discontinued operations | � | 56 | 1,622 |
| Other equity holders | � | � | � |
| From discontinued operations - perpetual notes2 | � | - | 28 |
| Non-controlling interests | � | � | � |
| From continuing operations -- preference shares | � | 5 | 5 |
| From discontinued operations - ordinary shares | � | - | 5 |
| � | � | 202 | 796 |
1. The Group has initially applied IFRS 9 and IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated. Refer Basis of preparation.
2. The presentation of amounts attributable to certain perpetual debt instruments in 2018 has been restated to show these amounts separately as related to other equity holders rather than as part of non-controlling interests. Refer Note 30.
The Notes on pages 129 to 231 are an integral part of these consolidated financial statements.
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Reconciliation of consolidated adjusted profit before tax to IFRS profit for the year
For the year ended 31 December 2019
| � | � | 2019 | 20181 | ||||
| � | � | Continuing operations | Discontinued operations | Total | Continuing operations | Discontinued operations | Total |
| � | Notes | �m | �m | �m | �m | �m | �m |
| Adjusted profit before tax | � | � | � | � | � | � | � |
| Asset management, platforms and wealth2 | � | 395 | - | 395 | 510 | - | 510 |
| Insurance associates and joint ventures | � | 189 | - | 189 | 140 | - | 140 |
| UK and European insurance | � | - | - | - | - | 210 | 210 |
| Adjusted profit before tax | 2 | 584 | - | 584 | 650 | 210 | 860 |
| Adjusted for the following items | � | � | � | � | � | � | � |
| Restructuring and corporate transaction expenses | 9 | (407) | - | (407) | (239) | (264) | (503) |
| Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts | 2 | (1,844) | - | (1,844) | (1,155) | - | (1,155) |
| Profit on disposal of subsidiaries | 1 | - | - | - | - | 1,780 | 1,780 |
| Profit on disposal of interests in associates | 1 | 1,542 | - | 1,542 | 185 | - | 185 |
| Reversal of/(loss on) impairment of associates | 16 | 243 | - | 243 | (228) | - | (228) |
| Investment return variances and economic assumption changes | 13 | (25) | - | (25) | 54 | (41) | 13 |
| Other3 | 13 | 158 | 56 | 214 | (14) | 44 | 30 |
| Total adjusting items | 2 | (333) | 56 | (277) | (1,397) | 1,519 | 122 |
| Share of associates' and joint ventures' tax expense | 2 | (8) | - | (8) | (40) | - | (40) |
| Profit attributable to non-controlling interests - ordinary shares | 2 | - | - | - | - | 5 | 5 |
| Profit/(loss) before tax expense4 | � | 243 | 56 | 299 | (787) | 1,734 | 947 |
| Tax (expense)/credit attributable to | � | � | � | � | � | � | � |
| Adjusted profit | 2 | (69) | - | (69) | (95) | (77) | (172) |
| Adjusting items | 2 | 41 | - | 41 | 52 | 41 | 93 |
| Total tax expense | � | (28) | - | (28) | (43) | (36) | (79) |
| Profit/(loss) for the year | � | 215 | 56 | 271 | (830) | 1,698 | 868 |
1. The Group has initially applied IFRS 9 and IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated. Refer Basis of preparation.
2. The Asset management, platforms and wealth segment was previously named Asset management and platforms. Refer Note 2.
3. The Other adjusting item in 2019 relating to continuing operations includes �140m received in relation to the settlement of arbitration with Lloyds Banking Group/ Scottish Widows (LBG). Refer Note 5.
4. For discontinued operations profit before tax expense attributable to equity holders consists of profit before tax of �56m (2018: �1,780m) less tax expense attributable to policyholders' returns of �nil (2018: �46m).
The Group's key alternative performance measure is adjusted profit before tax. Refer Note 13 for further details.
The Notes on pages 129 to 231 are an integral part of these consolidated financial statements.
�
Consolidated statement of financial position
As at 31 December 2019
| � | � | 2019 | 20181,2 |
| | Notes | �m | �m |
| Assets | � | � | � |
| Intangible assets | 15 | 1,707 | 3,404 |
| Pension and other post-retirement benefit assets | 34 | 1,163 | 1,111 |
| Investments in associates and joint ventures accounted for using the equity method | 16 | 1,509 | 1,444 |
| Property, plant and equipment | 17 | 266 | 61 |
| Deferred tax assets | 10 | 74 | 61 |
| Financial investments | 19 | 2,115 | 2,115 |
| Receivables and other financial assets | 19 | 560 | 697 |
| Current tax recoverable | 10 | 9 | 6 |
| Other assets | 22 | 55 | 46 |
| Assets held for sale | 23 | 767 | 762 |
| Cash and cash equivalents | 19 | 1,615 | 1,110 |
| � | � | 9,840 | 10,817 |
| Assets backing unit linked liabilities (excluding held for sale) | 25 | � | � |
| Financial investments | � | 1,528 | 1,659 |
| Receivables and other financial assets | � | 10 | 11 |
| Cash and cash equivalents | � | 44 | 30 |
| � | � | 1,582 | 1,700 |
| Total assets | � | 11,422 | 12,517 |
1. The Group has initially applied IFRS 9 and IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated. Refer Basis of preparation.
2. The Group has made a presentational change to show its unit linked liabilities and the assets backing these liabilities separately. Refer Note 25.
The Notes on pages 129 to 231 are an integral part of these consolidated financial statements.
| | | 2019 | 20181,2 |
| | Notes | �m | �m |
| Liabilities | | | |
| Third party interest in consolidated funds | 32 | 119 | 26 |
| Subordinated liabilities | 32 | 655 | 1,081 |
| Pension and other post-retirement benefit provisions | 34 | 55 | 38 |
| Deferred income | 35 | 67 | 75 |
| Deferred tax liabilities | 10 | 87 | 100 |
| Current tax liabilities | 10 | 19 | 22 |
| Derivative financial liabilities | 20 | 3 | 4 |
| Other financial liabilities | 32 | 1,315 | 1,161 |
| Provisions | 37 | 102 | 105 |
| Other liabilities | 37 | 5 | 9 |
| Liabilities of operations held for sale | 23 | 747 | 657 |
| � | � | 3,174 | 3,278 |
| Unit linked liabilities (excluding held for sale) | 25 | � | � |
| Investment contract liabilities | � | 1,152 | 1,468 |
| Third party interest in consolidated funds | � | 416 | 228 |
| Other unit linked liabilities | � | 14 | 4 |
| � | � | 1,582 | 1,700 |
| Total liabilities | � | 4,756 | 4,978 |
| Equity | � | � | � |
| Share capital | 26 | 327 | 353 |
| Shares held by trusts | 27 | (134) | (115) |
| Share premium reserve | 26 | 640 | 640 |
| Retained earnings | 28 | 2,886 | 2,778 |
| Other reserves | 29 | 2,845 | 3,782 |
| Equity attributable to equity shareholders of Standard Life Aberdeen plc | � | 6,564 | 7,438 |
| Non-controlling interests | � | � | � |
| Ordinary shares | 30 | 3 | 2 |
| Preference shares | 30 | 99 | 99 |
| Total equity | � | 6,666 | 7,539 |
| Total equity and liabilities | � | 11,422 | 12,517 |
1. The Group has initially applied IFRS 9 and IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated. Refer Basis of preparation.
2. The Group has made a presentational change to show its unit linked liabilities and the assets backing these liabilities separately. Refer Note 25.
The Notes on pages 129 to 231 are an integral part of these consolidated financial statements.
The consolidated financial statements on pages 121 to 231 were approved by the Board and signed on its behalf by the following Directors:
| Sir Douglas Flint | Stephanie Bruce |
| Chairman, 10 March 2020 | Chief Financial Officer, 10 March 2020 |
�
Consolidated statement of changes in equity
For the year ended 31 December 2019
| | � | � | � | � | � | � | � | Non-controlling interests | � | |
| | � | Share capital | Shares held by trusts | Share premium reserve | Retained earnings | Other reserves | Total equity attributable | Ordinary shares | Preference shares | Total equity |
| | Notes | �m | �m | �m | �m | �m | �m | �m | �m | �m |
| 31 December 2018 | | 353 | (115) | 640 | 2,778 | 3,782 | 7,438 | 2 | 99 | 7,539 |
| Effect of change in accounting policy to IFRS 91 | | - | - | - | (5) | (7) | (12) | - | - | (12) |
| Effect of change in accounting policy to IFRS 161 | | - | - | - | (12) | - | (12) | - | - | (12) |
| 1 January 2019 | | 353 | (115) | 640 | 2,761 | 3,775 | 7,414 | 2 | 99 | 7,515 |
| Profit for the year from continuing operations | | - | - | - | 210 | - | 210 | - | 5 | 215 |
| Profit for the year from discontinued operations | | - | - | - | 56 | - | 56 | - | - | 56 |
| Other comprehensive income for the year from continuing operations | | - | - | - | (33) | (36) | (69) | - | - | (69) |
| Other comprehensive income for the year from discontinued operations | | - | - | - | - | - | - | - | - | - |
| Total comprehensive income for the year | 28,29 | - | - | - | 233 | (36) | 197 | - | 5 | 202 |
| Issue of share capital | 26 | - | - | - | - | - | - | - | - | - |
| Dividends paid on ordinary shares | 14 | - | - | - | (518) | - | (518) | - | - | (518) |
| Dividends paid on preference shares | � | - | - | - | - | - | - | - | (5) | (5) |
| Shares bought back on-market and cancelled | 26, 28,29 | (26) | - | - | (390) | (100) | (516) | - | - | (516) |
| Other movements in non-controlling interests in the year | � | - | - | - | - | - | - | 1 | - | 1 |
| Reserves credit for employee share-based payments | 29 | - | - | - | - | 43 | 43 | - | - | 43 |
| Transfer to retained earnings for vested employee share-based payments | 28,29 | - | - | - | 57 | (57) | - | - | - | - |
| Transfer between reserves on impairment of subsidiaries | 28,29 | - | - | - | 780 | (780) | - | - | - | - |
| Shares acquired by employee trusts | � | - | (50) | - | - | - | (50) | - | - | (50) |
| Shares distributed by employee and other trusts and related dividend equivalents | 28 | - | 31 | - | (38) | - | (7) | - | - | (7) |
| Transfer from the Standard Life Unclaimed Asset Trust | 27,28 | - | - | - | 1 | - | 1 | - | - | 1 |
| 31 December | | 327 | (134) | 640 | 2,886 | 2,845 | 6,564 | 3 | 99 | 6,666 |
1. The Group has initially applied IFRS 9 and IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated and the cumulative effect of initially applying these standards is recognised in retained earnings at the date of initial application. Refer Basis of preparation.
| | | | | | | | | | Non-controlling interests | � | |
| � | � | Share capital | Shares held by trusts | Share premium reserve | Retained earnings | Other reserves | Total equity attributable | Other equity1 | Ordinary shares | Preference shares | Total equity |
| 2018 | Notes | �m | �m | �m | �m | �m | �m | �m | �m | �m | �m |
| 1 January | � | 364 | (61) | 639 | 3,162 | 4,500 | 8,604 | - | 289 | 99 | 8,992 |
| (Loss)/profit for the year from continuing operations | � | - | - | - | (835) | - | (835) | - | - | 5 | (830) |
| Profit for the year from discontinued operations | � | - | - | - | 1,665 | - | 1,665 | 28 | 5 | - | 1,698 |
| Other comprehensive income for the year from continuing operations | � | - | - | - | (44) | 15 | (29) | - | - | - | (29) |
| Other comprehensive income for the year from discontinued operations | � | - | - | - | - | (43) | (43) | - | - | - | (43) |
| Total comprehensive income for the year | 28,29 | - | - | - | 786 | (28) | 758 | 28 | 5 | 5 | 796 |
| Issue of share capital | 26 | - | - | 1 | - | - | 1 | - | - | - | 1 |
| Issue of B shares | 26,29 | 1,000 | - | - | - | (1,000) | - | - | - | - | - |
| Reclassification of perpetual debt instruments to equity | 30 | - | - | - | - | - | - | 1,005 | - | - | 1,005 |
| Repurchase of perpetual debt instruments | 30 | - | - | - | - | - | - | (970) | - | - | (970) |
| Redemption of perpetual debt instruments | 30 | - | - | - | - | - | - | (44) | - | - | (44) |
| Dividends paid on ordinary shares | 14 | - | - | - | (634) | - | (634) | - | - | - | (634) |
| Dividends paid on preference shares | � | - | - | - | - | - | - | - | - | (5) | (5) |
| Coupons paid on perpetual debt instruments | � | - | - | - | - | - | - | (25) | - | - | (25) |
| Redemption of B shares | 26,28 | (1,000) | 17 | - | (1,002) | 1,000 | (985) | - | - | - | (985) |
| Shares bought back on-market and cancelled | 26, | (11) | - | - | (238) | 11 | (238) | - | - | - | (238) |
| Other movements in non-controlling interests in the year | � | - | - | - | - | - | - | - | (292) | - | (292) |
| Reserves credit for employee share-based payments | 29 | - | - | - | - | 36 | 36 | - | - | - | 36 |
| Transfer to retained earnings for vested employee share-based payments | 28,29 | - | - | - | 68 | (68) | - | - | - | - | - |
| Transfer between reserves on disposal of subsidiaries | 1 | - | - | - | 99 | (99) | - | - | - | - | - |
| Transfer between reserves on impairment of subsidiaries | 28,29 | - | - | - | 570 | (570) | - | - | - | - | - |
| Shares acquired by employee trusts | � | - | (100) | - | - | - | (100) | - | - | - | (100) |
| Shares distributed by employee and other trusts and related dividend equivalents | 28 | - | 29 | - | (33) | - | (4) | - | - | - | (4) |
| Aggregate tax effect of items recognised directly in equity | 10 | - | - | - | - | - | - | 6 | - | - | 6 |
| 31 December | � | 353 | (115) | 640 | 2,778 | 3,782 | 7,438 | - | 2 | 99 | 7,539 |
1. The presentation of amounts attributable to certain perpetual debt instruments in 2018 has been corrected to show these amounts separately as related to other equity holders rather than as part of non-controlling interests. Refer Note 30.
The Notes on pages 129 to 231 are an integral part of these consolidated financial statements.
Consolidated statement of cash flows
For the year ended 31 December 2019
| � | � | 2019 | 20181,2 |
| � | Notes | �m | �m |
| Cash flows from operating activities | � | � | � |
| Profit/(loss) before tax from continuing operations | � | 243 | (787) |
| Profit before tax from discontinued operations | 11 | 56 | 1,780 |
| | � | 299 | 993 |
| Change in operating assets | 41 | 158 | 3,273 |
| Change in operating liabilities | 41 | (291) | (3,127) |
| Adjustment for non-cash movements in investment income | � | 4 | (80) |
| Change in unallocated divisible surplus | � | - | (48) |
| Other non-cash and non-operating items | 41 | (28) | (581) |
| Dividends received from associates and joint ventures | 16 | 93 | 44 |
| Taxation paid3 | � | (34) | (224) |
| Net cash flows from operating activities | � | 201 | 250 |
| � | � | � | � |
| Cash flows from investing activities | � | � | � |
| Purchase of property, plant and equipment | 17 | (28) | (28) |
| Proceeds from sale of property, plant and equipment | � | 2 | 1 |
| Acquisition of subsidiaries and unincorporated businesses net of cash acquired | � | (40) | (33) |
| Disposal of subsidiaries net of cash disposed of | 41 | - | (5,501) |
| Acquisition of investments in associates and joint ventures | 16 | (51) | (72) |
| Proceeds from contingent consideration assets | 40 | 63 | - |
| Payments of contingent consideration liabilities | 40 | (18) | - |
| Disposal of investments in associates and joint ventures | 1 | 1,720 | 201 |
| Taxation paid on disposal of investments in associates and joint ventures3 | � | (22) | (21) |
| Purchase of financial investments | � | (590) | (55) |
| Proceeds from sale or redemption of financial investments | � | 800 | 51 |
| Purchase of intangible assets | � | (15) | (128) |
| Net cash flows from investing activities | � | 1,821 | (5,585) |
| Cash flows from financing activities | � | � | � |
| Repayment of other borrowings | � | - | (2) |
| Repayment of subordinated liabilities and perpetual notes | � | (455) | (1,377) |
| Payment of lease liabilities | � | (32) | - |
| Shares acquired by trusts | � | (50) | (100) |
| Proceeds from issue of shares | 26 | - | 1 |
| Interest paid | � | (39) | (117) |
| Return of cash to shareholders under B share scheme | 26 | - | (983) |
| Shares bought back on-market and cancelled | 26 | (516) | (238) |
| Preference dividends paid | � | (5) | (5) |
| Ordinary dividends paid | 14 | (518) | (634) |
| Net cash flows from financing activities | � | (1,615) | (3,455) |
| Net increase/(decrease) in cash and cash equivalents | � | 407 | (8,790) |
| Cash and cash equivalents at the beginning of the year | � | 957 | 9,715 |
| Effects of exchange rate changes on cash and cash equivalents | � | (17) | 32 |
| Cash and cash equivalents at the end of the year | 24 | 1,347 | 957 |
| Supplemental disclosures on cash flows from operating activities | � | � | � |
| Interest paid | � | 5 | 6 |
| Interest received | � | 34 | 1,118 |
| Dividends received | � | 143 | 1,545 |
| Rental income received on investment property | � | 3 | 329 |
�
1. The Group has initially applied IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated. Refer Basis of preparation.
2. Restated. The Group has changed the classification of certain cash flows following the disposal of the UK and European insurance business in 2018. The reason for the changes is to make the financial statements more relevant to users as it is more consistent with asset management peers. Refer Basis of preparation (a)(iii).
3. Total taxation paid was �56m in 2019 (2018: �245m).
The Notes on pages 129 to 231 are an integral part of these consolidated financial statements.
The Group's significant accounting policies are included at the beginning of the relevant notes to the consolidated financial statements. This section sets out the basis of preparation, a summary of the Group's critical accounting estimates and judgements in applying accounting policies, and other significant accounting policies which have been applied to the financial statements as a whole.
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the IFRS Interpretations Committee (IFRICs), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of owner occupied property, derivative instruments and other financial assets and financial liabilities at fair value through profit or loss (FVTPL).
The principal accounting policies set out in these consolidated financial statements have been consistently applied to all financial reporting periods presented except as described below.
The Group has adopted the following new IFRS, interpretations and amendments to existing standards, which are effective by EU endorsement for annual periods beginning on or after 1 January 2019 and IFRS 9 whose adoption has previously been deferred (see the Group's Annual report and accounts for the year ended 31 December 2018 for further details).
IFRS 9 Financial Instruments�
On 1 January 2019 the Group adopted IFRS 9 Financial Instruments. Financial assets are classified at initial recognition based on whether their contractual cash flows are solely payments of principal and interest (SPPI) and the nature of the business model they are managed under. This has resulted in the Group's equity securities and interests in pooled investment funds and certain debt securities being classified as FVTPL and the Group's receivables, other financial assets, cash and other debt securities being measured at amortised cost. Derivative instruments are measured at fair value.
The classification of financial liabilities is unchanged from that applied under IAS 39. Financial liabilities are measured at amortised cost using the effective interest method unless they are derivatives or are designated at FVTPL.
Changes in fair value of all financial instruments classified as FVTPL and derivative instruments are recognised in profit or loss except for derivative instruments that are designated as a hedging instrument in a cash flow hedge or net investment hedge.
Interest is credited to profit or loss using the effective interest rate method for financial instruments measured at amortised cost.
An expected credit loss impairment model is applied to financial assets measured at amortised cost. Impairment losses representing the expected credit loss in the next 12 months are recognised unless there has been a significant increase in credit risk from initial recognition or they relate to trade receivables or contract assets recognised under IFRS 15 Revenue from Contracts with Customers or lease receivables recognised under IFRS 16 Leases in which case lifetime expected losses are recognised.
Where the terms of a financial liability are modified and the modification does not result in the derecognition of the liability, the liability is adjusted to the net present value of the future cash flows less transaction costs with a modification gain or loss recognised in the income statement.
The Group has elected to continue applying the hedge accounting requirements of IAS 39.
As permitted by IFRS 9 comparatives have not been restated. The impact of adopting IFRS 9 is recognised in retained earnings at 1 January 2019.
The updated accounting policies for financial assets, derivatives and financial liabilities are included in Notes 19, 20 and 32 respectively.
The table below sets out the impact of adopting IFRS 9 on 1 January 2019 on the Group's financial assets and liabilities.
�
| | � | 31 December 2018 | Reclassification | Remeasurement | 1 January 2019 | |
| � | Notes | �m | �m | �m | �m | |
| Financial assets - excluding those backing unit linked liabilities | � | � | � | � | | |
| Designated at FVTPL (IAS 39) | � | � | � | � | | |
| Equity securities and interests in pooled investment funds | � | 509 | - | - | 509 | |
| Debt securities | � | 725 | - | - | 725 | |
| Receivables and other | � | 8 | - | - | 8 | |
| Held for trading (IAS 39) | � | � | � | � | | |
| Derivative financial assets | � | 6 | - | - | 6 | |
| At FVTPL (IFRS 9) | � | � | � | � | 1,248 | |
| Cash flow hedge (IAS 39) | � | � | � | � | | |
| Derivative financial assets | � | 13 | - | - | 13 | |
| Cash flow hedge (IFRS 9) | � | � | � | � | 13 | |
| Available for Sale (IAS 39) | � | � | � | � | | |
| Debt securities | � | 862 | (862) | - | - | |
| Loans and receivables (IAS 39) | � | � | � | � | | |
| Debt securities | � | - | 862 | (8) | 854 | |
| Receivables and other financial assets | � | 689 | - | - | 689 | |
| Cash and Cash equivalents | � | 1,110 | - | - | 1,110 | |
| At amortised cost (IFRS 9) | � | � | � | � | 2,653 | |
| Total | 19 | 3,922 | - | (8) | 3,914 | |
| Financial liabilities - excluding those backing unit linked liabilities | � | � | � | � | | |
| Designated at FVTPL (IAS 39) | � | � | � | � | | |
| Third party interest in consolidated funds | � | (26) | - | - | (26) | |
| Other financial liabilities | � | (29) | - | - | (29) | |
| Held for trading (IAS 39) | � | � | � | � | | |
| Derivative financial liabilities | � | (4) | - | - | (4) | |
| Designated at FVTPL (IFRS 9) | � | � | � | � | (59) | |
| At amortised cost (IAS 39) | � | � | � | � | | |
| Subordinated liabilities | � | (1,081) | - | (5) | (1,086) | |
| Other financial liabilities | � | (1,132) | - | - | (1,132) | |
| At amortised cost (IFRS 9) | � | � | � | � | (2,218) | |
| Total | 32 | (2,272) | - | (5) | (2,277) | |
| Financial assets backing unit linked liabilities | | � | � | � | | |
| Designated at FVTPL (IAS 39) | | � | � | � | | |
| Financial investments | | 1,659 | - | - | 1,659 | |
| At FVTPL (IFRS 9) | | � | � | � | 1,659 | |
| At amortised cost (IAS 39) | | � | � | � | | |
| Receivables and other financial liabilities | | 11 | - | - | 11 | |
| Cash and cash equivalent | | 30 | - | - | 30 | |
| At amortised cost (IFRS 9) | | � | � | � | 41 | |
| Total | 25 | 1,700 | - | - | 1,700 | |
| Financial liabilities backing unit linked liabilities | | � | � | � | | |
| Designated at FVTPL (IAS 39) | | � | � | � | | |
| Investment contract liabilities | | (1,468) | - | - | (1,468) | |
| Third party interest in consolidated funds | | (228) | - | - | (228) | |
| Designated at FVTPL (IFRS 9) | | � | � | � | (1,696) | |
| At amortised cost (IAS 39) | | � | � | � | | |
| Other financial liabilities | | (3) | - | - | (3) | |
| At amortised cost (IFRS 9) | | � | � | � | (3) | |
| Total | 25 | (1,699) | - | - | (1,699) | |
| Change in deferred tax liability | � | � | � | 1 | | |
| Total net impact of transition from IAS 39 to IFRS 9 | � | � | � | (12) | | |
The main impacts of adopting IFRS 9 are as follows:
�� The Group's debt securities which were previously classified as available-for-sale (AFS) and therefore measured at fair value are now measured at amortised cost. At 31 December 2018 the fair value of AFS securities was �862m with a corresponding AFS financial assets reserve balance of �7m and deferred tax liability of �1m. On reclassification, the Group's debt securities were recognised at 1 January 2019 at their amortised cost (less expected credit losses) of �854m. The AFS financial assets reserve balance and the related deferred tax liability were no longer recognised. The expected credit losses at 1 January 2019 were less than �1m.
