Introduction

For the year ended 31 December 2004, the group (SBG) prepared financial statements in accordance with SA GAAP. In line with the listing requirements of the JSE Limited, the group has adopted International Financial Reporting Standards (IFRS) with effect from 1 January 2005. As the group publishes comparative information for one year in its financial statements, the date of transition to IFRS is effectively 1 January 2004, which represents the start of the earliest period of comparative information presented. The opening balance sheets at 1 January 2004 and 1 January 2005 have been restated accordingly.

Comparative information for 2004 is restated to take into account the requirements of all the standards except for IAS 32 – Financial Instruments: Disclosure and Presentation, IAS 39 – Financial Instruments: Recognition and Measurement and IFRS 4 –Insurance Contracts. These three standards are implemented with effect from 1 January 2005 and the opening balance sheet at this date is adjusted accordingly. Balance sheets prior to this date have been prepared in accordance with SA GAAP.

South African accounting standards have seen a number of significant changes over the past couple of years as they were being aligned with IFRS. The most notable change was the adoption of the South African version of IAS 39 (AC 133 –Financial Instruments: Recognition and Measurement) in the group’s 2003 results. The final move to full IFRS compliance is therefore less significant than what is currently being experienced in Europe and the United Kingdom.

The most significant IFRS change for the group originated from the implementation of IFRS 4 – Insurance Contracts which results in Standard Bank Group and Liberty Holdings’ shares held by Liberty Life for the benefit of policyholders being deemed treasury shares for accounting purposes and eliminated on consolidation. It is however important to note that although this treasury share adjustment potentially results in greater volatility in reported earnings, there is no impact on the underlying business fundamentals, cash flows, risks, growth strategies or the group’s capital management policies.

Apart from the reclassification of cash and cash equivalents held by Liberty Life policyholders, there have been no material adjustments to the cash flow statement in respect of cash utilised by operating activities before tax, cash flows from investment activities and cash flows from financing activities as a result of the adoption of IFRS.

In light of the potential for increased earnings volatility, the group will ensure that comparable underlying business performance and trends are clearly identified on an ongoing basis. With the exception of the above-mentioned change, the implementation of IFRS has a relatively immaterial impact on the group’s financial position and earnings.

Transitional arrangements

The key principle of IFRS 1 – First-time Adoption of International Financial Reporting Standards is full retrospective application of IFRS. However, in addition to exempting companies from the requirement to restate comparatives under IAS 32, IAS 39 and IFRS 4, this statement provides exemptions from retrospective application in certain instances due to cost and practical considerations. The group’s transitional elections in this regard are set out below:

Elections applicable 1 January 2004

• Business combinations: The group elected not to retrospectively apply the requirements of IFRS 3 for business combinations that occurred prior to 1 January 2004. As a result, the carrying amount of goodwill is the amortised amount on 31 December 2003 and previously amortised goodwill and goodwill eliminated against reserves were not re-instated.
• Property and equipment: A first-time adopter may elect to use the fair value of individual property and equipment at transition date as the deemed cost. The group did not make use of this transitional exemption and elected to measure individual items of property and equipment at depreciated cost determined in accordance with IFRS.
• Employee benefits: The group elected not to apply the exemption to account for all deferred actuarial gains or losses, including a 10% tolerance limit for differences in actuarial assumptions, in opening equity as at 1 January 2004. This exemption was not elected as the group’s accounting for employee benefits under previous SA GAAP was already substantially in compliance with IAS 19 – Employee Benefits.
• Cumulative foreign currency translation adjustment: The cumulative foreign currency translation reserve existing on transition to IFRS has been retained and the option to reset the reserve to zero was not elected as the group’s accounting for translation adjustments under previous SA GAAP was already substantially in compliance with IAS 21 – The Effects of Changes in Foreign Exchange Rates.
• Share-based payments: The group elected not to apply the provisions of IFRS 2 – Share-based Payments to equity-settled awards granted on or before 7 November 2002, or to awards granted after that date but which had vested prior to 1 January 2005.

Elections applicable 1 January 2005

• Comparative numbers restated for financial instruments and insurance contracts: The group elected the exemption not to restate its comparatives for IAS 32 – Financial Instruments: Disclosure and Presentation, IAS 39 – Financial Instruments: Recognition and Measurement and IFRS 4 – Insurance Contracts. The group has therefore applied SA GAAP applicable as at 31 December 2004 to financial instruments and insurance contracts in its 2004 numbers disclosed as comparatives for the 2005 IFRS results. It is considered impractical to retrospectively adjust for changes resulting from revised impairment and insurance contract requirements.
• Designation of financial assets and financial liabilities in terms of IAS 39: In terms of the transitional arrangements the group elected the option to reclassify certain financial assets and liabilities. These reclassifications were not material.