�� At 31 December 2018, the Group had subordinated liabilities of �1,081m. Under IFRS 9, where the terms of a financial liability are modified and the modification does not result in the derecognition of the liability, the liability is adjusted to the net present value of the future cash flows less transaction costs with a modification gain or loss recognised in the income statement. During the year ended 31 December 2018, the terms of the 4.25% US Dollar fixed rate subordinated notes were modified. Consequently, on adoption of IFRS 9, these subordinated liabilities have been recognised at 1 January 2019 at a revised amortised cost of �1,086m. The impact on retained earnings was �5m.
�� The Group's loans and receivables were reclassified as financial assets measured at amortised cost. This had no impact on their initial recognition or subsequent measurement.
�� Held for trading no longer exists as a separate FVTPL category and these assets and liabilities were included within the financial assets or liabilities measured at fair value through profit or loss. Similarly this had no impact on their initial recognition or subsequent measurement.
�� All the Group's financial liabilities that were designated as FVTPL under IAS 39 at 31 December 2018 remain designated as FVTPL under IFRS 9. All the Group's financial assets that were designated as FVTPL under IAS 39 at 31 December 2018 are mandatorily classified as FVTPL under IFRS 9.
The adoption of IFRS 9 has also resulted in a number of new disclosure requirements under IFRS 7 Financial Instruments: Disclosure. These include new disclosures in relation to:
�� Classification of financial assets and liabilities including disclosure of those that are mandatorily classified as FVTPL and those designated as such along with details of any significant reclassifications in the year
�� Information on impairment including the Group's approach to expected credit losses
�� Additional disclosure on hedging activities
These disclosures are provided in Notes 19 (financial assets), 20 (derivatives), 32 (financial liabilities) and 38 (financial instruments risk management), where relevant.
IFRS 16 Leases�
On 1 January 2019 the Group adopted IFRS 16 Leases. IFRS 16 replaces IAS 17 Leases and introduces a new single accounting approach for lessees for all leases (with limited exceptions). As a result there is no longer a distinction between operating leases and finance leases, and lessees will recognise a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. The accounting for leases by lessors remains largely unchanged. However, a number of the Group's subleases which were operating leases under IAS 17 now qualify as finance leases under IFRS 16.
The Group has applied the cumulative catch up approach to IFRS 16 and therefore comparatives have not been restated. On transition to IFRS 16, the Group recognised right-of-use assets and lease liabilities. Right-of-use assets for property have been calculated as if IFRS 16 has always been applied, recognising the difference between the assets and liabilities in retained earnings. For non-property leases, the right-of-use assets initially recognised were equal to the lease liabilities calculated with no impact on retained earnings.
The Group has used the following practical expedients permitted under IFRS 16:
�� To apply the new standard solely to leases previously identified in accordance with IAS 17 and IFRIC 4 Determining whether an Arrangement Contains a Lease
�� To not recognise leases with a low value or short-term leases including those whose term ends within 12 months at 1 January 2019
�� To apply a single discount rate to leases with similar characteristics
In addition, as at 31 December 2018 the Group recognised an onerous lease provision of �12m under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The Group has applied the practical expedient to utilise the assessment that the lease was onerous under IAS 37 and therefore adjust the right of use asset at the date of initial application by the onerous lease provision rather than conduct an impairment test.
The impact on opening retained earnings at 1 January 2019 is summarised below:
| � | 1 January 2019 |
| � | �m |
| Recognised under IFRS 16 | � |
| Right-of-use assets (within property, plant and equipment)1 | � |
| Property net of impairment | 178 |
| Equipment | 1 |
| Net investment in finance leases (within Receivables and other financial assets) | 7 |
| Lease liabilities (within Other financial liabilities)1 | (227) |
| Derecognised on application of IFRS 16 | � |
| Onerous lease provisions | 12 |
| Accruals for lease incentives (within Other financial liabilities) | 16 |
| Net liabilities recognised before tax | (13) |
| Deferred tax | 1 |
| Reduction in opening retained earnings | (12) |
1. Additional right-of-use assets of �5m and additional lease liabilities for �5m were recognised within Assets held for sale and Liabilities of operations held for sale respectively.
When measuring lease liabilities for leases previously classified as operating leases, the Group used discount rates determined on a portfolio basis depending on the geographic location and term of the lease. The weighted average rate used at initial application was 2.6%. The lease commitments for operating leases as previously disclosed in the Group's Annual report and accounts for the year ended 31 December 2018 is reconciled to the lease liabilities at 1 January 2019 below:
| � | 1 January 2019 |
| � | �m |
| Operating lease commitments at 31 December 2018 as disclosed in the Group's Annual report and accounts for the year ended 31 December 2018 | � 250 |
| � | � |
| Discounted value of operating lease commitments at 31 December 2018 | 227 |
| Exemptions for low value leases and leases whose term ends within 12 months at 1 January 2019 | (4) |
| Extension options reasonably certain to be exercised | 6 |
| Lease commitments for operations held for sale | (5) |
| Other | 3 |
| Lease liabilities recognised at 1 January 2019 | 227 |
The updated accounting policies for leases are included in Note 18.
IFRS 16 introduces new disclosure requirements for lessees and lessors which are provided in Note 18. The objective of the disclosures is for lessees and lessors to disclose information in the notes that, together with the information provided in the statement of financial position, statement of profit or loss and statement of cash flows, gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows.
Interpretations and amendments to other standards
�� IFRIC 23: Uncertainty over Income Tax Treatments
�� Amendments to IFRS 9 Prepayment Features with Negative Compensation
�� Amendments to IAS 19 Amendment, Curtailment or Settlement
�� Amendments to IAS 28 Long-term interests in associates and joint ventures
�� Annual Improvements 2015-2017 cycle
The Group's accounting policies have been updated to reflect these. Management considers the implementation of the above interpretations and amendments to existing standards has had no significant impact on the Group's financial statements.
Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for the Group's annual accounting periods beginning after 1 January 2019. The Group has not early adopted the standards, amendments and interpretations described below:
IFRS 17 Insurance Contracts (effective for annual periods beginning on or after 1 January 2021, expected to be amended to 1 January 2022)
IFRS 17 was issued in May 2017 and will replace IFRS 4 Insurance Contracts. IFRS 4 is an interim standard which permits the continued application of accounting policies, for insurance contracts and contracts with discretionary participation features, which were being used at transition to IFRS except where a change satisfies criteria set out in IFRS 4. IFRS 17 introduces new required measurement and presentation accounting policies for such contracts which reflect the view that these contracts combine features of a financial instrument and a service contract.
IFRS 17's measurement model, which applies to groups of contracts, combines a risk-adjusted present value of future cash flows and an amount representing unearned profit. On transition retrospective application is required unless impracticable, in which case either a modified retrospective approach or a fair value approach is required. IFRS 17 introduces a new approach to presentation in the income statement and statement of comprehensive income.
Following the sale of the UK and European insurance business, the Group has limited direct exposure to insurance contracts and contracts with discretionary participating features which will be impacted by the adoption of IFRS 17. However, the results of the Group's insurance associates, Phoenix and HDFC Life, are expected to be significantly impacted by IFRS 17. The standard has not yet been endorsed by the EU.
Other
There are no other new standards, interpretations and amendments to existing standards that have been published that are expected to have a significant impact on the consolidated financial statements of the Group.
In 2019, following the disposal of the UK and European insurance business in 2018, the Group's operating cash flows no longer predominantly relate to insurance business. From 1 January 2019 the Group has changed the classification of capital flows arising to/from third party interests in consolidated funds from cash flows arising from financing activities to cash flows arising from operating activities. The reason for this change is to make the financial statements more relevant to users as it is more consistent with asset management peers. Comparative amounts have been restated. The impact of the restatement is to reclassify the 2018 capital flows to third party interests in consolidated funds of �507m and the 2018 distributions paid to third party interests in consolidated funds of �69m which were previously presented as cash flows arising from financing activities. These capital outflows have been reclassified in the 2018 comparative balances and presented as changes in operating liabilities cash flows arising from operating activities. The change in the amounts previously presented is as summarised in the table below.
| � | 2018 As previously presented | 2018 Reclassification | 2018 Restated |
| Consolidated statement of cash flows | �m | �m | �m |
| Net cash flows from operating activities | 826 | (576) | 250 |
| Net cash flows from financing activities | (4,031) | 576 | (3,455) |
The preparation of financial statements requires management to exercise judgements in applying accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses arising during the year. Judgements and sources of estimation uncertainty are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The areas where judgements have the most significant effect on the amounts recognised in the consolidated financial statements are as follows:
| Financial statement area | Critical judgements in applying accounting policies | Related note |
| Defined benefit pension plans | Assessment of whether the Group has an unconditional right to a refund of the surplus Treatment of tax relating to the surplus | Note 34 |
| Investments in associates | Determining whether the investments in Phoenix and HDFC Life should continue to be classified as associates Identification, valuation and determination of useful lives for equity accounting purposes, of the Group's share of its associate's intangible assets at the date of acquisition of an investment in the associate | Note 16 |
| Intangible assets | Identification and valuation of intangible assets arising from business combinations and the determination of useful lives Determining the group of cash-generating units to which goodwill acquired in a business combination should be allocated | Note 15 |
| Provisions | Determining whether a provision is required for separation costs | Note 37 |
During the year to 31 December 2019 the following changes have been made to critical judgements in applying accounting policies:
�� As a result of the part disposal of our investment in HDFC Life, we have identified its classification as an associate as a critical judgement
There are no other changes to critical judgements from the prior year.
The areas where assumptions and other sources of estimation uncertainty at the end of the reporting period have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:
| Financial statement area | Critical accounting estimates and assumptions | Related note |
| Financial instruments at fair value through profit or loss | Determination of the fair value of contingent consideration assets and liabilities relating to the sale of the UK and European insurance business to Phoenix | Notes 19, 36 and 40 |
| Defined benefit pension plans | Determination of principal UK pension plan assumptions for mortality, discount rate and inflation | Note 34 |
| Intangible assets | Determination of the recoverable amount in relation to impairment assessment of asset management goodwill | Note 15 |
| Investments in associates | Determination of the recoverable amount in relation to the impairment assessment of investments in associates | Note 16 |
The determination of the recoverable amount in relation to customer relationships and investment management contract intangibles is no longer considered a critical estimate as a result of amortisation and market movements. All other critical accounting estimates and assumptions are the same as the prior year.
Further detail on critical accounting estimates and assumptions is provided in the relevant note.
The consolidated financial statements are presented in million pounds Sterling.
The statements of financial position of Group entities, including associates and joint ventures accounted for using the equity method, that have a different functional currency than the Group's presentation currency are translated into the presentation currency at the year end exchange rate and their income statements and cash flows are translated at average exchange rates for the year. All resulting exchange differences arising are recognised in other comprehensive income and the foreign currency translation reserve in equity. On disposal of a Group entity the cumulative amount of any such exchange differences recognised in other comprehensive income is reclassified to profit or loss.
Foreign currency transactions are translated into the functional currency at the exchange rate prevailing at the date of the transaction. Gains and losses arising from such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the relevant line in the consolidated income statement.
Translation differences on non-monetary items, such as equity securities held at fair value through profit or loss, are reported as part of the fair value gain or loss within investment return in the consolidated income statement. Translation differences on financial assets and liabilities held at amortised cost are included in the relevant line in the consolidated income statement.
The income statements and cash flows, and statements of financial position of Group entities that have a different functional currency from the Group's presentation currency have been translated using the following principal exchange rates:
| � | 2019 | 2018 | ||
| � | Income statement and cash flows (average rate) | Statement of financial position (closing rate) | Income statement and cash flows (average rate) | Statement of financial position (closing rate) |
| Euro | 1.142 | 1.180 | 1.129 | 1.114 |
| US Dollar | 1.280 | 1.325 | 1.333 | 1.274 |
| Indian Rupee | 90.106 | 94.563 | 90.711 | 88.913 |
| Chinese Renminbi | 8.830 | 9.228 | 8.818 | 8.744 |
| Hong Kong Dollar | 10.030 | 10.322 | 10.444 | 9.971 |
| Singapore Dollar | 1.745 | 1.781 | 1.795 | 1.736 |
The Group's financial statements consolidate the financial statements of the Company and its subsidiaries.
Subsidiaries are all entities (including investment vehicles) over which the Group has control. Control arises when the Group is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. For operating entities this generally accompanies a shareholding of 50% or more in the entity. For investment vehicles, including structured entities, the control assessment also considers the removal rights of other investors and whether the Group acts as principal or agent in assessing the link between power and variable returns. In determining whether the Group acts as principal, and therefore controls the entity, the removal rights of other investors and the magnitude of the variability associated with the returns are also taken into account. As a result, the Group often is considered to control investment vehicles in which its shareholding is less than 50%.
Where the Group is considered to control an investment vehicle, such as an open-ended investment company, a unit trust or a limited partnership, and it is therefore consolidated, the interests of parties other than the Group are assessed to determine whether they should be classified as liabilities or as non-controlling interests. The liabilities are recognised in the third party interest in consolidated funds line in the consolidated statement of financial position and any movements are recognised in the consolidated income statement. The financial liability is designated at fair value through profit or loss (FVTPL) as it is implicitly managed on a fair value basis as its value is directly linked to the market value of the underlying portfolio of assets. The interests of parties other than the Group in all other types of entities are recorded as non-controlling interests.
All intra-group transactions, balances, income and expenses are eliminated in full.
The Group uses the acquisition method to account for acquisitions of businesses. At the acquisition date the assets and liabilities of the business acquired and any non-controlling interests are identified and initially measured at fair value on the consolidated statement of financial position.
When the Group acquires or disposes of a subsidiary, the profits and losses of the subsidiary are included from the date on which control was transferred to the Group until the date on which it ceases, with consistent accounting policies applied across all entities throughout.
When the Group sells a subsidiary to an associate, the gain on sale of the subsidiary is recognised in full, with no elimination being made for the continuing interest in the subsidiary.
1.���� Group structure
(a) ��� Composition
The following diagram is an extract of the Group structure at 31 December 2019 and gives an overview of the composition of the Group.
Diagram removed for the purposes of this announcement.� However it can be viewed in full in the pdf document
A full list of the Company's subsidiaries is provided in Note 48.
(b)���� Acquisitions
(b)(i) ����� Subsidiaries
On 29 November 2019, 1825 Financial Planning and Advice Limited (a subsidiary of 1825 Financial Planning Limited) purchased the wealth advisory business of Grant Thornton UK LLP through a business acquisition agreement under which the majority of the clients and employees of the wealth advisory business transferred to 1825 Financial Planning and Advice Limited. The assets under advice at the acquisition date were �1.6bn. The acquisition significantly expands 1825's advice capability and national client reach.
At the acquisition date the consideration, net assets acquired from Grant Thornton UK LLP and resulting goodwill were as follows:
| 29 November 2019 | � | �m1 |
| Cash | � | 40 |
| Fair value of contingent consideration | � | 5 |
| Consideration | � | 45 |
| Fair value of net assets acquired | � | � |
| Customer-related intangible assets | � | 12 |
| Total assets | � | 12 |
| Deferred tax liabilities | � | 2 |
| Total liabilities | � | 2 |
| Goodwill | � | 35 |
1��� The fair value of the contingent consideration of �5m has been calculated by reference to assets under advice growth and could range from �nil to �5m.�
Customer-related intangible assets relate to the existing customer relationships in place at the acquisition date. The full amount of the goodwill is expected to be non-deductible for tax purposes.
The amounts of revenue from contracts with customers and profit contributed to the Group's consolidated income statement for the year ended 31 December 2019 from the acquired wealth advisory business were �1m and �nil respectively. The profit contributed excludes amortisation of intangible assets acquired through business combinations. If the acquisition had occurred on 1 January 2019, the Group's total revenue from contracts with customers for the period would have increased by �10m to �1,753m and the profit would have increased by �2m to �273m.
In addition, the following acquisitions were made in the year but are not considered to be material.
On 1 July 2019, 1825 Financial Planning and Advice Limited purchased the wealth management business of BDO Northern Ireland through a similar business acquisition agreement. The assets under advice at the acquisition date were �0.2bn.
On 15 February 2019, Aberdeen Asset Management PLC (AAM PLC) completed the purchase of the entire share capital of Orion Partners Holding Limited and Orion Partner Services Inc. The assets under management were US$0.9bn (�0.7bn) at the acquisition date.
On 31 July 2019, as part of the Group's strategic joint venture with Virgin Money, AAM PLC completed the acquisition of 50% (less one share) of Virgin Money Unit Trust Managers Limited (VMUTM) for an upfront cash payment of �40m plus 50% of the capital in the business and certain other costs.
On 27 April 2018, Aberdeen Asset Management Inc. purchased the US business of specialist commodity exchange traded product provider ETF Securities by purchasing the entire members' interests of ETF Securities USA LLC, ETF Securities (US) LLC and ETF Securities Advisers LLC. In addition, 1825 Financial Planning Limited completed the purchase of the entire share capital of Fraser Heath Financial Management Ltd and Cumberland Place Financial Management Ltd on 1 March 2018 and 6 April 2018 respectively.
(c)(i)� Associates
Profit on disposal of investments in associates for the year ended 31 December 2019 of �1,542m includes �1,337m in relation to sales of HDFC Life Insurance Company Limited (HDFC Life) shares and �204m in relation to the HDFC Asset Management Company Limited (HDFC Asset Management) Offer for Sale described below.
During the year, the Group completed the following sales of equity shares in HDFC Life on the National Stock Exchange of India Limited and BSE Limited:
�� 92,181,992 equity shares in HDFC Life sold through an Offer for Sale on 12 and 13 March 2019
�� 33,032,381 equity shares in HDFC Life sold through an Offer for Sale from 3 to 6 May 2019
�� 67,100,000 equity shares in HDFC Life sold through a Bulk Sale on 14 August 2019
�� 100,000,000 equity shares in HDFC Life sold through a Bulk Sale on 30 October 2019
In total, 14.49% of the issued equity share capital of HDFC Life was sold for a combined consideration net of taxes and expenses of Rs 135,994m (�1,503m). The combined gain on sale of �1,337m was calculated using the weighted-average cost method. The Group's shareholding in HDFC Life at 31 December 2019 is 297,311,894 equity shares or 14.73% of the issued equity share capital of HDFC Life.
During the year, the Group completed the following sale of equity shares in HDFC Asset Management on the National Stock Exchange of India Limited and BSE Limited:
�� 6,422,310 equity shares in HDFC Asset Management sold through an Offer for Sale on 4 and 5 December 2019
Through the sale, 3.02% of the issued equity share capital of HDFC Asset Management was sold for a total consideration net of taxes and expenses of Rs 18,279m (�195m). The gain on sale of �204m before tax was calculated using the weighted-average cost method. The Group's shareholding in HDFC Asset Management at 31 December 2019 is 57,228,305 equity shares or 26.91% of the issued equity share capital of HDFC Asset Management.
(c)(ii) Subsidiaries
(c)(ii)(i) UK and European insurance business
On 23 February 2018, the Group announced the proposed sale of the UK and European insurance business to Phoenix (the Sale), conditional on shareholder and relevant regulatory approvals. The Sale was completed on 31 August 2018 and was implemented by the sale to Phoenix of the entire issued share capital of Standard Life Assurance Limited (SLAL).
Under the transaction the following businesses were retained by the Group:
�� UK retail platforms, including Wrap and Elevate
�� 1825, our financial advice business
In addition, the assets and liabilities of both the UK and Ireland Standard Life staff defined benefit pension plans were retained by the Group.
Following the announcement on 23 February 2018 the UK and European insurance business was classified as held for sale and measured at its carrying amount. The results of the UK and European insurance business to 31 August 2018 were classified as discontinued operations.
Total consideration received comprised cash of �2.0bn, a dividend received from SLAL of �312m in March 2018 and new shares issued at completion representing approximately 19.98% of the then issued share capital of Phoenix. The shareholding in Phoenix was subject to a lock-up of 12 months from completion. The Group recognised a gain on disposal in respect of the Sale which is included in profit from discontinued operations in the consolidated condensed income statement for the year ended 31 December 2018 of �1,780m. On disposal �43m was recycled from the translation reserve and was included in determining the gain on sale. �99m (net) of other reserves were also released directly to retained earnings.
(c)(iii)(i) HDFC Asset Management
Profit on disposal of interests in associates for the year ended 31 December 2018 of �185m includes �177m in relation to the HDFC Asset Management initial public offering (IPO) which completed on 6 August 2018 with HDFC Asset Management listing on the National Stock Exchange of India Limited and the Bombay Stock Exchange Limited. Through the IPO, the Group sold 16,864,585 equity shares in HDFC Asset Management for a total net consideration of Rs.16,212m (�180m). The gain on sale from the IPO of �177m (�156m after tax) was calculated using the weighted-average cost method. On disposal �2m was recycled from the translation reserve and was included in determining the gain on sale.
2.���� Segmental analysis
The Group's reportable segments have been identified in accordance with the way in which the Group is structured and managed. IFRS 8 Operating Segments requires that the information presented in the financial statements is based on information provided to the 'Chief Operating Decision Maker'. The Chief Operating Decision Maker for the Group is the executive leadership team.
The Group's reportable segments are as follows:
The name of the segment has been changed from Asset management and platforms to Asset management, platforms and wealth. There has been no change to the definition of the segment.
This segment primarily relates to our Asset management, Platforms and Wealth businesses. Our Asset management subsidiaries and our Asset management associate in India, HDFC Asset Management, provide a range of investment products and services for individuals and institutional customers through a number of different investment vehicles. Our Platforms comprise the Standard Life branded Wrap and Elevate platforms which provide administration services to advisers. Our Wealth activity primarily relates to: Aberdeen Standard Capital which manages assets for private clients, intermediaries acting for clients, charities and trustees; Parmenion, our digital platform; 1825, our financial planning and advice business; and our strategic joint venture with Virgin Money. The segment also includes other wholly owned activities of the Group including the corporate centre and related activities and the UK and Ireland Standard Life staff defined benefit pension plans.
Insurance associates and joint ventures
This segment comprises our life insurance associates and joint ventures in India (HDFC Life), the UK (Phoenix) and China (HASL). These businesses offer a range of pension, insurance and savings products to the Indian, UK, European and Chinese markets.
On 23 February 2018, the Group announced the proposed sale of the UK and European insurance business. Refer Note 1 for further details. As a consequence, the results of this business have been presented as discontinued operations. The UK and European insurance business provided a broad range of long-term savings and investment products to individual and corporate customers in the UK, Germany, Austria and Ireland.
(b) ��� Reportable segments - Group adjusted profit before tax and revenue information
(b)(i) Analysis of Group adjusted profit before tax
Adjusted profit before tax is the key alternative performance measure utilised by the Group's management in their evaluation of segmental performance and is therefore also presented by reportable segment.
| � | � | Asset management, platforms | Insurance associates and joint ventures | Total continuing operations | Discontinued operations | Eliminations | Total |
| 31 December 2019 | Notes | �m | �m | �m | �m | �m | �m |
| Fee based revenue | | 1,634 | - | 1,634 | - | - | 1,634 |
| Adjusted operating expenses | | (1,333) | - | (1,333) | - | - | (1,333) |
| Adjusted operating profit | | 301 | - | 301 | - | - | 301 |
| Capital management | | 37 | - | 37 | - | - | 37 |
| Share of associates' and joint ventures' profit before tax1 | | 57 | 189 | 246 | - | - | 246 |
| Adjusted profit before tax | | 395 | 189 | 584 | - | - | 584 |
| Tax on adjusted profit | | (69) | - | (69) | - | - | (69) |
| Share of associates' and joint ventures' tax expense | 10 | (21) | (25) | (46) | - | - | (46) |
| Adjusted profit after tax | � | 305 | 164 | 469 | - | - | 469 |
| Adjusted for the following items | � | � | � | � | � | � | � |
| Restructuring and corporate transaction expenses | 9 | (379) | (28) | (407) | - | - | (407) |
| Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts2 | � | (1,733) | (111) | (1,844) | - | - | (1,844) |
| Profit on disposal of interests in associates | 1 | 205 | 1,337 | 1,542 | - | - | 1,542 |
| Reversal of impairment of associates | � | - | 243 | 243 | - | - | 243 |
| Investment return variances and economic assumption changes | 13 | - | (25) | (25) | - | - | (25) |
| Other | | 160 | (2) | 158 | 56 | - | 214 |
| Total adjusting items | | (1,747) | 1,414 | (333) | 56 | - | (277) |
| Tax on adjusting items | | 41 | - | 41 | - | - | 41 |
| Share of associates' and joint ventures' tax expense on adjusting items | | (5) | 43 | 38 | - | - | 38 |
| Profit attributable to non-controlling interests (preference shares) | | (5) | - | (5) | - | - | (5) |
| (Loss)/profit for the year attributable to equity shareholders of Standard Life Aberdeen plc | | (1,411) | 1,621 | 210 | 56 | - | 266 |
| Profit attributable to non-controlling interests | | � | � | � | � | � | � |
| Ordinary shares | | � | � | - | - | � | - |
| Preference shares | | � | � | 5 | - | � | 5 |
| Profit for the year | | � | � | 215 | 56 | � | 271 |
1. Share of associates' and joint ventures' profit before tax comprises the Group's share of results of HDFC Life, HDFC Asset Management, Phoenix, HASL and VMUTM.
2. Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts includes �1,733m included in administrative expenses and set out in Note 15, and �111m relating to intangibles recognised on the part acquisition of associates and included in Share of profit from associates and joint ventures in the consolidated income statement.
Fee based revenue is reported as the measure of revenue in the analysis of adjusted profit before tax. Refer Note 4 for a reconciliation to revenue from contracts with customers. For the year ended 31 December 2019, fee based revenue is the same as adjusted operating income.
Fee based revenue for the year ended 31 December 2019 relates to revenues generated from external customers. The fee based revenue forming part of the adjusted operating income of the Asset management, platforms and wealth segment for the year ended 31 December 2018 included �94m which related to investment management fees arising from intra-group transactions with the UK and European insurance segment classified as discontinued operations. At a Group level an elimination adjustment was required to remove intra-group impacts.
All interest income, interest expense, depreciation and amortisation from continuing operations relates to the Asset management, platforms and wealth segment.
There are no customers whose revenue represents greater than 10% of fee based revenue (2018: none).
| � | � | Asset management, platforms and wealth | Insurance associates and joint ventures | Total continuing operations | Discontinued operations | Eliminations | Total |
| 31 December 2018 | Notes | �m | �m | �m | �m | �m | �m |
| Fee based revenue | | 1,868 | - | 1,868 | 532 | (94) | 2,306 |
| Spread/risk margin | | - | - | - | 59 | - | 59 |
| Total adjusted operating income | | 1,868 | - | 1,868 | 591 | (94) | 2,365 |
| Adjusted operating expenses | | (1,395) | - | (1,395) | (376) | 94 | (1,677) |
| Adjusted operating profit | | 473 | - | 473 | 215 | - | 688 |
| Capital management | | (9) | - | (9) | (5) | - | (14) |
| Share of associates' and joint ventures' profit before tax1 | | 46 | 140 | 186 | - | - | 186 |
| Adjusted profit before tax | | 510 | 140 | 650 | 210 | - | 860 |
| Tax on adjusted profit | | (95) | - | (95) | (77) | - | (172) |
| Share of associates' and joint ventures' tax expense | 10 | (17) | (26) | (43) | - | - | (43) |
| Adjusted profit after tax | � | 398 | 114 | 512 | 133 | - | 645 |
| Adjusted for the following items | � | � | � | � | � | � | � |
| Restructuring and corporate transaction expenses | 9 | (231) | (8) | (239) | (264) | - | (503) |
| Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts2 | � | (1,117) | (38) | (1,155) | - | - | (1,155) |
| Profit on disposal of subsidiaries | 1 | - | - | - | 1,780 | - | 1,780 |
| Profit on disposal of interests in associates | 1 | 183 | 2 | 185 | - | - | 185 |
| Impairment of associates | � | - | (228) | (228) | - | - | (228) |
| Investment return variances and economic assumption changes | 13 | - | 54 | 54 | (41) | - | 13 |
| Other | | 4 | (18) | (14) | 44 | - | 30 |
| Total adjusting items | | (1,161) | (236) | (1,397) | 1,519 | - | 122 |
| Tax on adjusting items | | 52 | - | 52 | 41 | - | 93 |
| Share of associates' and joint ventures' tax expense on adjusting items | | 2 | 1 | 3 | - | - | 3 |
| Profit attributable to other equity holders and non-controlling interests (preference shares and perpetual notes) | | (5) | - | (5) | (28) | - | (33) |
| (Loss)/profit for the year attributable to equity shareholders of Standard Life Aberdeen plc | | (714) | (121) | (835) | 1,665 | - | 830 |
| Profit attributable to other equity holders and non-controlling interests | | � | � | � | � | � | � |
| Ordinary shares | | � | � | - | 5 | � | 5 |
| Preference shares and perpetual notes | | � | � | 5 | 28 | � | 33 |
| (Loss)/profit for the year | | � | � | (830) | 1,698 | � | 868 |
1. Share of associates' and joint ventures' profit before tax comprises the Group's share of results of HDFC Life, HDFC Asset Management, Phoenix and HASL.
2. Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts includes �1,117m included in administrative expenses and set out in Note 15, and �38m relating to intangibles recognised on the part acquisition of associates and included in Share of profit from associates and joint ventures in the consolidated income statement.
(b)(ii)����� Total income and expenses
The following table provides a reconciliation of adjusted operating income and adjusted operating expenses, as presented in the analysis of Group adjusted profit by segment, to total income and total expenses respectively, as presented in the IFRS consolidated income statement. For 2019, adjusted operating income is the same as fee based revenue.
| ����� | 2019 | 2018 | ||
| � | Income | Expenses | Income | Expenses |
| � | �m | �m | �m | �m |
| Adjusted operating income and adjusted operating expenses as presented in the analysis of Group adjusted profit by segment from continuing operations | 1,634 | (1,333) | 1,868 | (1,395) |
| Insurance and participating investment contract claims and change in liabilities | 156 | (156) | 1 | (1) |
| Change in non-participating investment contract liabilities | 265 | (265) | (78) | 78 |
| Change in liability for third party interest in consolidated funds | 21 | (21) | (5) | 5 |
| Other presentation differences | 177 | (177) | 152 | (152) |
| Adjusting items included in income and expenses | 1,703 | (2,120) | 202 | (1,355) |
| Capital management | 37 | - | (9) | - |
| Total income and expenses as presented in the IFRS consolidated income statement from continuing operations | 3,993 | (4,072) | 2,131 | (2,820) |
This reconciliation includes a number of reconciling items which arise due to presentation differences between IFRS reporting requirements and the determination of adjusted operating income and adjusted operating expenses. Adjusted operating income and expenses exclude items which have an equal and opposite effect on IFRS income and IFRS expenses in the consolidated income statement, such as investment returns which are for the account of policyholders. Other presentation differences generally relate to items included in administrative expenses which are borne by policyholders or are directly related to fee income. Other presentation differences include commission expenses which are presented in expenses in the consolidated income statement but are netted against adjusted operating income in the analysis of Group adjusted profit by segment.
Total income from continuing operations as presented in the consolidated income statement split by geographical location is as follows:
| � | 2019 | 2018 |
| � | �m | �m |
| UK | 1,862 | 1,291 |
| Europe, Middle East and Africa | 265 | 201 |
| Asia Pacific | 1,708 | 464 |
| Americas | 158 | 175 |
| Total | 3,993 | 2,131 |
The income of the operating businesses shown above is allocated based on where the income is earned. The return on investment funds is allocated based on where funds are registered.
(d) ��� Non-current non-financial assets by geographical location
| � | 2019 | 2018 |
| � | �m | �m |
| UK | 1,700 | 3,417 |
| Europe, Middle East and Africa | 60 | 2 |
| Asia Pacific | 71 | 6 |
| Americas | 142 | 40 |
| Total | 1,973 | 3,465 |
Non-current non-financial assets for this purpose consist of property, plant and equipment and intangible assets.
Gains and losses resulting from changes in both market value and foreign exchange on investments classified as fair value through profit or loss are recognised in the consolidated income statement in the period in which they occur. The gains and losses include investment income received such as interest payments but exclude dividend income. Dividend income is separately recognised in the consolidated income statement when the right to receive payment is established.
Interest income on financial instruments measured at amortised cost is separately recognised in the consolidated income statement using the effective interest rate method. The effective interest rate method allocates interest and other finance costs at a constant rate over the expected life of the financial instrument, or where appropriate a shorter period, by using as the interest rate the rate that exactly discounts the future cash receipts over the expected life to the net carrying value of the instrument.
Prior to the implementation of IFRS 9, interest income on debt securities classified as available-for-sale under IAS 39 was also separately recognised in the consolidated income statement using the effective interest rate method. These debt securities are measured at amortised cost under IFRS 9. Refer Basis of preparation for further details.
Investment return from discontinued operations for the year ended 31 December 2018 included rental income from investment property (refer Note 11) which was recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives granted such as rent free periods were recognised as an integral part of the total rental income and were spread over the term of the lease.
�
�
| � | � | 2019 | 2018 |
| � | � | �m | �m |
| Interest and similar income | � | � | � |
| Cash and cash equivalents | � | 18 | 18 |
| Debt securities measured at amortised cost | � | 10 | - |
| Available-for-sale debt securities | � | - | 11 |
| � | � | 28 | 29 |
| Gains on financial instruments at fair value through profit or loss | � | � | � |
| Equity securities and interests in pooled investment funds (other than dividend income) | � | 365 | (193) |
| Debt securities | � | 21 | 2 |
| Derivative financial instruments | � | 1 | (8) |
| � | � | 387 | (199) |
| Dividend income | � | 52 | 49 |
| Gains/(losses) on financial instruments at amortised cost | � | 1 | - |
| Foreign exchange (losses)/gains on financial instruments other than those at fair value through profit or loss | � | (4) | 5 |
| Investment return from continuing operations | � | 464 | (116) |
Included in investment return from continuing operations of �464m (2018: (�116m)) is �392m (2018: (�139m)) in relation to unit linked business including �107m (2018: (�65m)) relating to operations held for sale. Investment returns relating to unit linked business are for the account of policyholders and are excluded from adjusted operating income as they have an equal and opposite effect on IFRS income and IFRS expenses in the consolidated income statement.
Revenue from contracts with customers is recognised as services are provided i.e. as the performance obligation is satisfied and it is almost certain that the revenue will be received. Where revenue is received in advance (front-end fees), this income is deferred and recognised as a deferred income liability until the services have been provided (refer Note 35).
Revenue from contracts with customers excludes premium written and earned on insurance and participating investment contracts (Refer Note 31).
(a) ��� Revenue from contracts with customers
The following table provides a breakdown of total revenue from contracts with customers:
| � | 2019 | 2018 |
| � | �m | �m |
| Asset management | � | � |
| Management fee income - Strategic insurance partners1 | 312 | 370 |
| Management fee income - Other clients1 | 1,122 | 1,372 |
| Performance fees | 37 | 9 |
| Revenue from contracts with customers for asset management | 1,471 | 1,751 |
| Fund platforms | � | � |
| Fee income | 204 | 173 |
| Other revenue from contracts with customers | 68 | 31 |
| Total revenue from contracts with customers from continuing operations | 1,743 | 1,955 |
1. In addition to revenues earned as a percentage of AUM, management fee income includes certain other revenues such as registration fees.
Through a number of its subsidiaries, the Group provides asset management services to its customers. This performance obligation is performed over time with the revenue recognised as the obligation is performed. The Group generally receives asset management fees based on the percentage of the assets under management. The percentage varies depending on the level and nature of assets under management. Asset management fees are either deducted from assets or invoiced. Deducted fees are generally calculated, recognised and collected on a daily basis. Other asset management fees are invoiced to the customer either monthly or quarterly with receivables recognised for unpaid invoices. The payment terms for invoiced revenue vary but are typically 30 days from receipt of invoice. Accrued income is recognised to account for income earned but not yet invoiced. There is also some use of performance fees. Performance fees are only recognised once it is highly probable that the revenue will be received.
Through a number of its subsidiaries, the Group offers customers access to fund platforms. The platforms give customers the ongoing functionality to manage and administer their investments. This performance obligation is performed over time with the revenue recognised as the obligation is performed. Customers pay a platform charge which is generally calculated as a percentage of their assets. The percentage varies depending on the level of assets on the specific platform. The main platform charges are calculated either daily or monthly and are collected and recognised monthly. The charges are collected directly from assets on the platform. There are no significant payment terms.
Fee income from fund platforms includes revenue passed to the product provider and included below in other cost of sales.
The revenue from the contracts with customers is reported within the Asset management, platforms and wealth segment. The following table provides a reconciliation of Revenue from contracts with customers as presented in the consolidated income statement to fee based revenue, as presented in the analysis of adjusted profit before tax for the Asset management, platforms and wealth segment.
| � | 2019 | 2018 |
| � | �m | �m |
| Revenue from contracts with customers from continuing operations as presented in the consolidated income statement | 1,743 | 1,955 |
| Presentation differences | � | � |
| Commission expenses | (89) | (105) |
| Other cost of sales | (26) | (8) |
| Other differences | 6 | 26 |
| Fee based revenue from continuing operations as presented in the Asset management, platforms and wealth segment | 1,634 | 1,868 |
Commission expenses and other costs of sales are netted against fee based revenue in the segment reporting but are included within expenses in the consolidated income statement. Other presentation differences relate to amounts presented in a different income line item of the consolidated income statement and charges made to third parties for expenses incurred by the Group.
The Group has recognised the following receivables, assets and liabilities in relation to contracts with customers.
| � | � | 31 December 2019 | 31 December 2018 | 1 January |
| � | Notes | �m | �m | �m |
| Amount receivable from contracts with customers | 21 | 130 | 112 | 104 |
| Accrued income from contracts with customers | 21 | 227 | 214 | 249 |
| Cost of obtaining customer contracts | 15 | 60 | 80 | 11 |
| Deferred acquisition costs | 22 | 6 | 6 | 356 |
| Total contract receivables and assets | � | 423 | 412 | 720 |
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| � | � | 31 December 2019 | 31 December 2018 | 1 January |
| � | Notes | �m | �m | �m |
| Deferred Income | 35 | 67 | 75 | 157 |
| Accruals | 36 | 3 | 5 | 6 |
| Total contract liabilities | � | 70 | 80 | 163 |
The Group's other income for the year ended 31 December 2019 of �178m (2018: �34m) includes �140m (2018: �nil) in relation to the settlement of arbitration with Lloyds Banking Group/ Scottish Widows (LBG).
On 24 July 2019, the Group announced that it had agreed a final settlement in relation to the arbitration proceedings between the parties concerning LBG's attempt to terminate investment management arrangements under which assets were managed by members of the Group for LBG entities.
In its decision of March 2019, the arbitral tribunal found that LBG was not entitled to terminate these investment management contracts. The Group had continued to manage approximately �104bn (as at 30 June 2019) of assets under management (AUM) for LBG entities during the period of the dispute.
Under the terms of the settlement:
�� The Group will continue to manage approximately one third of the total AUM (circa �35bn as at 30 June 2019) on behalf of LBG entities until at least April 2022 (the end of the initial term under the original investment management agreements) subject to applicable investment management arrangements. As at 30 June 2019, this AUM comprised circa �30bn in passive portfolios as well as �5bn in real estate funds.
�� Approximately two thirds of the total AUM (the transferring AUM) will be transferred to third party managers appointed by LBG through a series of planned tranches over nine months from 24 July 2019. During this period, the Group will continue to be remunerated for its services in relation to the transferring AUM.
�� In addition, the Group received an upfront payment of �140m from LBG as final settlement to compensate for loss of profit in relation to the transferring AUM
| � | � | 2019 | 20182 |
| � | Notes | �m | �m |
| Interest expense | � | 5 | 5 |
| Commission expenses | � | 89 | 105 |
| Other cost of sales | � | 26 | 8 |
| Staff costs and other employee-related costs | � | 646 | 673 |
| Operating lease rentals | � | 2 | 50 |
| Auditors' remuneration | 8 | 8 | 8 |
| Depreciation of property, plant and equipment | 17 | 47 | 16 |
| Amortisation of intangible assets | 15 | 184 | 207 |
| Impairment losses on intangible assets1 | 15 | 2 | 46 |
| Impairment losses on disposal group classified as held for sale | 23 | - | 2 |
| Impairment losses on property right-of-use assets | 17 | 16 | - |
| Other | � | 626 | 626 |
| � | � | 1,651 | 1,746 |
| Acquisition costs deferred during the year | � | (2) | (2) |
| Amortisation of deferred acquisition costs | � | 2 | 2 |
| Total other administrative expenses from continuing operations | � | 1,651 | 1,746 |
1. Impairment losses on intangible assets excludes a goodwill impairment charge of �1,569m (2018: �880m) recognised separately as an individual item on the consolidated income statement. Refer Note 15.
2. The Group has initially applied IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated and the cumulative effect of initially applying these standards is recognised in retained earnings at the date of initial application. Refer Basis of preparation.
In addition to interest expense of �5m (2018: �5m) set out above, interest expense of �29m (2018: �45m) was incurred in respect of subordinated liabilities and the related cash flow hedge (refer Note 20) and interest expense of �7m (2018: �nil) in respect of lease liabilities which are included in Finance costs in the consolidated income statement.
7.���� Staff costs and other employee-related costs
The following table shows the staff costs and other employee-related costs aggregated for both continuing and discontinued operations.
| � | � | 2019 | 2018 |
| � | Notes | �m | �m |
| The aggregate remuneration payable in respect of employees: | � | � | � |
| Wages and salaries | � | 531 | 655 |
| Social security costs | � | 63 | 68 |
| Pension costs | � | � | � |
| Defined benefit plans | � | (40) | (36) |
| Defined contribution plans | � | 58 | 71 |
| Employee share-based payments and deferred fund awards | 44 | 34 | 14 |
| Total staff costs and other employee-related costs | � | 646 | 772 |
�
| � | 2019 | 2018 |
| The average number of staff employed by the Group during the year: | � | � |
| Asset management, platforms and wealth | 6,268 | 6,360 |
| UK and European insurance (classified as discontinued operations)1 | - | 1,959 |
| Total average number of staff employed | 6,268 | 8,319 |
1. Includes all staff employed by the UK and European insurance business until 31 August 2018.
Information in respect of Directors' remuneration is provided in the Directors' remuneration report on pages 78 to 104.
8.���� Auditors' remuneration
The following table shows the auditors' remuneration aggregated for both continuing and discontinued operations.
| � | 2019 | 2018 |
| � | �m | �m |
| Fees payable to the Company's auditors for the audit of the Company's individual and consolidated financial statements | 1.1 | 1.1 |
| Fees payable to the Company's auditors for other services | � | � |
| The audit of the Company's consolidated subsidiaries pursuant to legislation | 3.7 | 3.6 |
| Audit related assurance services | 2.1 | 1.7 |
| Total audit and audit related assurance fees | 6.9 | 6.4 |
| Other assurance services | 1.2 | 1.6 |
| Other non-audit fee services | - | 0.2 |
| Total non-audit fees | 1.2 | 1.8 |
| Total auditors' remuneration | 8.1 | 8.2 |
Auditors' remuneration disclosed above excludes audit and non-audit fees payable to the Group's principal auditor by Group managed funds which are not controlled by the Group, and therefore not consolidated in the Group's financial statements.
During the year ended 31 December 2019 no audit fees were payable in respect of defined benefit plans to the Group's principal auditor (2018: �nil).
For more information on non-audit services, refer to the Audit Committee report in Section 3 - Corporate governance statement.
Total restructuring and corporate transaction expenses incurred from continuing operations during the year were �374m (2018: �231m). The 2019 expenses mainly relate to merger integration, implementing our global simplified operating model, separation costs following the sale of the UK and European insurance business and �49m in respect of the repurchase of subordinated liabilities (refer Note 33). Deal costs relating to acquisitions included in restructuring and corporate transaction expenses for the year ended 31 December 2019 were �2m (2018: �1m).
For the purposes of determining adjusted profit from continuing operations, an additional �33m was recognised in 2019 relating to our share of asset management joint venture and insurance associate restructuring and corporate transaction expenses (2018: �8m).
Restructuring and corporate transaction expenses of �264m were used to determine adjusted profit before tax from discontinued operations in 2018. These expenses mainly related to the sale of the UK and European insurance business discussed in Note 1. This included separation costs of �53m and �198m in relation to the redemption of Tier 1 subordinated bonds. A further �80m of separation costs was included in the gain on sale relating to contractual obligations arising from the transaction.
The Group's tax expense comprises both current tax and deferred tax expense.
Current tax is the expected tax payable on taxable profit for the year.
A deferred tax asset represents a tax deduction that is expected to arise in a future period. It is only recognised to the extent that there is expected to be future taxable profit or investment return to offset the tax deduction. A deferred tax liability represents taxes which will become payable in a future period as a result of a current or prior year transaction. Where local tax law allows, deferred tax assets and liabilities are netted off on the statement of financial position. The tax rates used to determine deferred tax are those enacted or substantively enacted at the reporting date.
Deferred tax is recognised on temporary differences arising from investments in subsidiaries and associates unless the timing of the reversal is in our control and it is expected that the temporary difference will not reverse in the foreseeable future.
Current tax and deferred tax is recognised in the consolidated income statement except when it relates to items recognised in other comprehensive income or directly in equity, in which case it is credited or charged to other comprehensive income or directly to equity respectively.
(a)(i)� Current year tax expense
| � | � | 2019 | 2018 |
| � | � | �m | �m |
| Current tax: | � | � | � |
| UK | � | 6 | 20 |
| Overseas | � | 49 | 44 |
| Adjustment to tax expense in respect of prior years | � | (1) | 3 |
| Total current tax attributable to continuing operations | � | 54 | 67 |
| | | | � |
| Deferred tax: | � | � | � |
| Deferred tax credit arising from the current year | � | (26) | (12) |
| Adjustment to deferred tax in respect of prior years | � | - | (12) |
| Total deferred tax attributable to continuing operations | � | (26) | (24) |
| Total tax expense attributable to continuing operations | � | 28 | 43 |
The share of associates' and joint ventures' tax expense is �8m (2018: �40m) and is included in profit before tax in the consolidated income statement in 'Share of profit from associates and joint ventures'.