There are no changes to estimates made under previous SA GAAP for transition to IFRS (for example expected default or actuarial assumptions). Where estimates have previously been made under SA GAAP, consistent estimates (after adjustments to reflect any difference in accounting policies) have been made at the same date.

Adjustments as a result of the adoption of IFRS

The impact of changing from SA GAAP to IFRS is summarised below. The quantification of the IFRS adjustments is shown in the tables for reconciliation of assets, liabilities and equity, reconciliation of the 2004 closing balance sheet, reconciliation of changes in equity and reconciliation of the income statement.

Adjustments implemented with effect from 1 January 2004

Note 1: IAS 18 – Revenue recognition and deferred acquisition costs (excluding insurance contracts accounted for in terms of IFRS 4)

The previous South African version of IAS 39 (AC 133 – Financial Instruments: Recognition and Measurement) required that fees which form an integral part of the effective interest rate, including transaction costs, be taken into account in calculating the original effective yield. Initial fees that relate to the origination of loans are therefore deferred and amortised as an adjustment to the effective interest rate. The same accounting principle was carried forward in the revised IAS 18 with fees relating to the future provision of services deferred and amortised over the anticipated period in which the services will be provided. A small adjustment was required to align the previous deferral methodologies with the revised IAS 18, primarily for instalment finance on moveable assets.

Note 2: IAS 36/IFRS 3 – Goodwill

Previously, the group recognised acquired goodwill at cost and amortised it on a straight-line basis over its expected useful life. Goodwill was subject to regular review for indications of impairment and any impairment charges were recognised in the income statement. In terms of IFRS 3 – Business Combinations, goodwill is not amortised but is subject to impairment reviews, both annually and where there are indications that the carrying value may not be recoverable. The 2004 goodwill amortisation previously recognised in the income statement has been reversed, resulting in a corresponding increase in equity. All goodwill has accordingly been tested for impairment at 1 January 2004 and 31 December 2004. One instance of a goodwill impairment for 2004 arose following the application of the new accounting rules and this relates to the group’s international operations.

Note 3: IFRS 2 – Share-based Payments

The group grants share options to employees under equity compensation plans. Other than costs incurred in administering the schemes, which were expensed as incurred, the schemes did not result in any expense in the income statement, but rather a dilution in earnings per share when the shares were issued. In accordance with the requirements of IFRS 2, the group now recognises an expense in the income statement, with a corresponding credit to equity, representing the fair value of employee share options granted, recognised on a straight-line basis over the vesting period of the options.

The group also applied IFRS 2 to the Tutuwa initiative. The standard is applicable to awards that have not vested by 31 December 2004 and, as a result, the ownership of shares allocated to black managers that vest over a period ending on 31 December 2010 is accounted for in terms of this standard. The shares owned by the community trust and strategic partners have vested before 31 December 2004 and, as a result of the election not to apply IFRS 2 retrospectively, no expense is therefore required.

Note 4: IAS 16 – Revaluation of residual values in property and equipment

In calculating its depreciation charge, an entity reduces the depreciable amount of an asset by its residual value. Previously under SA GAAP, the estimated residual value was fixed on recognition of the asset and was not subject to reassessment. IAS 16 revised requires that the residual value of the assets should be reassessed at each balance sheet date. Annual increases in asset values result in annual upward adjustments of residual values. The continuous reassessment of residual values typically leads to a reduction in depreciation charges and depreciation charges cease when the carrying value of an asset equals the residual value.

Buildings’ carrying values that were previously fully depreciated are now partially re-instated to reflect the applicable residual value. Where buildings are not fully depreciated, there has generally been a reduction in depreciation as residual values are reassessed. The depreciation previously recognised in the income statement has accordingly been reversed or reduced, resulting in a corresponding increase in equity.

Note 5: IAS 16 – Reclassification of property revaluations

This adjustment is to account for property revaluation surpluses directly in equity. This has no impact on total equity.

Note 6: IAS 27 – Consolidation of mutual funds

IFRS requires the consolidation of certain mutual funds where Liberty Life and Corporate & Investment Banking International are considered to have control of such funds through the size of their investment, voting control and related management contracts. The consolidation of these mutual funds has an immaterial effect on net equity. Similarly where Liberty Life has a holding of between 20% and 50% in a mutual fund this is now treated as an associate. In terms of the allowance in IFRS for equity investments in mutual funds the group has elected to fair value these associates.