In 2019 unrecognised tax losses from previous years were used to reduce the current tax expense by �nil (2018: �4m). Unrecognised tax losses and timing differences were used to reduce the deferred tax expense by �1m (2018: �nil).
Current tax recoverable and current tax liabilities at 31 December 2019 were �9m (2018: �6m) and �19m (2018: �22m) respectively. In addition current tax recoverable and current tax liabilities in relation to unit linked business were �nil (2018: �nil) and �2m (2018: �1m) respectively. Current tax assets and liabilities at 31 December 2019 and 31 December 2018 are expected to be recoverable or payable in less than 12 months.
(a)(ii)����� Reconciliation of tax expense
| � | � | 2019 | 2018 |
| � | � | �m | �m |
| Profit/(Loss) before tax from continuing operations | � | 243 | (787) |
| Tax at 19% (2018: 19%) | � | 46 | (150) |
| Permanent differences | � | (4) | 21 |
| Tax effect of accounting for share of profit from associates and joint ventures | � | (15) | (25) |
| Impairment losses on intangible assets | � | 298 | 171 |
| (Reversal of)/impairment of investment in associate | � | (46) | 43 |
| Different tax rates | � | (15) | (16) |
| Adjustment to current tax expense in respect of prior years | � | (1) | 3 |
| Recognition of previously unrecognised tax credit | � | (1) | (4) |
| Deferred tax not recognised | � | 13 | 10 |
| Adjustment to deferred tax expense in respect of prior years | � | - | (12) |
| Write down of deferred tax asset | � | 6 | 4 |
| Non-taxable profit on sale of subsidiaries and associates | � | (254) | (2) |
| Other | � | 1 | - |
| Total tax expense from continuing operations for the year | � | 28 | 43 |
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The standard UK corporation tax rate for the accounting period is 19%. As at 31 December 2019 the standard UK corporation tax rate is due to fall to 17% from 1 April 2020 under legislation which had been substantively enacted at the reporting date. This change has, therefore, been taken into account in the calculation of UK deferred tax balances. The UK government has indicated that it will legislate to repeal the reduction in the standard UK corporation tax rate and maintain it at 19%.
The accounting for certain items in the consolidated income statement results in certain reconciling items in the table above, the values of which vary from year to year depending upon the underlying accounting values:
Details of significant reconciling items are as follows:
�� Permanent differences in 2019 include expenses and accounting losses which are not tax deductible for tax purposes. It also includes the difference between the tax basis and accounting value for employee share-based awards and non-deductible contributions to the Irish pension scheme.
�� The share of profits from associates and joint ventures is presented net of tax in the consolidated income statement and therefore gives a reconciling item
�� The impairment of the goodwill intangible asset is not tax deductible
�� The reversal of the impairment of the investment in associates is not subject to tax
�� Different tax rates will vary according to the level of profit subject to tax at rates different from the UK corporation tax rate (such as in our Asian business) and in 2019 mainly comprises a non-recurring reconciling item from the gain on sale made from the sale of shares in our associate HDFC Asset Management. This arose because the Indian rate of tax on long-term capital gains is less than the UK corporate tax rate.
�� The ability to value tax losses and other tax assets also affects the tax charge. We have not recognised a deferred tax asset of �13m on tax losses arising in the year due to uncertainty as to when these losses will be utilised and have written off previously recognised deferred tax assets of �6m due to uncertainty of recovery.
�� The sales of shares in HDFC Life did not give rise to taxable gains due to the effect of reliefs available under India's tax legislation and its international tax treaties
The Group operates in a large number of territories and during the normal course of business will be subject to audit or enquiry by local tax authorities. At any point in time the Group will also be engaged in commercial transactions the tax outcome of which may be uncertain due to their complexity or uncertain application of tax law. Tax provisions, therefore, are subjective by their nature and require management judgement based on the interpretation of legislation, management experience and professional advice. As such, this may result in the Group recognising provisions for uncertain tax positions. Management will provide for uncertain tax positions where they judge that it is probable there will be a future outflow of economic benefits from the Group to settle the obligation. In assessing uncertain tax positions management considers each issue on its own merits using their judgement as to the estimate of the most likely outcome. When making estimates, management considers all available evidence. This may include forecasts of future profitability, the frequency and severity of any losses, and statutory carry forward and carry back provisions as well as management experience of tax attributes expiring without use. Where the final outcome differs from the amount provided this difference will impact the tax charge in future periods. Management re-assesses provisions at each reporting date based upon latest available information.
Tax relating to components of other comprehensive income is as follows:
| � | � | 2019 | 2018 |
| � | � | �m | �m |
| Tax relating to defined benefit pension plan deficits | � | - | - |
| Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss | � | - | - |
| Deferred tax on net change in financial assets designated as available-for-sale1 | � | - | (1) |
| Tax relating to fair value losses recognised on cash flow hedges | � | (2) | 9 |
| Tax relating to cash flow hedge losses transferred to consolidated income statement | � | 4 | (7) |
| Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss | � | 2 | 1 |
| Tax relating to other comprehensive income from continuing operations | � | 2 | 1 |
1. Debt securities that were previously held at fair value as available-for-sale under IAS 39 are held under IFRS 9 at amortised cost from 1 January 2019.
All of the amounts presented above are in respect of equity holders of Standard Life Aberdeen plc.
(c)���� Tax relating to items taken directly to equity
| � | � | 2019 | 2018 |
| � | Notes | �m | �m |
| Tax credit relating to coupons payable on perpetual notes classified as equity | � | - | (6) |
| Tax relating to items taken directly to equity | � | - | (6) |
(d)(i) Movements in net deferred tax liabilities
| � | � | 2019 | 2018 |
| � | � | �m | �m |
| Opening balance carried forward | � | (39) | (302) |
| Effect of change in accounting policy to IFRS 91 | � | 1 | - |
| Effect of change in accounting policy to IFRS 161 | � | 1 | - |
| Opening balance at 1 January | � | (37) | (302) |
| Reclassified as held for sale during the year | � | - | 224 |
| Acquired through business combinations | � | (2) | (1) |
| Amounts credited to the consolidated income statement | � | 26 | 44 |
| Amounts credited directly to equity in respect of employee share-based payments | � | - | (2) |
| Tax on available-for-sale assets | � | - | 1 |
| Tax on cash flow hedge | � | (2) | (2) |
| Other | � | 2 | (1) |
| Net deferred tax liability at 31 December | � | (13) | (39) |
1. The Group has initially applied IFRS 9 and IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated. Refer Basis of preparation.
(d)(ii) ���� Analysis of recognised deferred tax
| � | � | 2019 | 2018 |
| � | � | �m | �m |
| Deferred tax assets comprise: | � | � | � |
| Losses carried forward | � | 40 | 27 |
| Depreciable assets | � | 12 | 9 |
| Employee benefits | � | 22 | 24 |
| Provisions and other temporary timing differences | � | 1 | 2 |
| Gross deferred tax assets | � | 75 | 62 |
| Less: Offset against deferred tax liabilities | � | (1) | (1) |
| Deferred tax assets | � | 74 | 61 |
| Deferred tax liabilities comprise: | � | � | � |
| Unrealised gains on investments | � | 2 | 3 |
| Employee benefits | � | 3 | 2 |
| Temporary timing differences | � | 2 | 1 |
| Deferred tax on intangible assets acquired through business combinations | � | 78 | 92 |
| Other | � | 3 | 3 |
| Gross deferred tax liabilities | � | 88 | 101 |
| Less: Offset against deferred tax assets | � | (1) | (1) |
| Deferred tax liabilities | � | 87 | 100 |
| Net deferred tax liability at 31 December | � | (13) | (39) |
A deferred tax asset of �40m (2018: �27m) for the Group has been recognised in respect of losses of various subsidiaries. Deferred tax assets are recognised to the extent that it is probable that the losses will be capable of being offset against taxable profits and gains in future periods. The value attributed to them takes into account the certainty or otherwise of their recoverability. Their recoverability is measured against the reversal of deferred tax liabilities and anticipated taxable profits and gains based on business plans.
Deferred tax assets and liabilities are expected to be recovered or settled after more than 12 months.
Due to uncertainty regarding recoverability, deferred tax assets have not been recognised in respect of the following:
�� Cumulative losses carried forward of �80m in the UK and �301m overseas (2018: �74m, �268m respectively)
Of these unrecognised deferred tax assets, certain losses have expiry dates as follows:
�� US losses of �164m with expiry dates between 2027-2037 (2018: �169m)
�� Other overseas losses of �19m with expiry dates before 2024 (2018: �11m)
�� Other overseas losses of �9m with expiry dates between 2025 and 2029 (2018: �3m)
The Group classifies as discontinued operations areas of business which have been disposed of or are classified as held for sale at the year end and which either, represent a separate major line of business or geographical area, or are part of a plan to dispose of one. The results of discontinued operations are shown separately on the face of the consolidated income statement from the results of the remaining (continuing) parts of the Group's business.
Discontinued operations relate solely to the UK and European insurance business. The sale completed on 31 August 2018 (refer Note 1).
For the year ended 31 December 2019, the profit from discontinued operations of �56m reflects a change in the value of the contingent consideration relating to the sale of the UK and European insurance business to Phoenix. For the year ended 31 December 2019, net cash flows from discontinued operations of �63m are included in net cash flows from investing activities.
The consolidated income statement, other comprehensive income and cash flows from discontinued operations for the year ended 31 December 2018 are shown below:
| � | � | � | 2018 |
| Consolidated income statement | Notes | � | �m |
| Income | � | � | � |
| Investment return | � | � | 2,350 |
| Revenue from contracts with customers | � | � | 117 |
| Insurance and participating investment contract premium income | � | � | 1,256 |
| Profit on disposal of subsidiaries | � | � | 1,780 |
| Other income | � | � | 10 |
| Total income from discontinued operations | � | � | 5,513 |
| � | � | � | � |
| Expenses | � | � | � |
| Insurance and participating investment contract claims and change in liabilities | � | � | 1,657 |
| Change in non-participating investment contract liabilities | � | � | 1,470 |
| Administrative expenses | � | � | � |
| Restructuring and corporate transaction expenses | 9 | � | 264 |
| Other administrative expenses | � | � | 339 |
| Total administrative expenses | � | � | 603 |
| Provision for annuity sales practices | � | � | - |
| Change in liability for third party interest in consolidated funds | � | � | (32) |
| Finance costs | � | � | 35 |
| Total expenses from discontinued operations | � | � | 3,733 |
| � | � | � | � |
| Profit before tax from discontinued operations | � | � | 1,780 |
| � | � | � | � |
| Tax expense attributable to policyholders' returns | � | � | 46 |
| � | � | � | � |
| Profit before tax expense attributable to equity holders | � | � | 1,734 |
| � | � | � | � |
| Total tax expense | � | � | 82 |
| Less: Tax attributable to policyholders' returns | � | � | (46) |
| Tax expense attributable to equity holders | � | � | 36 |
| Profit for the period from discontinued operations | � | � | 1,698 |
Intercompany income and expenses that will continue post completion are eliminated in discontinued operations and those that will not continue post completion are eliminated in continuing operations. Revenue from contracts with customers is shown net of elimination of intra-group revenue which will continue post completion.
The Group provides additional disclosure in relation to the total tax expense for discontinued operations. Certain products are subject to tax on policyholders' investment returns. This tax 'policyholder tax', is accounted for as an element of income tax. To make the tax expense disclosures more meaningful, policyholder tax and tax payable on equity holder's profit are disclosed separately. The policyholder tax expense is the amount payable in the period plus the movement of amounts expected to be payable in future periods by policyholders on their investment return. The remainder of the tax expense is attributed to equity holders as tax payable on equity holders' profit.
| � | � | � | 2018 |
| Other comprehensive income | � | � | �m |
| Items that will not be reclassified subsequently to profit or loss: | � | � | � |
| Revaluation of owner occupied property | � | � | 2 |
| Total items that will not be reclassified subsequently to profit or loss | � | � | 2 |
| � | � | � | � |
| Items that may be reclassified subsequently to profit or loss: | � | � | � |
| Exchange differences on translating foreign operations | � | � | 3 |
| Change in unallocated divisible surplus | � | � | (5) |
| Total items that may be reclassified subsequently to profit or loss | � | � | (2) |
| Items that were transferred to profit or loss on disposal of subsidiaries: | � | � | � |
| Release of foreign currency translation reserve | � | � | (43) |
| Total items that were transferred to profit or loss on disposal of subsidiaries | � | � | (43) |
| Other comprehensive income for the period from discontinued operations | � | � | (43) |
�
| � | � | 20181 |
| Cash flows | � | �m |
| Net cash flows from operating activities | � | (519) |
| Net cash flows from financing activities | � | (36) |
| Net cash flows from investing activities | � | (7,537) |
| Total net cash flows | � | (8,092) |
1. Restated. The Group has changed the classification of certain cash flows following the disposal of the UK and European insurance business in 2018. The reason for the changes is to make the financial statements more relevant to users as it is more consistent with asset management peers. Refer Basis of preparation (a)(iii).
The net cash flows from investing activities for the year ended 31 December 2018 did not include cash consideration received from the disposal of the UK and European insurance business of �1,971m but included the cash and cash equivalents of �7,472m at the date of disposal.
Basic earnings per share is calculated by dividing profit attributable to ordinary equity holders by the weighted average number of ordinary shares in issue during the year excluding shares owned by the employee trusts that have not vested unconditionally to employees.
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue during the year to assume the conversion of all dilutive potential ordinary shares, such as share options granted to employees.
Adjusted earnings per share is calculated on adjusted profit after tax attributable to ordinary equity holders of the Company i.e. adjusted profit net of dividends paid on preference shares.
Basic earnings per share was 11.2p (2018: 29.1p) and diluted earnings per share was 11.1p (2018: 29.1p) for the year ended 31 December 2019. The following table shows details of basic, diluted and adjusted earnings per share.
| | 2019 | 2018 | ||||
| | Continuing operations | Discontinued operations | Total | Continuing operations | Discontinued operations | Total |
| | �m | �m | �m | �m | �m | �m |
| Adjusted profit before tax | 584 | - | 584 | 650 | 210 | 860 |
| Tax on adjusted profit | (69) | - | (69) | (95) | (77) | (172) |
| Share of associates' and joint ventures' tax expense | (46) | - | (46) | (43) | - | (43) |
| Adjusted profit after tax | 469 | - | 469 | 512 | 133 | 645 |
| Dividend paid on preference shares | (5) | - | (5) | (5) | - | (5) |
| Adjusted profit after tax attributable to equity shareholders of the Company | 464 | - | 464 | 507 | 133 | 640 |
| Adjusting items | (333) | 56 | (277) | (1,397) | 1,519 | 122 |
| Tax on adjusting items | 41 | - | 41 | 52 | 41 | 93 |
| Share of associates' and joint ventures' tax expense on adjusting items | 38 | - | 38 | 3 | - | 3 |
| Adjustment for perpetual debt instruments classified as equity net of tax | - | - | - | - | (28) | (28) |
| Profit attributable to equity shareholders of the Company | 210 | 56 | 266 | (835) | 1,665 | 830 |
| � | | | ||||
| � | Millions | Millions | ||||
| Weighted average number of ordinary shares outstanding | | | 2,374 | � | � | 2,848 |
| Dilutive effect of share options and awards | | | 32 | � | � | 29 |
| Weighted average number of diluted ordinary shares outstanding | | | 2,406 | � | � | 2,877 |
| � | | | | | | |
| � | Pence | Pence | Pence | Pence | Pence | Pence |
| Basic earnings per share | 8.9 | 2.3 | 11.2 | (29.3) | 58.4 | 29.1 |
| Diluted earnings per share | 8.8 | 2.3 | 11.1 | (29.3) | 58.4 | 29.1 |
| Adjusted earnings per share | 19.5 | - | 19.5 | 17.8 | 4.7 | 22.5 |
| Adjusted diluted earnings per share | 19.3 | - | 19.3 | 17.8 | 4.7 | 22.5 |
Details of the share options and awards which may be treated as dilutive are provided in Note 44. In accordance with IAS 33, no share options and awards were treated as dilutive for the year ended 31 December 2018 due to the loss attributable to equity holders of the Company from continuing operations in the year. This results in the adjusted diluted earnings per share from continuing operations and the total diluted earnings per share including discontinued operations being calculated using a weighted average number of ordinary shares of 2,848 million.
As discussed in Note 26 the Company undertook a share consolidation during the year ended 31 December 2018 followed by a return of capital to shareholders. In accordance with IAS 33, earnings per share has not been restated following the share consolidation as there was an overall corresponding change in resources due to the redemption of the B shares. As a result of the share consolidation and share buyback (refer Note 26), earnings per share from continuing operations for the year ended 31 December 2019 and the year ended 31 December 2018 are not directly comparable.
Adjusted profit before tax is the Group's key alternative performance measure. Adjusted profit excludes the impact of the following items:
�� Restructuring costs and corporate transaction expenses. Restructuring includes the impact of major regulatory change.
�� Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts
�� Profit or loss arising on the disposal of a subsidiary, joint venture or associate
�� Fair value movements in contingent consideration
�� Items which are one-off and, due to their size or nature, are not indicative of the long-term operating performance of the Group
Adjusted profit also excludes impacts arising from investment return variances and economic assumption changes in the Group's insurance entities. It is calculated based on expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movements in equity holder liabilities. Impacts arising from the difference between the expected return and actual return on investments, and the corresponding impact on equity holder liabilities except where they are directly related to a significant management action, are excluded from adjusted profit and are presented within profit before tax. The impact of certain changes in economic assumptions is also excluded from adjusted profit and is presented within profit before tax.
Dividends payable on preference shares classified as non-controlling interests are excluded from adjusted profit in line with the treatment of ordinary shares. Similarly to preference shares, coupons paid on perpetual debt instruments classified as equity for which interest is only accounted for when paid is excluded from adjusted profit. This includes our share of interest payable on Tier 1 debt instruments held by associates. Coupons payable on perpetual debt instruments classified as equity for which interest is accrued are included in adjusted profit before tax.
Wholly owned insurance entities
The Group's UK and European insurance business was sold during the year ended 31 December 2018 and was classified as discontinued operations in 2018. The Group's other wholly owned insurance business, SL Asia, is classified as held for sale (refer Note 23).
The components of IFRS profit attributable to market movements and interest rate changes which give rise to variances between actual and expected returns on investments backing equity holder funds, with consistent allowance for the corresponding expected movement in equity holder liabilities, as well as the impact of changes in economic assumptions on equity holder liabilities, are excluded from adjusted profit for the Group's wholly owned insurance entities. Investments backing equity holder funds include investments backing annuities and subordinated debt, and investments from surplus capital in insurance companies.
For UK and European insurance annuities this meant that all fluctuations in liabilities and the assets backing those liabilities due to market interest rate (including credit risk) movements over the year were excluded from adjusted profit.
The expected rates of return for debt securities and equity securities were determined separately for the UK and European insurance business. The expected rates of return for equity securities were determined based on the gilt spot rates of an appropriate duration plus an equity risk premium (2018: 3%). Investments in pooled investment funds which target equity returns over the longer term, including absolute return funds, also used an expected rate of return determined based on the gilt spot rates of an appropriate duration plus a risk premium (2018: 3%).
In respect of debt securities at fair value through profit or loss, the expected rate of return was determined based on the average prospective yields for the debt securities actually held.
For UK and European insurance business, the expected rates of return used for both the assets backing subordinated liabilities and the subordinated liabilities themselves included a discount for expected credit defaults. This meant that the interest expense included in adjusted profit for subordinated liabilities was after deducting a margin for own credit risk. Additionally, the effect of the accounting mismatch, where subordinated liabilities are measured at amortised cost and certain assets backing the liabilities are measured at fair value, was also excluded from adjusted profit.
Gains and losses on foreign exchange are deemed to represent investment return variances and economic assumption changes and thus are excluded from adjusted profit.
Investment return variances and economic assumption changes for the year ended 31 December 2018 related principally to the impact of interest rate changes on UK annuity liabilities and the assets backing those liabilities.
Where associates and joint ventures have a policy for determining investment return variances and economic assumption changes, the Group uses the policy of the associate or joint venture for including their results in the Group's adjusted profit. This currently applies only to the Group's investment in Phoenix. The Phoenix policy is similar to that used by the wholly owned insurance entities as described above. The main differences are as follows:
�� Phoenix investment return variances, including those relating to owners' funds, include gains and losses on derivatives held to hedge life company Solvency II surplus positions. Such hedging positions were not previously held outside with profit funds by wholly owned insurance entities.
�� Phoenix recognise charges on unit linked business based on expected investment returns, whereas wholly owned insurance entities use actual investment returns
�� Phoenix include the impact of strategic asset allocation activities, such as investment in higher yielding illiquid assets, as investment variances. Wholly owned subsidiaries treat these within adjusted profit where they are directly related to a significant management action.
In the reconciliation of consolidated adjusted profit before tax to profit for the period the other adjusting item sub-total includes �140m (2018: �nil) relating to the settlement of arbitration with LBG. Refer Note 5. Also included is (�16m) (2018: �nil) in relation to the impairment of property right-of-use assets, �12m (2018: �nil) in relation to the alignment of the reporting period of HDFC Asset Management and �61m (2018: �3m) net fair value movements in contingent consideration. In 2019, �56m of the �61m fair value gain is in relation to discontinued operations.
The other adjusting item in 2018 relating to discontinued operations included a held for sale accounting adjustment relating to the amortisation of intangible assets (primarily deferred acquisition costs) and depreciation of tangible assets of �44m. Following the classification of the UK and European insurance business as held for sale on the announcement of the proposed transaction on 23 February 2018, no amortisation or depreciation was recognised. This increase to profit has been recognised as an adjusting item.
Dividends are distributions of profit to holders of Standard Life Aberdeen plc's share capital and as a result are recognised as a deduction in equity. Final dividends are announced with the Annual report and accounts and are recognised when they have been approved by shareholders. Interim dividends are announced with the Half year results and are recognised when they are paid.
�
| � � | 2019 | 2018 | ||
| � | Pence per share | �m1 | Pence per share | �m |
| Prior year's final dividend paid | 14.30 | 345 | 14.30 | 420 |
| Interim dividend paid | 7.30 | 173 | 7.30 | 214 |
| Total dividends paid on ordinary shares | � | 518 | � | 634 |
| | � | � | � | � |
| Current year final recommended dividend | 14.30 | 322 | 14.30 | 345 |
1. Estimated for current year final recommended dividend.
The final recommended dividend will be paid on 19 May 2020 to shareholders on the Company's register as at 3 April 2020, subject to approval at the 2020 Annual General Meeting. After the current year final recommended dividend, the total dividend in respect of the year ended 31 December 2019 is 21.60p (2018: 21.60p).
During the year ended 31 December 2018, in addition to the dividend distribution on ordinary shares, the Group returned 33.99 pence per ordinary share (�1,000m) to shareholders through a B share scheme as discussed in Note 26.
Goodwill is created when the Group acquires a business and the consideration exceeds the fair value of the net assets acquired. In determining the net assets acquired in business combinations, intangible assets are recognised where they are separable or arise from contractual or legal rights. Intangible assets acquired by the Group through business combinations consist mainly of customer relationships, technology and brands. Any remaining value that cannot be identified as a separate intangible asset on acquisition forms part of goodwill.
In addition to intangible assets acquired through business combinations, the Group recognises as intangible assets software which has been developed internally and other purchased technology which is used in managing and executing our business. Costs to develop software internally are capitalised after the research phase and when it has been established that the project is technically feasible and the Group has both the intention and ability to use the completed asset.
Intangible assets are recognised at cost and amortisation is charged to the income statement over the length of time the Group expects to derive benefits from the asset. The allocation of the income statement charge to each reporting period is dependent on the expected pattern over which future benefits are expected to be derived. Where this pattern cannot be determined reliably the charge is allocated on a straight-line basis.
Goodwill is not charged to the income statement unless it becomes impaired.
The Group also recognises the cost of obtaining customer contracts (refer Note 4) as an intangible asset. For the cost of obtaining customer contracts, the intangible asset is amortised on the same basis as the transfer to the customer of the services to which the intangible asset relates.
�
�
| � | � | Acquired through business combinations | � | � | � | � | |||
| � | � | Goodwill | Brand | Customer relationships and investment management contracts | Technology | Internally developed software1 | Purchased software | Cost of obtaining customer contracts | Total |
| � | Notes | �m | �m | �m | �m | �m | �m | �m | �m |
| Gross amount | | | | | | | | | |
| At 1 January 2018 | | 3,442 | 93 | 982 | 74 | 403 | 66 | 11 | 5,071 |
| Reclassified as held for sale during the year | | (18) | - | - | (6) | (311) | (67) | - | (402) |
| Additions | | 14 | - | 37 | - | 29 | 4 | 79 | 163 |
| Disposals and adjustments | | - | - | - | (1) | - | 1 | - | - |
| Other | | - | - | - | - | - | - | 6 | 6 |
| At 31 December 2018 | | 3,438 | 93 | 1,019 | 67 | 121 | 4 | 96 | 4,838 |
| Additions | | 37 | - | 13 | - | 10 | 3 | 2 | 65 |
| Other | | - | - | (1) | - | - | (4) | (2) | (7) |
| At 31 December 2019 | | 3,475 | 93 | 1,031 | 67 | 131 | 3 | 96 | 4,896 |
| Accumulated amortisation and impairment | | | | | | | | | |
| At 1 January 2018 | | (15) | (7) | (208) | (34) | (247) | (46) | - | (557) |
| Reclassified as held for sale during the year | | - | - | - | 6 | 204 | 46 | - | 256 |
| Amortisation charge for the year | | - | (19) | (143) | (13) | (16) | - | (16) | (207) |
| Impairment losses recognised2 | | (891) | - | (35) | - | - | - | - | (926) |
| At 31 December 2018 | | (906) | (26) | (386) | (41) | (59) | - | (16) | (1,434) |
| Amortisation charge for the year | 6 | - | (19) | (111) | (13) | (20) | (1) | (20) | (184) |
| Impairment losses recognised2 | 6 | (1,569) | - | - | (1) | (1) | - | - | (1,571) |
| At 31 December 2019 | | (2,475) | (45) | (497) | (55) | (80) | (1) | (36) | (3,189) |
| Carrying amount | | | | | | | | | |
| At 1 January 2018 | | 3,427 | 86 | 774 | 40 | 156 | 20 | 11 | 4,514 |
| At 31 December 2018 | | 2,532 | 67 | 633 | 26 | 62 | 4 | 80 | 3,404 |
| At 31 December 2019 | | 1,000 | 48 | 534 | 12 | 51 | 2 | 60 | 1,707 |
1��� Included in the internally developed software of �51m (2018: �62m) is �6m (2018: �13m) relating to intangible assets not yet ready for use.
2��� Included in the 2019 goodwill impairment losses recognised of �1,569m (2018: �891m) is an impairment of �1,569m (2018: �880m) recognised on asset management goodwill and shown separately in the consolidated income statement and �nil (2018: �11m) included in other administrative expenses in Note 6.
The Group's goodwill has been acquired through a series of business combinations. Of the Group's goodwill of �1,000m (2018: �2,532m) at 31 December 2019, �915m (2018: �2,483m) is attributed to the asset management group of cash-generating units, which comprises the Group's asset management business excluding HDFC Asset Management, in the Asset management, platforms and wealth segment. The remaining goodwill of �85m (2018: �49m) is attributable to a number of smaller cash-generating units in the Asset management, platforms and wealth segment.
On the acquisition of AAM PLC in 2017, we identified intangible assets in relation to customer relationships, brand and technology as being separable from goodwill. Identification and valuation of intangible assets acquired in business combinations is a key judgement.
Goodwill of �3,209m was attributed to the asset management group of cash-generating units in relation to the acquisition of AAM PLC in 2017. In attributing the goodwill relating to the acquisition of AAM PLC to a group of cash-generating units we considered the existing cash-generating units which are expected to benefit from the synergies from the combination. As the benefit was expected to arise across Aberdeen Standard Investments (a combination of AAM PLC and Standard Life Investments now managed and reported together within the Asset management, platforms and wealth segment) we judged it was appropriate to allocate goodwill to this asset management group of cash-generating units. This is the lowest level at which goodwill is monitored for internal management purposes.
The customer relationships acquired through AAM PLC were grouped where the customer groups have similar economic characteristics and similar useful economic lives. This gave rise to three separate intangible assets which we have termed Lloyds Banking Group, open ended funds, and segregated and similar.
In relation to the open ended funds we considered that it was most appropriate to recognise an intangible asset relating to customer relationships between AAM PLC and open ended fund customers, rather than an intangible asset relating to investment management agreements between AAM PLC and AAM PLC's open ended funds. Our judgement was that the value associated with the open ended fund assets under management was predominantly derived from the underlying customer relationships, taking into account that a significant proportion of these assets under management are from institutional clients.
The description of the three separate intangible assets including their estimated useful life at the acquisition date of 14 August 2017 was as follows:
| Customer relationship intangible asset | Description | Useful life at acquisition date | Fair value on acquisition date | Carrying 2019 | Carrying 2018 |
| � | � | � | �m | �m | �m |
| Lloyds Banking Group | Customer relationship with Lloyds Banking Group, including Scottish Widows Group. | 4 years | 78 | - | 4 |
| Open ended funds | Separate vehicle group - open ended investment vehicles. | 11 years | 223 | 111 | 138 |
| Segregated and similar | All other vehicle groups dominated by segregated mandates which represent 75% of this group. | 12 years | 427 | 280 | 338 |
Measuring the fair value of intangible assets acquired in business combinations required further assumptions and judgements. Customer relationships were valued using discounted cash flow projections. The key assumptions in measuring the fair value of the customer relationships at the acquisition date were as follows:
�� Net attrition - net attrition represents the expected rate of outflows of assets under management net of inflows from existing customers. This assumption was primarily based on recent experience.
�� Market growth - a market growth adjustment was applied based on the asset class
�� Operating margin - this assumption was consistent with forecast margins and included the impact of synergies that would be expected by any market participant and impacted the Aberdeen customer relationship cash flows
�� Discount rate - this assumption was based on the internal rate of return (IRR) of the transaction and is consistent with a market participant discount rate
The above assumptions, and in particular the net attrition assumption, were also used to determine the useful economic life at the acquisition date of each asset used for amortisation. The reducing balance method of amortisation is considered appropriate for these intangibles, consistent with the attrition pattern on customer relationships which means that the economic benefits delivered from the existing customer base will reduce disproportionately over time.
There has been no change to the useful lives of the Open ended funds and Segregated and similar customer relationship intangible assets. Therefore the residual useful life of the Open ended funds customer relationship intangible asset is 8.6 years and the residual life of the Segregated and similar customer relationship intangible asset is 9.6 years.
Estimates and assumptions
The key estimates and assumptions in relation to intangible assets are:
�� Determination of the recoverable amount of goodwill and customer intangibles
�� Determination of useful lives
Goodwill is assessed for impairment at least annually by comparing the recoverable amount of each cash-generating unit to which goodwill has been allocated with its carrying value.
For all other intangible assets, an assessment is made at each reporting date as to whether there is an indication that the intangible asset has become impaired. If any indication of impairment exists then the recoverable amount of the asset is determined. The recoverable amounts are defined as the higher of fair value less costs to sell and the value in use where the value in use is based on the present value of future cash flows. Where the carrying value exceeds the recoverable amount then the carrying value is written down to the recoverable amount.
In assessing value in use, expected future cash flows are discounted to their present value using a pre-tax discount rate. Judgement is required in assessing both the expected cash flows and an appropriate discount rate which is based on current market assessments of the time value of money and the risks associated with the asset.
The impairment of goodwill in 2019 of �1,569m relates to an impairment of asset management goodwill (2018: �880m), the group of cash-generating units for which is our asset management business excluding HDFC Asset Management. The impairment charge is in the Asset management, platforms and wealth segment. The impairment resulted from the impact of 2019 net outflows, market conditions and competitive pricing on future revenue projections. Further details relating to 2019 net outflows, fee based revenue and fee revenue yield are included in the Chief Financial Officer's overview in the Strategic report. The impairment has been included within administrative expenses in the consolidated income statement.
The recoverable amount of this group of cash-generating units, which is based on value in use (VIU) at 31 December 2019, is �2,603m (2018: �4,111m). This is also the carrying value at the year end. The key assumptions are discount rate, growth rate and forecast cash flows.
The VIU calculation uses a pre-tax discount rate of 11.9% (2018: 11.1%). This is based on the Group/ peer companies cost of equity adjusted for forecasting risk. The risk free rate used in determining the cost of equity is based on 20-year gilts. The increase in the discount rate compared to 2018 reflects increased risk in variation of cash flows due to inherently uncertain market and sector conditions, and takes into account that future revenue projections are now significantly lower than previously forecast and used in the prior year impairment review. The VIU calculation uses a terminal growth rate of 2.2% (2018: 2.2%) based on global GDP growth and inflation.
The VIU calculation used cash flow projections for three years to end 2022 which were based on management approved profit forecasts adjusted to market conditions at 31 December 2019, with the terminal growth rate used for subsequent years. Three years of projections is in line with our business planning process. Profits were adjusted to a cash flow basis, e.g. amortisation and depreciation removed.
Key assumptions used by management in setting the three-year profit forecasts are:
�� Revenue is modelled based on future levels of assets under management and fee revenue yields by asset class
�� Assets under management is modelled from future net flow assumptions and market movements. Net flow assumptions take into account past experience, the pipeline of sales, improved investment performance, the withdrawal of LBG assets and assume a reduction in institutional channel redemptions over the three-year forecast period. Market assumptions assume modest equity market growth, for example UK equity market growth of 3% per annum (excluding dividends).
�� Fee revenue yields reflect past experience adjusted to assume a decline relative to 2019 due to market pressure on margins
�� Cost forecasts are based on function level budgets, which are based on past experience adjusted to assume the delivery of planned expense savings over the three-year planning period
Where future expense savings relating to staff and property costs require provisions to be made in future years, IFRS does not permit these expense savings to be allowed for in VIU calculations. Consequently, for the purpose of the VIU calculation these expense savings (and the related implementation costs) have been added back to management's expectation of the level of future operating expenses.
The following table shows the consequence of illustrative downside sensitivities of key assumptions on the carrying amount of the goodwill balance at 31 December 2019. As the year end carrying value is the recoverable amount any downside sensitivity will lead to a further future impairment loss.
| � | � | � | Goodwill |
| � | � | � | �m |
| Reduction in terminal growth rate of 0.2% | � | � | 61 |
| Discount rate increased by 1% | � | � | 284 |
| Forecast cash flows reduced by 20% | � | � | 550 |
The recoverable amount for customer intangible assets is value in use. In assessing value in use, expected future cash flows are discounted to their present value using a pre-tax discount rate. Judgement is required in assessing both the expected cash flows and an appropriate discount rate which is based on current market assessments of the time value of money and the risks associated with the asset.
In 2019, no indicators of impairment have been identified in relation to customer intangible assets reflecting the impact of higher market levels on assets under management, and associated revenues, and the amortisation of the customer intangible assets in the year.
The 2018 impairment of �35m related to the open-ended funds customer relationship intangible asset which is in the Asset management, platforms and wealth segment.�The impairment resulted from the impact of markets and flows on future earnings expectations. The recoverable amount of this asset was calculated using a pre-tax discount rate of 13.1%.
There have been no previous impairment charges recognised on the segregated and similar customer relationship intangible asset recognised on the acquisition of Aberdeen.
The determination of useful lives requires judgement in respect of the length of time that the Group expects to derive benefits from the asset and considers for example expected duration of customer relationships and when technology is expected to become obsolete for technology based assets. The amortisation period and method for each of the Group's intangible asset categories is as follows:
�� Customer relationships acquired through business combinations - generally between 7 and 12 years, generally reducing balance method
�� Investment management contracts acquired through business combinations - between 10 and 17 years, straight-line
�� Brand acquired through business combinations - 5 years, straight-line
�� Technology acquired through business combinations - between 3 and 6 years, straight line
�� Internally developed software - between 2 and 6 years. Amortisation is on a straight-line basis and commences once the asset is available for use
�� Purchased software - between 2 and 6 years, straight-line
�� Costs of obtaining customer contracts - between 3 and 9 years, generally reducing balance method
The determination of amounts to be recognised as internally developed software requires judgement and assumptions in respect of whether assets are capable of being separated and the extent to which development costs form part of the separable asset. Additionally judgement is required to determine which costs have been incurred in relation to the research phase, which are not capitalised, and which have been incurred in relation to the development phase of a project, which can be capitalised. We consider that costs are directly attributable to the software asset and can therefore be capitalised, where they would not have been incurred if the software development had not taken place.
Associates are entities where the Group can significantly influence decisions made relating to the financial and operating policies of the entity but does not control the entity. For entities where voting rights exist, significant influence is presumed where the Group holds between 20% and 50% of the voting rights.
Joint ventures are strategic investments where the Group has agreed to share control of an entity's financial and operating policies through a shareholders' agreement and decisions can only be taken with unanimous consent.
Associates, other than those accounted for at fair value through profit or loss, and joint ventures are accounted for using the equity method from the date that significant influence or shared control, respectively, commences until the date this ceases with consistent accounting policies applied throughout.
Under the equity method, investments in associates and joint ventures are initially recognised at cost. When an interest is acquired at fair value from a third party, the value of the Group's share of the investee's identifiable assets and liabilities is determined applying the same valuation criteria as for a business combination at the acquisition date. This is compared to the cost of the investment in the investee. Where cost is higher the difference is identified as goodwill and the investee is initially recognised at cost which includes this component of goodwill. Where cost is lower a bargain purchase has arisen and the investee is initially recognised at the Group's share of the investee's identifiable assets and liabilities unless the recoverable amount for the purpose of assessing impairment is lower, in which case the investee is initially recognised at the recoverable amount.
Subsequently the carrying value is adjusted for the Group's share of post-acquisition profit or loss and other comprehensive income of the associate or joint venture, which are recognised in the consolidated income statement and other comprehensive income respectively. The Group's share of post-acquisition profit or loss includes amortisation charges based on the valuation exercise at acquisition. The carrying value is also adjusted for any impairment losses.
Where the Group has an investment in an associate, a portion of which is held by, or is held indirectly through, a mutual fund, unit trust or similar entity, including investment-linked insurance funds, that portion of the investment is measured at FVTPL. In general, investment vehicles which are not subsidiaries are considered to be associates where the Group holds more than 20% of the voting rights.
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The level of future dividend payments and other transfers of funds to the Group from associates and joint ventures accounted for using the equity method could be restricted by the regulatory solvency and capital requirements of the associate or joint venture, certain local laws or foreign currency transaction restrictions.
| � | 2019 | 2018 | ||||
| � | Associates | Joint ventures | Total | Associates | Joint ventures | Total |
| � | �m | �m | �m | �m | �m | �m |
| At 1 January | 1,260 | 184 | 1,444 | 404 | 99 | 503 |
| Reclassified from held for sale | - | - | - | 8 | - | 8 |
| Exchange translation adjustments | (16) | (11) | (27) | (15) | 3 | (12) |
| Additions | - | 51 | 51 | 1,023 | 72 | 1,095 |
| Disposals | (178) | - | (178) | - | - | - |
| Profit after tax | 63 | 16 | 79 | 121 | 9 | 130 |
| Other comprehensive income | (22) | 12 | (10) | (16) | 1 | (15) |
| Dilution gains | - | - | - | 7 | - | 7 |
| Reversal of impairment/ (impairment) | 243 | - | 243 | (228) | - | (228) |
| Distributions of profit | (93) | - | (93) | (44) | - | (44) |
| At 31 December | 1,257 | 252 | 1,509 | 1,260 | 184 | 1,444 |
The following associates and joint ventures are considered to be material to the Group as at 31 December 2019.
| Name of associate | Nature of relationship | Principal place of business | Measurement Method | Interest held by | Fair value of interest held by the Group at | Interest held by | Fair value of interest held by the Group at |
| Phoenix Group Holdings plc (Phoenix) | Associate | United Kingdom | Equity Accounted | 19.97% | 1,079 | 19.98% | 812 |
| HDFC Life Insurance Company Limited (HDFC Life) | Associate | India | Equity Accounted | 14.73% | 1,968 | 29.23% | 2,567 |
| HDFC Asset Management Company Limited (HDFC Asset Management) | Associate | India | Equity Accounted | 26.91% | 1,937 | 29.96% | 1,077 |
| Heng An Standard Life Insurance Company Limited (HASL) | Joint venture | China | Equity Accounted | 50.00% | n/a | 50.00% | n/a |
The country of incorporation or registration is the same as their principal place of business. The interest held by the Group is the same as the proportion of voting rights held. The material associates are all listed. HASL is not listed.
The table below provides summarised financial information for those associates which are considered to be material to the Group. The summarised financial information reflects the amounts presented in the financial statements or management accounts of the relevant associates amended to reflect adjustments made when using the equity method, including fair value adjustments on acquisition and not the Group's share of those amounts.
| � | Phoenix | HDFC Life | HDFC Asset Management1 | � | � | |||||
| � | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | � | � | � | � |
| � | �m | �m | �m | �m | �m | �m | � | � | � | � |
| Summarised financial information of associate: | � | � | � | � | � | � | � | � | � | � |
| Revenue | 4,182 | 1,409 | 3,617 | 3,072 | 276 | 207 | � | � | � | � |
| Profit after tax (all from continuing operations) | 28 | 366 | 128 | 118 | 170 | 83 | � | � | � | � |
| Other comprehensive income | (110) | (76) | - | - | - | - | � | � | � | � |
| Total comprehensive income | (82) | 290 | 128 | 118 | 170 | 83 | � | � | � | � |
| Total assets2 | 242,666 | 230,111 | 14,607 | 13,349 | 388 | 336 | � | � | � | � |
| Total liabilities2 | 237,043 | 224,042 | 13,818 | 12,598 | 27 | 23 | � | � | � | � |
| Net assets | 5,623 | 6,069 | 789 | 751 | 361 | 313 | � | � | � | � |
| Attributable to NCI and other equity holders | 808 | 788 | - | - | - | - | � | � | � | � |
| Attributable to investee's shareholder | 4,815 | 5,281 | 789 | 751 | 361 | 313 | � | � | � | � |
| Interest held | 19.97% | 19.98% | 14.73% | 29.23% | 26.91% | 29.96% | � | � | � | � |
| Share of net assets | 962 | 1,055 | 116 | 220 | 97 | 94 | � | � | � | � |
| � | � | � | � | � | � | � | � | � | � | � |
| � | Phoenix | HDFC Life | HDFC Asset Management | Other | Total | |||||
| � | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 |
| � | �m | �m | �m | �m | �m | �m | �m | �m | �m | �m |
| Carrying value of associates accounted for using the equity method | 961 | 812 | 167 | 329 | 120 | 110 | 9 | 9 | 1,257 | 1,260 |
| Dividends received3 | 67 | 33 | 9 | - | 17 | 14 | - | - | 93 | 47 |
| Share of (loss)/profit after tax | (5) | 65 | 26 | 31 | 42 | 26 | - | (1) | 63 | 121 |
1. Revenue and profit after tax for HDFC Asset Management presented are for the 15 months to 31 December 2019 (2018: 12 months to September 2018). Total assets and total liabilities presented are as at 30 September 2019 (2018: 30 September 2018) as the statement of financial position at 31 December 2019 was not made publicly available. (Refer below for details of accounting period alignment).
2.�� As a liquidity presentation is used by insurance companies when presenting their statement of financial position, an analysis of total assets and total liabilities between current and non-current has not been provided for Phoenix and HDFC Life. The majority of HDFC Asset Management's assets and liabilities are current.
3. 2018 dividend received from HDFC Asset Management includes �3m on interest that was classified as held for sale.
Phoenix is the largest life and pensions consolidator in Europe. Our investment in Phoenix supports our strategic partnership.
On 23 February 2018, the Group announced the proposed sale of the UK and European insurance business to Phoenix (the Sale), implemented by selling the entire issued share capital of Standard Life Assurance Limited (SLAL). Refer Note 1 for further details. Following the completion of the Sale in August 2018, as part of the total consideration, the Group was issued with new Phoenix shares representing 19.98% of the issued share capital of Phoenix. Our judgement is that taking into account our representation on Phoenix's board and the significant transactions between the Group and Phoenix, Phoenix should be classified as an associate.
At acquisition the value of the Group's share of Phoenix's identifiable assets and liabilities was determined. This value was determined using the same valuation bases as required for a business combination under which most of the identifiable assets and liabilities of the enlarged Phoenix group (including SLAL) were measured at fair value. The most significant assets that were not measured at fair value were Phoenix's defined benefit pension schemes which were measured at their IAS 19 value.
A key judgement was the identification, valuation and determination of useful lives, of the Group's share of Phoenix's intangible assets at the date of acquisition. The main intangible assets identified were the acquired present value of in-force business (AVIF) for both SLAL and other Phoenix entities. AVIF comprised the difference between the fair value and IFRS carrying value of insurance contracts together with the fair value of future profits expected to arise on investment contracts. The valuation of the AVIF was determined using the application of present value techniques to the best estimate cash flows expected to arise from policies that were in-force at the acquisition date, adjusted to reflect the price of bearing the uncertainty inherent in those cash flows. This approach incorporated a number of judgements and assumptions which impacted the resultant valuation, the most significant of which were mortality rates, expected policy lapses, the expenses associated with servicing the policies, future investment returns, the discount rate and the risk adjustment for uncertainty, determined using a cost of capital approach. The Group's share of profit after acquisition under the equity method reflects the amortisation of these intangible assets. This differs from the amortisation recognised in Phoenix's own IFRS financial statements due to the revaluation of the existing Phoenix intangible assets at August 2018 for equity method purposes. The amortisation method reflects the expected emergence of economic benefits which results in higher amortisation in earlier periods.
| | Useful life at Years | Fair value at �m | Group's share at �m |
| Intangible asset: | | | |
| SLAL AVIF | 24 | 2,931 | 586 |
| Existing Phoenix AVIF | 15 | 1,503 | 300 |
The cost of the Group's investment in Phoenix was equal to the fair value of its 19.98% interest at the date of acquisition, being �1,023m. The Group's share of the value of the identifiable net assets of the enlarged Phoenix group exceeded the cost of the Group's investment in Phoenix resulting in a bargain purchase gain of �15m which was offset by an impairment loss as described below.
There has been no change to the useful lives of the SLAL AVIF and Existing Phoenix AVIF. Therefore the residual useful lives of these assets at 31 December 2019 are 22.7 years and 13.7 years respectively.
The determination of longevity and persistency actuarial assumptions is also a key judgement in the determination of the Phoenix profits for 2019 and therefore the Group's carrying value of Phoenix at 31 December 2019.
Estimates and assumptions
A key area of estimation is determining the recoverable amount of Phoenix on a value in use basis for the purpose of assessing impairment. We consider that under IAS 28 the market value of Phoenix represents the best estimate of the present value of future dividends and therefore this market value is used as the value in use. As the value in use is based on the market value, a discount rate is not determined.
At 31 December 2018 the market value of the Group's interest in Phoenix was �812m which was significantly below the carrying value. We considered this to be an indicator of impairment and therefore an impairment review was performed. During the 12 months ended 31 December 2018 an impairment loss of �243m was recognised on the Group's interest in Phoenix, of which �15m arose at acquisition and was offset against the bargain purchase gain giving a loss on impairment in the consolidated income statement for the year ended 31 December 2018 of �228m.
At 31 December 2019 the market value of the Group's interest in Phoenix was �1,079m and this has been used as the value in use. On this basis, a reversal of the impairment above of �243m has been recognised in the consolidated income statement for the year ended 31 December 2019.
The determination that market value should be used as the value in use is an area of judgement. If the recoverable amount falls below the carrying value in a future period this will result in a future impairment.
Phoenix has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 as a result of meeting the exemption criteria as at 31 December 2015. As at that date Phoenix's activities were considered to be predominantly connected with insurance as the percentage of the carrying amount of its liabilities in relation to insurance relative to the total carrying amounts of all its liabilities was greater than 90%.
The financial assets with contractual cash flows that are solely payments of principal and interest (excluding those held for trading or managed on a fair value basis) are set out below together with all other financial assets, measured at fair value through profit and loss.
| � | Fair value as at | Fair value as at |
| � | �m | �m |
| Financial assets with contractual cash flows that are solely payments of principal and interest (SPPI) excluding those held for trading or managed on a fair value basis | 6,197 | 6,526 |
| Financial assets other than those above2 | 218,355 | 204,398 |
| Total | 224,552 | 210,924 |
1. Comparative figures have been restated by Phoenix to ensure a consistent presentation for all similar items across all Phoenix subsidiaries following the acquisition of the UK and European insurance business.
2. The change in fair value in the year to 31 December 2019 of all other financial assets that are FVTPL is a gain of �20,231m (4 months ended 31 December 2018: loss of �11,509m).
An analysis of credit ratings of financial assets with contractual cash flows that are SPPI, excluding those held for trading or managed on a fair value basis, is provided below:
| 2019 | AAA | AA | A | BBB | BB and below | Non-rated | Unit-linked | Total |
| Carrying value | �m | �m | �m | �m | �m | �m | �m | �m |
| Loans and deposits | - | 21 | 47 | 164 | - | 284 | - | 516 |
| Cash and cash equivalents | 295 | 733 | 3,105 | 23 | - | 142 | 40 | 4,338 |
| Accrued income | - | - | - | - | - | 160 | - | 160 |
| Other receivables | - | - | - | - | - | 1,183 | - | 1,183 |
| | 295 | 754 | 3,152 | 187 | - | 1,769 | 40 | 6,197 |
�
| 2018 | AAA | AA | A | BBB | BB and below | Non-rated | Unit-linked | Total |
| Carrying value | �m | �m | �m | �m | �m | �m | �m | �m |
| Loans and deposits | - | 7 | 46 | - | - | 370 | - | 423 |
| Cash and cash equivalents | 327 | 947 | 1,836 | 1,265 | - | 450 | 101 | 4,926 |
| Accrued income | - | - | - | - | - | 151 | - | 151 |
| Other receivables | - | - | - | - | - | 1,026 | - | 1,026 |
| | 327 | 954 | 1,882 | 1,265 | - | 1,997 | 101 | 6,526 |
HDFC Life is one of India's leading life insurance companies. The investment in HDFC Life allows the Group to benefit from the life insurance market in one of the world's fastest growing economies.
During 2019 the Group reduced its interest in HDFC Life to 14.73%. Refer Note 1 for further details. Whilst the Group's remaining interest is less than 20%, being the threshold where significant influence is presumed, our judgement is that HDFC Life should continue to be classified as an associate. This judgement takes into account other key indicators of significant influence including the Group's representation on the Board of HDFC Life and the Group's ability to participate in policy-making processes including decisions about dividends or other distributions that require unanimous Board approval under the articles of association.
The difference between the carrying value of this associate and the Group's current share of net assets is due primarily to goodwill of �49m arising from additional investments being made at fair value rather than book value. (2018: �104m.)
The year end date for HDFC Life is 31 March which is different from the Group's year end date of 31 December. For the purposes of the preparation of the Group's consolidated financial statements, financial information as at and for the 12 months ended 31 December is used for HDFC Life.
At 31 March 2016 HDFC Life had significant insurance liabilities and its liabilities arising from contracts within the scope of IFRS 4 and liabilities connected with insurance were over 90% of its total liabilities. Therefore HDFC Life was eligible to defer the implementation of IFRS 9 for equity accounting purposes.
The fair value of HDFC Life's financial assets at 31 December 2019 that remain under IAS 39 for equity accounting purposes and the change in fair value during the year ended 31 December 2019 are as follows:
| � | Fair value as at | Fair value as at |
| � | �m | �m |
| Financial assets with contractual cash flows that are solely payments of principal and interest (SPPI) excluding those held for trading or managed on a fair value basis1,2 | 6,871 | 5,662 |
| Financial assets other than those above2 | 8,046 | 7,596 |
| Total | 14,917 | 13,258 |
1��� Financial assets that are SPPI (excluding those held for trading or managed on a fair value basis) are predominantly AAA debt instruments including central and state government securities. Their carrying value at 31 December 2019 is �6,659m (2018: �5,642m). Securities with fair value and carrying value of �34m (2018: �10m) are rated below BBB.
2��� The change in fair value in the year to 31 December 2019 for financial assets that are SPPI (excluding those held for trading or managed on a fair value basis) is a gain of �758m (2018: �385m). The change in fair value for all other financial assets is a gain of �727m (2018: �116m).
HDFC Asset Management manages a range of mutual funds and provides portfolio management and advisory services. The investment in HDFC Asset Management is a strategic investment in a leading asset manager in India, one of the world's fastest growing markets.
On 6 August 2018, HDFC Asset Management listed on the National Stock Exchange of India Limited and the Bombay Stock Exchange Limited following completion of an IPO. Refer Note 1 for further details.
The difference between the carrying value of this associate and the Group's share of net assets is due primarily to goodwill arising on the buyback of shares by HDFC Asset Management from employees.
The year end date of HDFC Asset Management is 31 March which is different from the Group's year end date of 31 December. For the purposes of the preparation of the Group's consolidated financial statements, financial information for the period to 31 December is used for HDFC Asset Management. In previous years, financial information for the 12 months to 30 September was used for HDFC Asset Management. The Group's share of HDFC Asset Management's profits for the 15 months to 31 December 2019, being �42m which includes �7m related to the 3 months to 31 December 2018 (�12m net of tax of �5m), has been recognised in the consolidated income statement. Profits for the 3 months to 31 December 2018 have been excluded from adjusted profit (Refer Note 13).
| � | HASL | Other | Total | |||
| � | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 |
| � | �m | �m | �m | �m | �m | �m |
| Carrying value of joint ventures accounted for using the equity method | 205 | 184 | 47 | - | 252 | 184 |
| Dividends received | - | - | - | - | - | - |
| Share of profit/(loss) after tax | 20 | 9 | (4) | - | 16 | 9 |
The Group's share of the profit after tax (all from continuing operations) and total comprehensive income of other joint ventures was a loss of �4m (2018: �nil).
The Group has a 50% share in HASL, one of China's leading life insurance companies offering life and health insurance products. The investment in HASL is a strategic investment giving the Group access to one of the world's largest markets.
On 25 September 2018, the Group made a US$95m (�72m) capital contribution to HASL. The Group's interest remained at 50%.
The table below provides summarised financial information for HASL, the joint venture which is considered to be material to the Group. The summarised financial information reflects the amounts presented in the financial statements of HASL amended to reflect adjustments made when using the equity method.
| � | HASL | |
| � | 2019 | 2018 |
| � | �m | �m |
| Summarised financial information of joint venture: | � | � |
| Revenue | 426 | 361 |
| Depreciation and amortisation | 3 | 2 |
| Interest income | 57 | 49 |
| Interest expense | 2 | 3 |
| Income tax (expense)/income | 6 | (6) |
| Profit after tax (all from continuing operations) | 41 | 17 |
| Other comprehensive income | 25 | 1 |
| Total comprehensive income | 66 | 18 |
| Total assets1 | 1,957 | 1,714 |
| Total liabilities1 | 1,547 | 1,347 |
| Cash and cash equivalents | 67 | 208 |
| Net assets | 410 | 367 |
| Attributable to investee's shareholder | 410 | 367 |
| Interest held | 50% | 50% |
| Share of net assets | 205 | 184 |
1.�� As a liquidity presentation is used by insurance companies when presenting their statement of financial position, an analysis of total assets and total liabilities between current and non-current has not been provided for HASL.
At 31 December 2015 HASL had significant insurance liabilities and its liabilities arising from contracts within the scope of IFRS 4 and liabilities connected with insurance were over 90% of its total liabilities. Therefore HASL was eligible to defer the implementation of IFRS 9 for equity accounting purposes.
The fair value of HASL's financial assets at 31 December 2019 that remain under IAS 39 for equity accounting purposes and the change in fair value during the year ended 31 December 2019 are as follows:
| � | Fair value as at | Fair value as at |
| � | �m | �m |
| Financial assets with contractual cash flows that are solely payments of principal and interest (SPPI) excluding those held for trading or managed on a fair value basis1,2 | 1,344 | 1,338 |
| Financial assets other than those above2 | 598 | 365 |
| Total | 1,942 | 1,703 |
1. Financial assets that are SPPI (excluding those held for trading or managed on a fair value basis) are predominantly AAA debt instruments. Their carrying value at 31 December 2019 is �1,321m (2018: �1,321m). No securities are rated below BBB (2018: none).
2. The change in fair value in the year to 31 December 2019 for financial assets that are SPPI (excluding those held for trading or managed on a fair value basis) is a gain of �63m (2018: �80m). The change in fair value for all other financial assets is a gain of �68m (2018: loss of �12m).
The aggregate fair value of associates accounted for at FVTPL included in equity securities and interests in pooled investment funds (refer Note 19) at 31 December 2019 is �45m (2018: �34m) none of which are considered individually material to the Group.
Property, plant and equipment consists primarily of property owned and occupied by the Group and the computer equipment used to carry out the Group's business along with right-of-use assets for leased property and equipment.
Owner occupied property: Owner occupied property is initially recognised at cost and subsequently revalued to fair value at each reporting date. Depreciation, being the difference between the carrying amount and the residual value of each significant part of a building, is charged to the consolidated income statement over its useful life. The useful life of each significant part of a building is estimated as being between 30 and 50 years. A revaluation surplus is recognised in other comprehensive income unless it reverses a revaluation deficit which has been recognised in the consolidated income statement.
Equipment: Equipment is initially recognised at cost and subsequently measured at cost less depreciation. Depreciation is charged to the income statement over 2 to 15 years depending on the length of time the Group expects to derive benefit from the asset.
Right-of-use asset: Refer Note 18 below for the accounting policies for right-of-use assets.
�
| � | � | Owner occupied property | Equipment | Right-of-use assets - property | Right-of-use assets - equipment | Total |
| � | Notes | �m | �m | �m | �m | �m |
| Cost or valuation | � | � | � | � | � | � |
| At 1 January 2018 | � | 81 | 182 | - | - | 263 |
| Reclassified as held for sale during the year | � | (79) | (108) | - | - | (187) |
| Additions | � | - | 28 | - | - | 28 |
| Disposals and adjustments2 | � | - | (4) | - | - | (4) |
| Foreign exchange adjustment | � | - | 3 | - | - | 3 |
| At 31 December 2018 | � | 2 | 101 | - | - | 103 |
| Right-of-use assets recognised on implementation of IFRS 161 | � | - | - | 354 | 1 | 355 |
| At 1 January 2019 | � | 2 | 101 | 354 | 1 | 458 |
| Additions | � | - | 28 | 74 | 1 | 103 |
| Disposals and adjustments2 | � | - | (3) | (9) | - | (12) |
| Derecognition of right-of-use assets relating to subleases classified as finance leases | � | - | - | (11) | - | (11) |
| Foreign exchange adjustment | � | - | (1) | (4) | - | (5) |
| At 31 December 2019 | � | 2 | 125 | 404 | 2 | 533 |
| Accumulated depreciation and impairment | � | � | � | � | � | � |
| At 1 January 2018 | � | - | (117) | - | - | (117) |
| Reclassified as held for sale during the year | � | - | 91 | - | - | 91 |
| Depreciation charge for the year | 6 | - | (16) | - | - | (16) |
| Disposals and adjustments2 | � | - | 2 | - | - | 2 |
| Foreign exchange adjustment | � | - | (2) | - | - | (2) |
| At 31 December 2018 | � | - | (42) | - | - | (42) |
| Right-of-use assets recognised on implementation of IFRS 161 | � | - | - | (176) | - | (176) |
| At 1 January 2019 | � | - | (42) | (176) | - | (218) |
| Depreciation charge for the year | 6 | - | (18) | (28) | (1) | (47) |
| Disposals and adjustments2 | � | - | 1 | 3 | - | 4 |
| Derecognition of right-of-use assets relating to subleases classified as finance leases | � | - | - | 8 | - | 8 |
| Impairment | � | - | - | (16) | - | (16) |
| Foreign exchange adjustment | � | - | - | 2 | - | 2 |
| At 31 December 2019 | � | - | (59) | (207) | (1) | (267) |
| Carrying amount | � | � | � | � | � | � |
| At 1 January 2018 | � | 81 | 65 | - | - | 146 |
| At 31 December 2018 | � | 2 | 59 | - | - | 61 |
| At 1 January 2019 | � | 2 | 59 | 178 | 1 | 240 |
| At 31 December 2019 | � | 2 | 66 | 197 | 1 | 266 |
1. The Group has initially applied IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated and the cumulative effect of initially applying these standards is recognised in retained earnings at the date of initial application. Refer Basis of preparation.
2. For the year ended 31 December 2019 �nil (2018: �nil) of disposals and adjustments relates to equipment with net book value of �nil which is no longer in use.
Included in property right-of-use assets, are right-of-use assets that meet the definition of investment property. Their carrying amount at 31 December 2019 is �28m (1 January 2019: �24m). During the year to 31 December 2019 there were additions of �26m, depreciation of �2m, derecognitions related to new subleases classified as finance leases �4m and impairments of �16m related to these assets. Rental income received and direct operating expenses incurred to generate that rental income in the year to 31 December 2019 were �2m and �3m respectively.
The fair value of these right-of-use assets at 31 December 2019 is �28m. The valuation technique used to determine the fair value considers the rental income expected to be received under sub-leases during the term of the lease and the direct expenses expected to be incurred in managing the leased property, discounted using a discount rate that reflects the risks inherent in the cash flow estimates. It is not based on valuations by an independent valuer. This is a Level 3 valuation technique as defined in Note 40.
The impairment charge of �16m, which has been included in other administrative expenses in the consolidated income statement, relates to a leased property that is vacant at 31 December 2019 awaiting subletting. The recoverable amount of the property right-of-asset is its value in use of �11m and is reported in the asset management, platforms and wealth segment.
If owner occupied property was measured using the cost model, the historical cost before impairment would be �2m (2018: �2m). As the expected residual value of owner occupied property is in line with the current fair value, no depreciation is currently charged.
Further details on the leases under which the Group's right-of-use assets are recognised are provided in Note 18 below.
On 1 January 2019, the Group adopted IFRS 16 Leases. Refer Basis of preparation for details of the transition from the previous leasing standard, IAS 17 to IFRS 16.
As the Group has not restated comparative information, the classification and measurement of leases at 31 December 2019 is in accordance with IFRS 16 while the classification and measurement of leases at 31 December 2018 is in accordance with IAS 17.
Classification and measurement in accordance with IFRS 16
Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At inception of a contract, the Group assesses whether a contract is, or contains, a lease. However, as noted in the Basis of preparation, the Group used the practical expedient permitted under IFRS 16 to apply the new standard at transition solely to leases previously identified in accordance with IAS 17 and IFRIC 4 Determining whether an Arrangement Contains a Lease.
Right-of-use assets are measured at cost less accumulated depreciation and impairment losses and are presented in property, plant and equipment (refer Note 17). The Group does not revalue its right-of-use assets. This applies to all right-of-use assets, including those that are assessed as meeting the definition of investment property. The cost comprises the amount of the initial measurement of the lease liability plus any initial direct costs and expected restoration costs not relating to wear and tear. Costs relating to wear and tear are expensed over the term of the lease. Depreciation is charged on right-of-use assets on a straight line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group assesses right-of-use assets for impairment when such indicators exist, and where required, reduces the value of the right-of-use asset accordingly.
The related lease liability (included in other financial liabilities - refer Note 36) is calculated as the present value of the future lease payments. The lease payments are discounted using the rate implicit within the lease where readily available or the Group's incremental borrowing rate where the implicit rate is not readily available. Interest is calculated on the liability using the discount rate and is charged to the consolidated income statement under finance costs.
In determining the value of the right-of-use assets and lease liabilities, the Group considers whether any leases contain lease extensions or termination options that the Group is reasonably certain to exercise.
Where a leased property has been sublet, the Group assesses whether the sublease has transferred substantially all the risk and rewards of the right-of-use asset to the lessee under the sublease. Where this is the case, the right-of-use asset is derecognised and a net investment in finance leases (included in Receivables and other financial assets - refer Note 21) is recognised, calculated as the present value of the future lease payments receivable under the sublease. Where a property is only partially sublet, only the portion of the right-of-use asset relating to the sublet part of the property is derecognised and recognised as a net investment in finance leases.
Any difference between the initial value of the net investment in finance leases and the right-of-use asset derecognised is recognised in the consolidated income statement (within other income or expenses). Interest is calculated on the net investment in finance lease using the discount rate and is recognised in the consolidated income statement as interest income.
Where the sublease does not transfer substantially all the risk and rewards of the right-of-use assets to the lessee under the sublease, the Group continues to recognise the right-of-use asset. The sub-lease is accounted for as an operating lease with the lease payments received recognised as property rental income in other income in the consolidated income statement. Lease incentives granted are recognised as an integral part of the property rental income and are spread over the term of the lease.
The Group does not recognise right-of-use assets and lease liabilities for short-term leases (less than 1 year from inception) and leases where the underlying asset is of low value.
Classification and measurement in accordance with IAS 17 in respect of prior periods
Under IAS 17, a contract was or contained a lease based on the assessment of whether fulfilment of the arrangement was dependent on the use of a specific asset or assets; and the arrangement had conveyed a right to use the asset.
All the Group's leases as lessee were classified as operating leases under IAS 17. Operating lease rentals were recognised in the consolidated income statement on a straight line over the term of the lease. Lease incentives received such as rent free periods were recognised as an integral part of the operating lease rental expense and were spread over the term of the lease.
Under IAS 17, all the Group's subleases were also classified as operating leases. Unlike IFRS 16 where the assessment of whether a sublease is a finance or operating lease is based on the head lease right-of-use asset, the IAS 17 assessment was based on the underlying asset e.g. the building for property leases. IFRS 16 did not change the lessor accounting for operating leases.
The Group leases various offices and equipment used to carry out its business. Leases are generally for fixed periods but may be subject to extensions or early termination clauses. The remaining periods for current leases range from less than 1 year to 19 years. A number of leases which are due to end in 2031 contain options that would allow the Group to extend the lease term. The Group reviews its property use on an ongoing basis and these extensions have not been included in the right-of-use asset or lease liability calculations.
The Group has recognised the following assets and liabilities in relation to these leases where the Group is a lessee:
| � | � | 2019 |
| � | � | �m |
| Right-of-use assets: | � | � |
| Property | � | 197 |
| Equipment | � | 1 |
| Total right-of-use assets | � | 198 |
| � | � | � |
| Lease liabilities | � | (268) |
The following table provides a maturity analysis of the contractual undiscounted cash flows for the lease liabilities:
| � | � | 2019 |
| � | � | �m |
| Less than 1 year | � | 33 |
| Greater than or equal to 1 year and less than 2 years | � | 29 |
| Greater than or equal to 2 years and less than 3 years | � | 28 |
| Greater than or equal to 3 years and less than 4 years | � | 26 |
| Greater than or equal to 4 years and less than 5 years | � | 23 |
| Greater than or equal to 5 years and less than 10 years | � | 102 |
| Greater than or equal to 10 years and less than 15 years | � | 57 |
| Greater than or equal to 15 years | � | 14 |
| Total undiscounted lease liabilities | � | 312 |
Details of the movements in the Group's right-of-use assets including additions and depreciation are included in Note 17.
The interest on lease liabilities for the year ended 31 December 2019 was �7m.
The Group does not recognise right-of-use assets and lease liabilities for short-term leases and leases where the underlying asset is of low value. The expenses for these leases for the year ended 31 December 2019 were �2m. The Group lease commitment for short-term leases was �nil at 31 December 2019.
Prior to the implementation of IFRS 16, the Group accounted for all leases where the Group was the lessee as operating leases and recorded an operating lease rental expense of �50m for the year ended 31 December 2018. The Group's commitment under operating leases was �250m at 31 December 2018. Refer to Basis of preparation for the reconciliation of this lease commitment on a discounted basis to the opening lease liabilities on implementation of IFRS 16 at 1 January 2019.
The total cash outflow for lease liabilities recognised in the consolidated statement of cash flows for the year ended 31 December 2019 was �32m.
Where the Group no longer requires a leased property, the property may be sublet to a third party. The sublease may be for the full remaining term of the Group's lease or only part of the remaining term.
At 31 December 2019, the Group had a net investment in finance leases asset of �15m for subleases which had transferred substantially all the risk and rewards of the right-of-use assets to the lessee under the sublease. All other sub-leases are accounted for as operating leases. Prior to the implementation of IFRS 16, all the Group's subleases were accounted for as operating leases. The net investment in finance leases recognised at 1 January 2019 on implementation of IFRS 16 was �7m. The increase during the year ended 31 December 2019 was mainly due to four new subleases entered into during the year.
During the year ended 31 December 2019, the Group received finance income on the net investment in finance leases asset of less than �1m. The Group recorded an initial gain of �4m in relation to new sub-leases entered into during the year ended 31 December 2019.
The following table provides a maturity analysis of the future contractual undiscounted cash flows for the net investment in finance leases and a reconciliation to the net investment in finance leases asset:
| � | 2019 |
| � | �m |
| Less than 1 year | 2 |
| Greater than or equal to 1 year and less than 2 years | 2 |
| Greater than or equal to 2 years and less than 3 years | 2 |
| Greater than or equal to 3 years and less than 4 years | 1 |
| Greater than or equal to 4 years and less than 5 years | 1 |
| Greater than or equal to 5 years and less than 10 years | 7 |
| Greater than or equal to 10 years and less than 15 years | 2 |
| Total contractual undiscounted cash flows under finance leases | 17 |
| Unearned finance income | (2) |
| Total net investment in finance leases | 15 |
During the year ended 31 December 2019, the Group received property rental income from operating leases of �2m.
The following table provides a maturity analysis of the future contractual undiscounted cash flows for subleases classified as operating leases:
| � | 2019 | 20181 |
| � | �m | �m |
| Less than 1 year | 3 | 4 |
| Greater than or equal to 1 year and less than 2 years | 3 | 3 |
| Greater than or equal to 2 years and less than 3 years | 2 | 3 |
| Greater than or equal to 3 years and less than 4 years | - | 3 |
| Greater than or equal to 4 years and less than 5 years | - | 1 |
| Greater than or equal to 5 years and less than 10 years | - | 5 |
| Greater than or equal to 10 years and less than 15 years | - | 1 |
| Total contractual undiscounted cash flows under operating leases | 8 | 20 |
1. Subleases classified as operating leases under IAS 17.
On 1 January 2019, the Group adopted IFRS 9 Financial Instruments. Refer Basis of preparation for details of the transition from the previous financial instruments standard, IAS 39 to IFRS 9.
As the Group has not restated comparative information, the classification and measurement of financial assets at 31 December 2019 is in accordance with IFRS 9 while the classification and measurement of financial assets at 31 December 2018 is in accordance with IAS 39.
Classification and measurement in accordance with IFRS 9
Financial assets are initially recognised at their fair value. Subsequently all equity securities and interests in pooled investment funds and derivative instruments are measured at fair value. All equity securities and interests in pooled investment funds are classified as FVTPL on a mandatory basis. Changes in their fair value are recognised in investment return in the consolidated income statement. The classification of derivatives and the accounting treatment of derivatives designated as a hedging instrument are set out in Note 20.
The subsequent measurement of debt instruments depends on whether their cash flows are solely payments of principal and interest and the nature of the business model they are held in as follows:
| SPPI1 test satisfied? | Business model����� | IFRS 9 classification |
| Yes | A: Objective is to hold to collect contractual cash flows | Amortised cost2 |
| Yes � | B: Objective is achieved by both collecting contractual cash flows and selling | Fair value through other comprehensive income (FVOCI)2 |
| Yes | C: Objective is neither A nor B | FVTPL |
| No | N/A | FVTPL |
1. Solely payments of principal and interest.
2. May be classified as FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.
The Group has no debt instruments that are managed within a business model whose objective is achieved both by collecting contractual cash flows and selling and therefore there are no debt instruments classified as FVOCI. Debt instruments classified as FVTPL are classified as such due to the business model they are managed under, predominantly being held in consolidated investment vehicles.
The methods and assumptions used to determine fair value of financial assets at FVTPL are discussed in Note 40.
Amortised cost is calculated, and related interest is credited to the consolidated income statement, using the effective interest method. Impairment is determined using an expected credit loss impairment model which is applied to all financial asset measured at amortised cost. Financial assets measured at amortised cost attract a loss allowance equal to either:
�� 12 month expected credit losses (losses resulting from possible default within the next 12 months)
�� Lifetime expected credit losses (losses resulting from possible defaults over the remaining life of the financial asset)
Financial assets attract a 12 month ECL allowance unless the asset has suffered a significant deterioration in credit quality or the simplified approach for calculation of ECL has been applied. As permitted under IFRS 9 Financial Instruments, the Group has applied the simplified approach to calculate the ECL allowance for trade receivables and contract assets recognised under IFRS 15 Revenue from Contracts with Customers and lease receivables recognised under IFRS 16 Leases. Under the simplified approach the ECL is calculated over the remaining life of the asset.
Classification and measurement in accordance with IAS 39 in respect of prior periods
Management determined the classification of financial investments at initial recognition. Financial investments which were not derivatives and were not designated at FVTPL were classified as either available-for-sale (AFS) or loans and receivables.
Derivatives were measured at fair value. Derivatives were classified as held for trading except for derivatives that were designated as hedging instruments in cash flow or net investment hedges. Changes in the fair value of held for trading derivatives were recognised in investment return in the consolidated income statement. The classification of derivatives and the accounting treatment of derivatives designated as a hedging instrument are set out in Note 20.
The majority of the Group's debt securities and all equity securities and interests in pooled investment funds were designated at FVTPL as they were part of groups of assets which were managed and whose performance was evaluated on a fair value basis. These investments were recognised at fair value with changes in fair value recognised in investment return in the consolidated income statement. Commercial real estate loans were included within debt securities designated at fair value.
All other debt securities were classified as AFS and were recognised at fair value with changes in fair value recognised in other comprehensive income. Interest was credited to the consolidated income statement using the effective interest rate method. On disposal of an AFS security any gains or losses previously recognised in other comprehensive income were recognised in the consolidated income statement (recycling).
Loans and receivables which included cash and cash equivalents were measured at amortised cost calculated using the effective interest rate method.
The table below sets out an analysis of financial assets excluding those assets backing unit linked liabilities which are set out in Note 25.
| � | � | �At fair value through profit or loss1 | Cash flow | At amortised cost | Total |
| 2019 | Notes | �m | �m | �m | �m |
| Derivative financial assets | 20 | 16 | 3 | - | 19 |
| Equity securities and interests in pooled investment funds | 40 | 725 | - | - | 725 |
| Debt securities | 40 | 769 | - | 602 | 1,371 |
| Financial investments | � | 1,510 | 3 | 602 | 2,115 |
| � | � | � | � | � | � |
| Receivables and other financial assets | 21 | 1 | - | 559 | 560 |
| Cash and cash equivalents | 24 | - | - | 1,615 | 1,615 |
| Total | � | 1,511 | 3 | 2,776 | 4,290 |
1. All financial assets measured at fair value through profit or loss have been classified at FVTPL on a mandatory basis. The Group has not designated any financial assets as FVTPL.
�
| � | � | �Designated as at fair value through profit or loss | Held for | Cash flow hedge | Available- | Loans and receivables | Total |
| 20181 | Notes | �m | �m | �m | �m | �m | �m |
| Derivative financial assets | 20 | - | 6 | 13 | - | - | 19 |
| Equity securities and interests in pooled investment funds | 40 | 509 | - | - | - | - | 509 |
| Debt securities | 40 | 725 | - | - | 862 | - | 1,587 |
| Financial investments | � | 1,234 | 6 | 13 | 862 | - | 2,115 |
| � | � | � | � | � | � | � | � |
| Receivables and other financial assets | 21 | 8 | - | - | - | 689 | 697 |
| Cash and cash equivalents | 24 | - | - | - | - | 1,110 | 1,110 |
| Total | � | 1,242 | 6 | 13 | 862 | 1,799 | 3,922 |
1. Comparatives for 2018 have been represented to exclude assets backing unit linked liabilities. Refer Notes 20 and 25.
The amount of debt securities expected to be recovered or settled after more than 12 months is �273m (2018: �287m). Due to the nature of equity securities and interests in pooled investment funds, there is no fixed term associated with these securities.
Estimates and assumptions
Determination of the fair value of contingent consideration assets included in receivables and other financial assets is a key estimate. The methods and assumptions used to determine fair value of these assets are discussed in Note 40.
A derivative is a financial instrument that is typically used to manage risk and whose value moves in response to an underlying variable such as interest or foreign exchange rates. The Group uses derivative financial instruments in order to match subordinated debt liabilities and to reduce the risk from potential movements in foreign exchange rates on seed capital and co-investments and potential movements in market rates on seed capital. Certain consolidated investment vehicles may also use derivatives to take and alter market exposure, with the objective of enhancing performance and controlling risk.
Management determines the classification of derivatives at initial recognition. Under IFRS 9, all derivative instruments are classified as at FVTPL except those designated as part of a cash flow hedge or net investment hedge. Derivatives at FVTPL are measured at fair value with changes in fair value recognised in the consolidated income statement.
Under IAS 39, all derivative instruments were classified as held for trading except those designated as part of a hedging relationship. Held for trading derivatives were also measured at fair value with changes in fair value recognised in the consolidated income statement.
On adoption of IFRS 9 Financial instruments, the Group has elected to continue applying the hedge accounting requirements of IAS 39. The accounting treatment below applies to derivatives designated as part of a hedging relationship.
Using derivatives to manage a particular exposure is referred to as hedging. For a derivative to be considered as part of a hedging relationship its purpose must be formally documented at inception. In addition, the effectiveness of the hedge must be initially high and be able to be reliably measured on a regular basis. Derivatives used to hedge variability in future cash flows such as coupons payable on subordinated liabilities or revenue receivable in a foreign currency are designated as cash flow hedges, while derivatives used to hedge currency risk on investments in foreign operations are designated as net investment hedges.
Where a derivative qualifies as a cash flow or net investment hedge, hedge accounting is applied. The effective part of any gain or loss resulting from the change in fair value is recognised in other comprehensive income, and in the cash flow or net investment hedge reserve in equity, while any ineffective part is recognised immediately in the consolidated income statement. If a derivative ceases to meet the relevant hedging criteria, hedge accounting is discontinued.
For cash flow hedges, the amount recognised in the cash flow hedge reserve is transferred to the consolidated income statement (recycled) in the same period or periods during which the hedged item affects profit or loss and is transferred immediately if the cash flow is no longer expected to occur. For net investment hedges, the amount recognised in the net investment hedge reserve is transferred to the consolidated income statement on disposal of the investment.
�
| � | � | 2019 | 2018 | ||||
| � | � | Contract amount | Fair value assets | Fair value liabilities | Contract amount | Fair value assets | Fair value liabilities |
| � | Notes | �m | �m | �m | �m | �m | �m |
| Cash flow hedges | 19,32 | 566 | 3 | - | 589 | 13 | - |
| Net investment hedges | � | - | - | - | 6 | - | - |
| FVTPL/Held for trading | 19,32 | 534 | 16 | 3 | 330 | 6 | 4 |
| Derivative financial instruments | 40 | 1,100 | 19 | 3 | 925 | 19 | 4 |
| Derivative financial instruments backing unit linked liabilities | 25 | 669 | 5 | 6 | 295 | 2 | 2 |
| Total derivative financial instruments | � | 1,769 | 24 | 9 | 1,220 | 21 | 6 |
Derivative assets of �4m (2018: �13m) are expected to be recovered after more than 12 months. Derivative liabilities of �1m (2018: �nil) are expected to be settled after more than 12 months.
During 2019 the Group reaffirmed its strategy for hedging foreign currency risks, providing a consistent approach to managing these risks. The Group generally does not hedge the currency exposure relating to revenue and expenditure, nor does it hedge translation of overseas profits in the income statement. Where appropriate, the Group may use derivative contracts to reduce or eliminate currency risk arising from individual transactions or seed capital and co-investment activity.
On 18 October 2017, the Group issued subordinated notes with a principal amount of US$750m. In order to manage its foreign exchange risk relating to the principal and coupons payable on these notes the Group entered into a cross-currency swap which is designated as a cash flow hedge. The cash flow hedge was fully effective during the year. The cross-currency swap has the effect of swapping the 4.25% US Dollar fixed rate subordinated notes into 3.2% Sterling fixed rate subordinated notes with a principal amount of �569m. The cross-currency swap has a fair value asset position of �3m (2018: �13m asset). During the year ended 31 December 2019 fair value losses of �10m (2018: gains of �54m) were recognised in other comprehensive income in relation to the cross-currency swap. Losses of �28m (2018: gains of �35m) and forward points/gains of �6m (2018: gains of �6m) were transferred from other comprehensive income to investment return and finance costs respectively in the consolidated income statement in relation to the cross-currency swap during the year.
At 31 December 2019, the Group had no open derivative contracts which were designated as net investment hedges. At 31 December 2018, forward foreign exchange contracts with a notional principal amount of �6m and a net fair value liability position of less than �1m were designated as net investment hedges and gave rise to losses for the year of less than �1m which was deferred in the net investment hedge translation reserve. The effectiveness of hedges of net investments in foreign operations was�measured with reference to changes in the spot exchange rates. Any ineffectiveness, together with any difference in value attributable to forward points, was recognised in the consolidated income statement. In 2019, the losses recognised in the consolidated income statement for forward foreign exchange contracts designated as net investment hedges were less than �1m (2018: less than �1m).
Derivative financial instruments classified as FVTPL/held for trading include those that the Group holds as economic hedges of financial instruments that are measured at fair value. FVTPL/held for trading derivative financial instruments are also held by the Group to match contractual liabilities that are measured at fair value or to achieve efficient portfolio management in respect of instruments measured at fair value.
| � | 2019 | 2018 | ||||
| � | Contract amount | Fair value assets | Fair value liabilities | Contract | Fair value assets | Fair value liabilities |
| � | �m | �m | �m | �m | �m | �m |
| Equity derivatives: | � | � | � | � | � | � |
| Futures | 177 | 2 | 1 | 58 | 1 | - |
| Variance swaps | 5 | 6 | - | 4 | 4 | - |
| Total return swaps | 29 | - | 1 | - | - | - |
| Bond derivatives: | � | � | � | � | � | � |
| Futures | 1 | - | - | - | - | - |
| Interest rate derivatives: | � | � | � | � | � | � |
| Swaps | 153 | - | 2 | 37 | - | - |
| Futures | - | - | - | 15 | - | - |
| Foreign exchange derivatives: | � | � | � | � | � | � |
| Forwards | 718 | 10 | 5 | 475 | 2 | 6 |
| Other derivatives: | � | � | � | � | � | � |
| Inflation rate swaps | 14 | 1 | - | 5 | - | - |
| Credit default swaps | 106 | 2 | - | 31 | 1 | - |
| Derivative financial instruments at FVTPL/ held for trading | 1,203 | 21 | 9 | 625 | 8 | 6 |
The maturity profile of the contractual undiscounted cash flows in relation to derivative financial instruments is as follows:
| � | Within 1 | 1-5 | 5-10 | 10-15 | 15-20 | Greater than 20 years | Total |
| 2019 | �m | �m | �m | �m | �m | �m | �m |
| Cash inflows | � | � | � | � | � | � | � |
| Derivative financial assets | 411 | 99 | 651 | - | - | 1 | 1,162 |
| Derivative financial liabilities | 281 | - | - | - | - | - | 281 |
| Total | 692 | 99 | 651 | - | - | 1 | 1,443 |
| | | | | | | | |
| Cash outflows | � | � | � | � | � | � | � |
| Derivative financial assets | (386) | (73) | (633) | - | - | - | (1,092) |
| Derivative financial liabilities | (287) | (1) | (1) | - | - | (1) | (290) |
| Total | (673) | (74) | (634) | - | - | (1) | (1,382) |
| � | � | � | � | � | � | � | � |
| Net derivative financial instruments cash inflows | 19 | 25 | 17 | - | - | - | 61 |
Included in the above maturity profile are the following cash flows in relation to cash flow hedge assets:
| � | Within 1 | 1-5 | 5-10 | 10-15 | 15-20 | Greater than 20 years | Total |
| 2019 | �m | �m | �m | �m | �m | �m | �m |
| Cash inflows | 24 | 96 | 650 | - | - | - | 770 |
| Cash outflows | (18) | (73) | (632) | - | - | - | (723) |
| Net cash flow hedge cash inflows | 6 | 23 | 18 | - | - | - | 47 |
Cash inflows and outflows are presented on a net basis where the Group is required to settle cash flows net.
| � | Within 1 | 1-5 | 5-10 | 10-15 | 15-20 | Greater than 20 years | Total |
| 2018 | �m | �m | �m | �m | �m | �m | �m |
| Cash inflows | � | � | � | � | � | � | � |
| Derivative financial assets | 34 | 88 | 714 | - | - | - | 836 |
| Derivative financial liabilities | 5 | - | - | - | - | - | 5 |
| Total | 39 | 88 | 714 | - | - | - | 841 |
| | | | | | | | |
| Cash outflows | � | � | � | � | � | � | � |
| Derivative financial assets | (18) | (64) | (660) | - | - | - | (742) |
| Derivative financial liabilities | (10) | - | - | - | - | - | (10) |
| Total������ | (28) | (64) | (660) | - | - | - | (752) |
| � | � | � | � | � | � | � | � |
| Net derivative financial instruments cash inflows | 11 | 24 | 54 | - | - | - | 89 |
Included in the above maturity profile are the following cash flows in relation to cash flow hedge assets:
| � | Within 1 | 1-5 | 5-10 | 10-15 | 15-20 | Greater than 20 years | Total |
| 2018 | �m | �m | �m | �m | �m | �m | �m |
| Cash inflows | 25 | 88 | 714 | - | - | - | 827 |
| Cash outflows | (18) | (64) | (660) | - | - | - | (742) |
| Net cash flow hedge cash inflows | 7 | 24 | 54 | - | - | - | 85 |
| � | � | 2019 | 20181 |
| � | Notes | �m | �m |
| Amounts receivable from contracts with customers | 4(b) | 130 | 112 |
| Accrued income | � | 231 | 214 |
| Cancellations of units awaiting settlement | � | 111 | 189 |
| Net investment in finance leases | � | 15 | - |
| Collateral pledged in respect of derivative contracts | 38 | 18 | 8 |
| Contingent consideration asset | 40 | 1 | 8 |
| Other | � | 54 | 166 |
| Receivables and other financial assets | � | 560 | 697 |
1. Comparatives for 2018 have been represented to exclude assets backing unit linked liabilities. Refer Note 25.
The carrying amounts disclosed above reasonably approximate the fair values as at the year end.
The amount of receivables and other financial assets expected to be recovered after more than 12 months is �25m (2018: �10m).
Accrued income includes �227m (2018: �214m) of accrued income from contracts with customers (refer Note 4(b)).
| � | 2019 | 2018 |
| � | �m | �m |
| Prepayments | 48 | 38 |
| Deferred acquisition costs | 6 | 6 |
| Other | 1 | 2 |
| Other assets | 55 | 46 |
The amount of other assets expected to be recovered after more than 12 months is �6m (2018: �9m).
All deferred acquisition costs above are costs deferred on investment contracts (deferred origination costs) which relate to contracts with customers (refer Note 4(b)). The amortisation charge for deferred origination costs relating to contracts with customers from continuing operations for the year was �2m (2018: �2m).
Assets and liabilities held for sale are presented separately in the consolidated statement of financial position and consist of operations and individual non-current assets whose carrying amount will be recovered principally through a sale transaction (expected within one year) and not through continuing use.
Operations held for sale, being disposal groups, and investments in associates accounted for using the equity method are measured at the lower of their carrying amount and their fair value less disposal costs. No depreciation or amortisation is charged on assets in a disposal group once it has been classified as held for sale.
Operations held for sale include newly established investment vehicles which the Group has seeded but is actively seeking to divest from. For these investment funds, which do not have significant liabilities or non-financial assets, financial assets continue to be measured based on the accounting policies that applied before they were classified as held for sale. The Group classifies seeded operations as held for sale where the intention is to dispose of the investment vehicle in a single transaction. Where disposal of a seeded investment vehicle will be in more than one tranche the operations are not classified as held for sale in the consolidated statement of financial position.
Certain amounts seeded into funds are classified as interests in pooled investment funds. Investment property and owner occupied property held for sale relates to property for which contracts have been exchanged but the sale had not completed during the current financial year. Interests in pooled investment funds and investment property held for sale continue to be measured based on the accounting policies that applied before they were classified as held for sale.
�
| � | � | 2019 | 2018 |
| � | � | �m | �m |
| Assets of operations held for sale | � | � | � |
| Standard Life (Asia) Limited | � | 765 | 667 |
| Investment vehicles | � | 2 | 95 |
| Assets held for sale | � | 767 | 762 |
| Liabilities of operations held for sale | � | � | � |
| Standard Life (Asia) Limited | � | 747 | 643 |
| Investment vehicles | � | - | 14 |
| Liabilities of operations held for sale | � | 747 | 657 |
(a) ��������� Standard Life (Asia) Limited
On 29 March 2017, the Group announced the proposed sale of its wholly owned Hong Kong insurance business, Standard Life (Asia) Limited to the Group's Chinese joint venture business, Heng An Standard Life Insurance Company Limited. Standard Life (Asia) Limited is reported in the Asset management, platforms and wealth segment and Heng An Standard Life Insurance Company Limited is reported within the Insurance associates and joint ventures segment. The transaction remains subject to regulatory approval and Standard Life (Asia) Limited continues to be classified as an operation held for sale.
At 31 December 2019, this disposal group was measured at fair value less cost to sell and comprised the following assets and liabilities:
| � | 2019 | 2018 |
| � | �m | �m |
| Assets of operations held for sale | � | � |
| Equity securities and interests in pooled investment funds | 674 | 604 |
| Cash and cash equivalents | 26 | 33 |
| Other assets | 65 | 30 |
| Total assets of operations held for sale | 765 | 667 |
| Liabilities of operations held for sale | � | � |
| Non-participating insurance contract liabilities | 647 | 574 |
| Non-participating investment contract liabilities | 49 | 52 |
| Other liabilities | 51 | 17 |
| Total liabilities of operations held for sale | 747 | 643 |
| Net assets of operations held for sale | 18 | 24 |
Following the remeasurement of the disposal group to the lower of its carrying amount and its fair value less costs to sell, an impairment loss of �nil (2018: �2m) is included in Other administrative expenses in the consolidated income statement. Fair value has been determined by reference to the expected sale price.
Net assets of operations held for sale are net of intercompany balances between Standard Life (Asia) Limited and the rest of the Group. The net assets of Standard Life (Asia) Limited on a gross basis as at 31 December 2019 are �18m (2018: �18m).
Cash and cash equivalents include cash at bank, money at call and short notice with banks, and any highly liquid investments with less than three months to maturity from the date of acquisition. For the purposes of the consolidated statement of cash flows, cash and cash equivalents also include bank overdrafts which are included in other financial liabilities on the consolidated statement of financial position.
Where the Group has a legally enforceable right of set off and intention to settle on a net basis, cash and overdrafts are offset in the consolidated statement of financial position.
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| � | 2019 | 20181 |
| � | �m | �m |
| Cash at bank and in hand | 852 | 658 |
| Money at call, term deposits and debt instruments with less than three months to maturity from acquisition | 763 | 452 |
| Cash and cash equivalents | 1,615 | 1,110 |
�
| � | � | 2019 | 20181 |
| � | Notes | �m | �m |
| Cash and cash equivalents | � | 1,615 | 1,110 |
| Cash and cash equivalents backing unit linked liabilities | 25 | 44 | 30 |
| Cash and cash equivalents classified as held for sale | 23 | 26 | 33 |
| Bank overdrafts | 36 | (338) | (216) |
| Total cash and cash equivalents for consolidated statement of cash flows | � | 1,347 | 957 |
1. Comparatives for 2018 have been represented to exclude assets backing unit linked liabilities. Refer Note 25.
Cash at bank, money at call and short notice and deposits are subject to variable interest rates.
Included in cash and cash equivalents and bank overdrafts are �592m (2018: �566m) and �338m (2018: �216m) relating to balances within a cash pooling facility in support of which cross guarantees are provided by certain subsidiary undertakings and interest is paid or received on the net balance. Included in cash and cash equivalents is an offsetting overdraft of �219m (2018: �343m) where the Group has a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis.
Cash and cash equivalents in respect of unit linked funds (including third party interests in consolidated funds) are held in separate bank accounts and are not available for general use by the Group.
The Group operates unit linked life assurance businesses through a number of subsidiaries. These subsidiaries provide investment products through a life assurance wrapper. These products do not contain any features which transfer significant insurance risk and therefore are classified as investment contracts. Unit linked non-participating investment contracts are separated into two components being an investment management services component and a financial liability. All fees and related administrative expenses are deemed to be associated with the investment management services component (refer Note 4). The financial liability component is designated at FVTPL as it is implicitly managed on a fair value basis as its value is directly linked to the market value of the underlying portfolio of assets. This is unchanged following the adoption of IFRS 9.
Where the Group is deemed to control an investment vehicle as a result of holdings in that vehicle by subsidiaries to back unit linked non-participating investment contract liabilities, the assets and liabilities of the vehicle are consolidated within the Group's statement of financial position. The liability for third party interest in such consolidated funds is presented as a unit linked liability.
Unit linked liabilities and assets backing unit linked liabilities are presented separately in the consolidated statement of financial position except for those held in operations held for sale, which are presented in assets and liabilities held for sale in the consolidated statement of financial position. This is a change in presentation compared to 2018, where these assets and liabilities were not presented separately. This change in presentation, which follows the sale of the UK and European insurance business in 2018, is to make the financial statements more relevant to users by highlighting the matched assets and liabilities that relate to unit linked business separately to other shareholder business assets and liabilities on the face of the consolidated statement of financial position.
Contributions received on non-participating investment contracts and from third party interest in consolidated funds are treated as deposits and not reported as revenue in the consolidated income statement.
Withdrawals paid out to policyholders on non-participating investment contracts and to third party interest in consolidated funds are treated as a reduction to deposits and not recognised as expenses in the consolidated income statement.
Investment return and related benefits credited in respect of non-participating investment contracts and third party interest in consolidated funds are recognised in the consolidated income statement as changes in investment contract liabilities and changes in liability for third party interest in consolidated funds respectively.
Assets backing unit linked liabilities comprise financial investments, which are all classified as FVTPL on a mandatory basis, and receivables and other financial assets and cash and cash equivalents which are measured at amortised cost.
The shareholder is not directly exposed to market risk or credit risk in relation to the financial assets backing unit linked liabilities. The shareholder's exposure to market risk on these assets is limited to variations in the value of future fee based revenue as fees are based on a percentage of fund value.
The shareholder is exposed to liquidity risk relating to unit linked funds. For the unit linked business, liquidity risk is primarily managed by holding a range of diversified instruments which are assessed against cash flow and funding requirements. A core portfolio of assets is maintained and invested in accordance with the mandates of the relevant unit linked funds. Given that unit linked policyholders can usually choose to surrender, in part or in full, their unit linked contracts at any time, the non-participating investment contract unit linked liabilities are designated as payable within one year. Such surrenders would be matched in practice, if necessary, by sales of underlying assets. Policyholder behaviour and the trading position of asset classes are actively monitored. The Group can delay settling liabilities to unit linked policyholders to ensure fairness between those remaining in the fund and those leaving the fund. The length of any such delay is dependent on the underlying financial assets.
Each of the unit linked financial liabilities and the financial assets backing unit linked liabilities has been categorised below using the fair value hierarchy as defined in Note 40. Refer Note 40 for details of valuation techniques used.
| � | Level 1 | Level 2 | Level 3 | Not at fair value | Classified as held for sale1 | Total |
| 2019 | �m | �m | �m | �m | �m | �m |
| Financial investments | 1,991 | 211 | - | - | (674) | 1,528 |
| Receivables and other financial assets | - | - | - | 10 | - | 10 |
| Cash and cash equivalents | - | - | - | 45 | (1) | 44 |
| Total financial assets backing unit linked liabilities | 1,991 | 211 | - | 55 | (675) | 1,582 |
| Investment contract liabilities | - | 1,201 | - | - | (49) | 1,152 |
| Third party interest in consolidated funds | - | 416 | - | - | - | 416 |
| Other unit linked financial liabilities | - | 6 | - | 6 | - | 12 |
| Total unit linked financial liabilities | - | 1,623 | - | 6 | (49) | 1,580 |
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| � | � Level 1 | Level 2 | Level 3 | Not at fair value | Classified as held for sale1 | Total |
| 2018 | �m | �m | �m | �m | �m | �m |
| Financial investments | 2,114 | 149 | - | - | (604) | 1,659 |
| Receivables and other financial assets | - | - | - | 11 | - | 11 |
| Cash and cash equivalents | - | - | - | 31 | (1) | 30 |
| Total financial assets backing unit linked liabilities | 2,114 | 149 | - | 42 | (605) | 1,700 |
| Investment contract liabilities | - | 1,520 | - | - | (52) | 1,468 |
| Third party interest in consolidated funds | - | 228 | - | - | - | 228 |
| Other unit linked financial liabilities | - | - | - | 3 | - | 3 |
| Total unit linked financial liabilities | - | 1,748 | - | 3 | (52) | 1,699 |
1. Financial investments include financial assets backing unit linked liabilities classified as non-participating insurance contracts within liabilities of operations held for sale. (Refer Note 23).
The financial investments backing unit linked liabilities comprise equity securities and interests in pooled investment funds of �1,338m (2018: �1,521m), debt securities of �185m (2018: �136m) and derivative financial assets of �5m (2018: �2m). In addition to unit linked financial liabilities shown above there is a current tax liability of �2m (2018: �1m) included in unit linked liabilities.
The fair value of financial instruments not held at fair value approximates to their carrying value at 31 December 2019 and 31 December 2018.
There were no financial instruments transferred from level 1 to level 2 in the year (2018: none). There were no movements in level 3 financial assets and liabilities (2018: none).
The change in non-participating investment contract liabilities was as follows:
| � | � | 2019 | 2018 |
| � | � | �m | �m |
| At 1 January | � | 1,468 | 105,769 |
| Reclassified as held for sale during the year | � | - | (104,174) |
| Contributions | � | 158 | 183 |
| Account balances paid on surrender and other terminations in the year | � | (729) | (235) |
| Change in non-participating investment contract liabilities recognised in the consolidated income statement1 | � | 258 | (72) |
| Recurring management charges | � | (3) | (3) |
| At 31 December | � | 1,152 | 1,468 |
1. Change in non-participating investment contract liabilities recognised in the consolidated income statement in the table above excludes �7m (2018: (�6m)) in relation to non-participating investment contract liabilities classified as held for sale.
The treatment of collateral accepted and pledged in respect of financial instruments and the Group's approach to offsetting financial assets and liabilities is described in Note 38. The following table presents the impact of master netting agreements and similar arrangements for derivatives backing unit linked liabilities.
| | | Related amounts not offset on the consolidated | | |
| | Gross amounts of financial instruments as presented on the consolidated statement of financial position | Financial | Financial collateral pledged/(received) | Net position |
| As at 31 December 2019 | �m | �m | �m | �m |
| Financial assets | | | | |
| Derivatives1 | 3 | (2) | - | 1 |
| Total financial assets | 3 | (2) | - | 1 |
| Financial liabilities | | | | |
| Derivatives1 | (5) | 2 | - | (3) |
| Total financial liabilities | (5) | 2 | - | (3) |
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| | | Related amounts not offset on the consolidated | | |
| | Gross amounts of financial instruments as presented on the consolidated statement of financial position | Financial | Financial collateral pledged/(received) | Net position |
| As at 31 December 2018 | �m | �m | �m | �m |
| Financial assets | | | | |
| Derivatives1 | 2 | - | - | 2 |
| Total financial assets | 2 | - | - | 2 |
| Financial liabilities | � | � | � | � |
| Derivatives1 | (2) | - | - | (2) |
| Total financial liabilities | (2) | - | - | (2) |
1. Only OTC derivatives subject to master netting agreements have been included above.
Shares are classified as equity instruments when there is no contractual obligation to deliver cash or other assets to another entity on terms that may be unfavourable. The Company's share capital consists of the number of ordinary shares in issue multiplied by their nominal value. The difference between the proceeds received on issue of the shares and the nominal value of the shares issued is recorded in share premium.
The movement in the issued ordinary share capital of the Company was:
| � | 2019 | 2018 | |||
| Issued shares fully paid � | 13 61/63p each | �m | 12 2/9p each | 13 61/63p each | �m |
| At 1 January | 2,529,412,224 | 353 | 2,978,936,877 | - | 364 |
| Shares issued in respect of share incentive plans | 1,114 | - | 435,340 | 288 | - |
| Shares issued in respect of share options | - | - | 350,156 | - | - |
| New shares issued immediately prior to share consolidation | - | - | 4 | - | - |
| Share consolidation | - | - | (2,941,738,848) | 2,574,021,492 | - |
| Shares bought back on-market and cancelled | (190,689,614) | (26) | (37,983,529) | (44,609,556) | (11) |
| At 31 December | 2,338,723,724 | 327 | - | 2,529,412,224 | 353 |
All ordinary shares in issue in the Company rank pari passu and carry the same voting rights and entitlement to receive dividends and other distributions declared or paid by the Company.
On 22 October 2018, the Company undertook a share consolidation of the Company's share capital. 7 new ordinary shares of 13 61/63 pence each were issued for each holding of 8 existing ordinary shares of 12 2/9 pence each. As a result, the number of shares in issue reduced from 2,941,738,848 to 2,574,021,492.
On 25 June 2018, a share buyback of up to �750m through on-market purchases was approved by shareholders. During the year ended 31 December 2019, the Company has bought back and cancelled 190,689,614 shares (2018: 82,593,085 shares). The total consideration was �516m (2018: �238m) which includes transaction costs and any unsettled purchases of shares. At 31 December 2019, there were no unsettled purchases of shares (2018: 792,527 shares).
This consideration has resulted in a reduction in retained earnings of �390m (2018: �238m) and in the special reserve of �126m (2018: �nil). An amount of �26m (2018: �11m) has been credited to the capital redemption reserve relating to the nominal value of the shares cancelled.
The Company can issue shares to satisfy awards granted under employee incentive plans which have been approved by shareholders. Details of the Group's employee plans are provided in Note 44.
(b) ��� Return of capital in the prior year
2,941,738,848 B shares were issued for nil consideration with a nominal value of 33.99 pence each on 22 October 2018, resulting in a total of �1,000m being credited to the B share capital account. At the same time �1,000m was deducted from the merger reserve. On 24 October 2018 the B shares were redeemed at 33.99 pence each. An amount of �1,000m was deducted from the B share capital account and �1,000m was transferred from retained earnings to the capital redemption reserve. The costs of the B share scheme of �2m were recognised directly in equity.
(c)���� Share premium
| � | � | � | � | 2019 | 2018 |
| � | � | � | � | �m | �m |
| 1 January | � | � | � | 640 | 639 |
| Shares issued in respect of share options | � | � | � | - | 1 |
| 31 December | � | � | � | 640 | 640 |
Shares held by trusts relates to shares in Standard Life Aberdeen plc that are held by the Standard Life Aberdeen Employee Benefit Trust (SLA EBT), Standard Life Employee Trust (ET), the Aberdeen Asset Management Employee Benefit Trust 2003 (AAM EBT) and, prior to its closure, the Standard Life Unclaimed Asset Trust (UAT). The SLA EBT was established on 28 March 2019.
The SLA EBT, ET and AAM EBT purchase shares in the Company for delivery to employees under employee incentive plans. Purchased shares are recognised as a deduction from equity at the price paid for them. Where new shares are issued to the SLA EBT, ET or AAM EBT the price paid is the nominal value of the shares. When shares are distributed from the trust their corresponding value is released to retained earnings.
In July 2006 Standard Life Group demutualised and former members of the mutual company were allocated shares in the new listed Company. Some former members had not claimed their shares and the UAT was established to hold these shares on their behalf. The claim entitlement period for the UAT expired on 9 July 2016 and all remaining claims have now been concluded. On 13 December 2019, Standard Life Aberdeen plc instructed the Trustees of the UAT to return all remaining unclaimed shares and other assets held and to formally close the UAT. All assets in the UAT were transferred to Standard Life Aberdeen plc on 20 December 2019 and �1m was credited to the retained earnings of the Company (see Note 28). Prior to Standard Life Aberdeen plc issuing its closure instruction to the Trustees, the shares remaining in the UAT after 9 July 2016 had been measured at �nil.
The number of shares held by trusts at 31 December 2019 was as follows:
| � | � | � | � | 2019 | 2018 |
| Number of shares held by trusts | � | � | � | � | � |
| Standard Life Aberdeen Employee Benefit Trust | � | � | � | 15,378,831 | - |
| Standard Life Employee Trust | � | � | � | 26,685,390 | 31,589,855 |
| Aberdeen Asset Management Employee Benefit Trust 2003 | � | � | � | 10,579,914 | 20,327,295 |
| Standard Life Unclaimed Asset Trust | � | � | � | - | 153,020 |
The following table shows movements in retained earnings during the year. The movements are aggregated for both continuing and discontinued operations.
| � | � | 2019 | 2018 |
| � | Notes | �m | �m |
| Opening balance carried forward | � | 2,778 | 3,162 |
| Effect of change in accounting policy to IFRS 91 | � | (12) | - |
| Effect of change in accounting policy to IFRS 161 | � | (5) | - |
| Opening balance at 1 January | � | 2,761 | 3,162 |
| | � | � | � |
| Recognised in comprehensive income | � | � | � |
| Recognised in profit for the year attributable to equity holders | � | 266 | 830 |
| Recognised in other comprehensive income | � | � | � |
| Remeasurement (losses)/gains on defined benefit pension plans | 34 | (23) | (29) |
| Share of other comprehensive income of associates and joint ventures | � | (10) | (15) |
| Total items recognised in comprehensive income | � | 233 | 786 |
| � | � | � | � |
| Recognised directly in equity | � | � | � |
| Dividends paid on ordinary shares | � | (518) | (634) |
| Redemption of B shares | 26 | - | (1,002) |
| Shares bought back on-market and cancelled | 26 | (390) | (238) |
| Transfer from other reserves on disposal of subsidiaries | 1 | - | 99 |
| Transfer between reserves on impairment of subsidiaries | 29 | 780 | 570 |
| Transfer for vested employee share-based payments | � | 57 | 68 |
| Transfer from the Standard Life Unclaimed Asset Trust | 27 | 1 | - |
| Shares distributed by employee and other trusts | � | (38) | (33) |
| Total items recognised directly in equity | � | (108) | (1,170) |
| At 31 December | � | 2,886 | 2,778 |
1. The Group has initially applied IFRS 9 and IFRS 16 at 1 January 2019. Under the transition methods chosen, comparative information is not restated and the cumulative effect of initially applying these standards is recognised in retained earnings at the date of initial application. Refer Basis of preparation.
In July 2006 Standard Life Group demutualised and during this process the merger reserve, the reserve arising on Group reconstruction and the special reserve were created.
Merger reserve: the merger reserve consists of two components. Firstly at demutualisation in July 2006 the Company issued shares to former members of the mutual company. The difference between the nominal value of these shares and their issue value was recognised in the merger reserve. The reserve includes components attaching to each subsidiary that was transferred to the Company at demutualisation based on their fair value at that date. Secondly following the completion of the merger of Standard Life plc and AAM PLC on 14 August 2017, an additional amount was recognised in the merger reserve representing the difference between the nominal value of shares issued to shareholders of AAM PLC and their fair value at that date. On disposal or impairment of a subsidiary any related component of the merger reserve is released to retained earnings.
Reserve arising on Group reconstruction: The value of the shares issued at demutualisation was equal to the fair value of the business at that date. The business's assets and liabilities were recognised at their book value at the time of demutualisation. The difference between the book value of the business's net assets and its fair value was recognised in the reserve arising on Group reconstruction. The reserve comprises components attaching to each subsidiary that was transferred to the Company at demutualisation. On disposal of such a subsidiary any related component of the reserve arising on Group reconstruction is released to retained earnings.
Special reserve: Immediately following demutualisation and the related initial public offering, the Company reduced its share premium reserve by court order giving rise to the special reserve. Dividends can be paid out of this reserve.
Capital redemption reserve: In August 2018, as part of the return of capital and share buyback (refer Note 26) the capital redemption reserve was created.
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The following tables show the movements in other reserves during the year. The movements are aggregated for both continuing and discontinued operations.
| | � | Cash flow hedges | Foreign currency translation | Available-for-sale financial assets | Merger reserve | Equity compensation reserve | Special reserve | Reserve arising on Group reconstruction | Capital redemption reserve | Total |
| | Notes | �m | �m | �m | �m | �m | �m | �m | �m | �m |
| 31 December 2018 | � | (6) | 49 | 7 | 3,097 | 68 | 241 | (685) | 1,011 | 3,782 |
| Effect of change in accounting policy to | | - | - | (7) | - | - | - | - | - | (7) |
| 1 January 2019 | � | (6) | 49 | - | 3,097 | 68 | 241 | (685) | 1,011 | 3,775 |
| Recognised in other comprehensive income | | � | � | � | � | � | � | � | � | � |
| Fair value gains on cash flow hedges | � | (10) | - | - | - | - | - | - | - | (10) |
| Exchange differences on translating foreign operations | � | - | (46) | - | - | - | - | - | - | (46) |
| Items transferred to profit or loss from continuing operations | � � | 22 | - | - | - | - | - | - | - | 22 |
| Aggregate tax effect of items recognised in other comprehensive income | � | (2) | - | - | - | - | - | - | - | (2) |
| Total items recognised in other comprehensive income | � | 10 | (46) | - | - | - | - | - | - | (36) |
| Recognised directly in equity | � | � | � | � | � | � | � | � | � | � |
| Shares bought back on-market and cancelled | 26 | - | - | - | - | - | (126) | - | 26 | (100) |
| Reserves credit for employee share-based payments | � | - | - | - | - | 43 | - | - | - | 43 |
| Transfer to retained earnings for vested employee share-based payments | � | - | - | - | - | (57) | - | - | - | (57) |
| Transfer between reserves on impairment of subsidiaries | | - | - | - | (780) | - | - | - | - | (780) |
| Total items recognised directly within equity | | - | - | - | (780) | (14) | (126) | - | 26 | (894) |
| At 31 December 2019 | � | 4 | 3 | - | 2,317 | 54 | 115 | (685) | 1,037 | 2,845 |
1. The Group has initially applied IFRS 9 at 1 January 2019. Under the transition method chosen, comparative information is not restated and the cumulative effect of initially applying this standard is recognised in retained earnings at the date of initial application. Refer Basis of preparation.
The merger reserve includes �2,304m (2018: �3,084m) in relation to the Group's asset management businesses. This includes �1,990m (2018: �2,601m) relating to the merger with Aberdeen. Following the impairment of the Company's investments in its asset management entities (refer Section 8), �780m (2018: �570m) was transferred from the merger reserve to retained earnings to mitigate the impact on distributable reserves. �996m of the merger reserve relating to the asset management businesses was also utilised during the year ended 31 December 2018 for the issue of the B shares (refer Note 26).
| | � | Revaluation of owner occupied property | Cash flow hedges | Foreign currency translation | Available-for-sale financial assets | Merger reserve | Equity compensation reserve | Special reserve | Reserve arising on Group reconstruction | Capital redemption reserve | Total |
| 2018 | Notes | �m | �m | �m | �m | �m | �m | �m | �m | �m | �m |
| At 1 January | | 1 | (17) | 82 | 15 | 5,957 | 100 | 241 | (1,879) | - | 4,500 |
| Recognised in other comprehensive income | | � | � | � | � | � | � | � | � | � | � |
| Fair value losses on available-for-sale financial assets | | - | - | - | (9) | - | - | - | - | - | (9) |
| Fair value gains on cash flow hedges | | - | 54 | - | - | - | - | - | - | - | 54 |
| Revaluation of owner occupied property | | 2 | - | - | - | - | - | - | - | - | 2 |
| Exchange differences on translating foreign operations | | - | - | 17 | - | - | - | - | - | - | 17 |
| With profits funds: Associated UDS movement recognised in other comprehensive income | | - | - | (5) | - | - | - | - | - | - | (5) |
| Items transferred to profit or loss from continuing operations | | - | (41) | (2) | - | - | - | - | - | - | (43) |
| Items transferred to profit or loss on disposal of a subsidiary | 1 | - | - | (43) | - | - | - | - | - | - | (43) |
| Aggregate tax effect of items recognised in other comprehensive income | | - | (2) | - | 1 | - | - | - | - | - | (1) |
| Total items recognised in other comprehensive income | � | 2 | 11 | (33) | (8) | - | - | - | - | - | (28) |
| Recognised directly in equity | | � | � | � | � | � | � | � | � | � | � |
| Issue of B shares | 26 | - | - | - | - | (1,000) | - | - | - | - | (1,000) |
| Redemption of B shares | 26 | - | - | - | - | - | - | - | - | 1,000 | 1,000 |
| Shares bought back on-market and cancelled | 26 | - | - | - | - | - | - | - | - | 11 | 11 |
| Reserves credit for employee share-based payments | | - | - | - | - | - | 36 | - | - | - | 36 |
| Transfer to retained earnings for vested employee share-based payments | | - | - | - | - | - | (68) | - | - | - | (68) |
| Transfer between reserves on disposal of subsidiaries | 1 | (3) | - | - | - | (1,290) | - | - | 1,194 | - | (99) |
| Transfer between reserves on impairment of subsidiaries | | - | - | - | - | (570) | - | - | - | - | (570) |
| Total items recognised directly within equity | | (3) | - | - | - | (2,860) | (32) | - | 1,194 | 1,011 | (690) |
| At 31 December | | - | (6) | 49 | 7 | 3,097 | 68 | 241 | (685) | 1,011 | 3,782 |
Non-controlling interests include preference shares. In addition, the perpetual debt instruments issued by Standard Life Aberdeen plc were classified prior to their redemption as other equity as no contractual obligation to deliver cash existed.
Non-controlling interests - ordinary shares of �3m were held at 31 December 2019 (2018: �2m). The profit attributable to non-controlling interests from discontinued operations for the year ended 31 December 2018 comprised �5m in respect of ordinary shares.
(b) ��� Non-controlling interests - preference shares
| � | 2019 | 2018 |
| � | �m | �m |
| 5% 2015 Non-voting perpetual non-cumulative redeemable preference shares | 99 | 99 |
The Group recognises preference shares issued by AAM PLC as non-controlling interests. The profit attributable to these non-controlling interests from continuing operations for the year ended 31 December 2019 was �5m (2018: �5m).
The preference shares have no fixed redemption date, except at the sole discretion of the issuer after the fifth anniversary from issue. Preference share dividends are discretionary and where declared, are paid in arrears in two tranches at a rate of 5% per annum and are non-cumulative. No interest accrues on any cancelled or unpaid dividends. During the year ended 31 December 2019 preference share dividends of �5m (2018: �5m) were paid.
The preference shares can be converted irrevocably into a fixed number of ordinary shares of AAM PLC in the event of the conversion trigger. The conversion trigger occurs if AAM PLC's Common Equity Tier 1 (CET1) capital ratio falls below 5.125%. The CET1 ratio (unaudited) at 31 December 2019 was 29.3% (2018: 34.4%).
6.75% Sterling fixed rate perpetual subordinated guaranteed bonds and 6.546% Sterling fixed rate perpetual Mutual Assurance Capital Securities
From the date of the repayment of a �100 internal subordinated loan note issued by Standard Life Assurance Limited (SLAL) to the Company on 30 August 2018, the perpetual subordinated guaranteed bonds and Mutual Assurance Capital Securities (MACS) issued by the Company were reclassified to equity from subordinated liabilities (refer Note 33). The perpetual subordinated guaranteed bonds and MACS were recognised in equity at their fair value of the subordinated debt liabilities at 30 August 2018 of �672m and �334m respectively. During the year ended 31 December 2018, the Group recognised a fair value loss of �198m on the reclassification which is included in Restructuring and corporate transaction expenses from discontinued operations (refer Note 9).
The prior classification as liabilities was determined by the interaction of these perpetual debt instruments with the �100 internal subordinated loan note. There was no fixed redemption date for the internal loan note, but interest payments could not be deferred and had to be paid on the date they became due and payable. Under the terms for the guaranteed bonds and MACS any interest deferred on these instruments would have become immediately due and payable on the date of an interest payment in respect of the internal loan note. The existence of the internal loan note therefore removed the discretionary nature of the interest payments on the subordinated guaranteed bonds and MACS, and resulted in their classification as liabilities.
Following a tender and redemption process which completed on 25 October 2018, the Company repurchased/redeemed the guaranteed bonds and MACS for �703m and �336m respectively (including accrued interest and fees). The difference between the carrying value of the guaranteed bonds and MACS and the cost of the repurchase and mandatory redemption of �21m (net of tax) was recognised directly as profit attributable to other equity during the year ended 31 December 2018.
The guaranteed bonds bore interest on their principal amount at 6.75% per annum payable annually in arrears on 12 July. The MACS bore interest on their principal amount at 6.546% per annum payable annually in arrears on 4 November. The coupons payable on the guaranteed bonds and MACS were tax deductible. During the year ended 31 December 2018, �7m (net of tax) was recognised directly in equity as profit attributable to other equity in relation to the coupons payable on the guaranteed bonds and MACS.
The total amount in respect of the year ended 31 December 2018 recognised as profit attributable to other equity holders in relation to perpetual debt instruments was therefore �28m. The presentation of amounts attributable to these perpetual debt instruments in the consolidated income statement, consolidated statement of comprehensive income and consolidated statement of changes in equity has been corrected in 2019 to show these amounts separately as related to other equity holders rather than as part of non-controlling interests.
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