The consolidation of such funds is still subject to international industry debate, and progress in this regard will be monitored.

Note 7: IAS 17 – Leases

IAS 17 requires operating lease costs and income to be accounted for on a straight-line basis. Future lease increases in terms of the lease contract are estimated and the average lease expense is then recognised in equal amounts over the lease period. In general, this leads to earlier recognition of lease income and lease expense compared with the pattern of recognition in terms of previous industry practice in South Africa where income and expenses were recognised at a constant real rate of return on the net cash investment in the lease. This would, in most cases, result in higher lease costs for previously reported periods with a reduction in the 2004 opening equity and an increase in the 2004 lease costs.

IAS 40 – Investment Property states that the fair value of investment property should exclude prepaid or accrued operating lease income if this would otherwise result in double counting. Liberty Life has therefore offset the resulting adjustment against the fair value adjustment on investment properties. This has no impact on net income, as there is a corresponding increase in lease income. At 1 January 2004 an amount of R850 million has been accrued in other assets with a decrease in investment properties of R593 million and an increase in deferred tax of R257 million. The movement for the year ended 31 December 2004 was an additional reclassification from investment properties of R37 million.

Note 8: IAS 12/IAS 40 – Deferred tax applicable to fair value adjustments on investment properties

IAS 12 – Income Taxes defines the difference between the carrying amount of a revalued depreciable asset and its tax base as a temporary difference and therefore gives rise to a deferred tax liability or asset. The carrying amount of a portion of investment property portfolios is considered to be recovered through future net rental income with the remaining portion recovered through disposals. In terms of IAS 12, deferred tax has to be provided on fair value adjustments on the future net rental portion at the use tax rate (income tax rate). Liberty Life already provides for deferred tax on fair value adjustments in investment properties at the applicable capital gains tax rate (CGT rate).

The resulting additional deferred tax charge has been debited to policyholders’ liabilities to the extent that the applicable investment property return impacts the determination of the policyholder liability.

It is believed that the fair (open market) value already discounts the average tax consequences of market participants in respect of rental income. IAS 12 is being revised by the IASB and we will continue to engage with them to ensure this issue is addressed in the revisions.

This has resulted in a restatement decreasing policyholders’ liabilities by R655 million with a corresponding increase in the deferred tax liability at 1 January 2004. The net movement at 31 December 2004 is a decrease of R106 million to R549 million.

Under IFRS 3 – Business Combinations and IAS 12 – Income Taxes, the relevant deferred taxation liability on the intangible asset, present value of in-force (PVIF) should be separately recognised. In Liberty Life, this has resulted in the carrying value of PVIF relating to the Investec Employee Benefits book increasing as at 1 January 2004, with the corresponding credit to deferred taxation. This results in an additional amortisation charge and a tax credit of the same amount and consequently, there is no impact on earnings.

An adjustment of R53 million was processed increasing the PVIF with a corresponding increase to deferred tax. The movement for the year ended 31 December 2004 is a decrease of R6 million to R47 million.

Adjustments implemented with effect from 1 January 2005

Note 9: IAS 39 – Credit impairments

Previously the group raised an impairment for credit losses on performing loans as the shortfall between the carrying value of a loan and the present value of expected future cash flows discounted at the original effective interest rate of loans, taking changes in expected cash flows and the average maturity of loans into account. Under IFRS an impairment loss can only be accounted for if there is objective evidence that a loss event has occurred after the initial recognition of the financial asset but before the balance sheet date. IFRS also allows for the creation of a credit impairment for incurred but not reported losses in order to provide for latent losses in a portfolio of loans that have not yet been individually identified as impaired. This change results in a net release of credit impairments and a consequent increase in the opening 2005 equity.

For certain African entities, already reporting under IFRS, the impairment for credit losses is lower than the level required by their respective regulatory authorities. As a result, a portion of their impairment for credit losses is released to equity on a retrospective basis. It has been agreed with these regulatory authorities that any shortfall on impairment for credit losses will be set aside in a statutory credit risk reserve within total equity.

Note 10: IAS 32 – Elimination of treasury shares

Shares in group companies held for the benefit of policyholders in the insurance operation were previously not classified as treasury shares in terms of industry practice. Significantly all of the risks and rewards arising from these shares are for the benefit of the policyholders. As a result of the issue of IFRS 4 – Insurance Contracts, the SA GAAP statement dealing with the insurance industry (AC 121: Disclosure in the financial statements of long-term insurers) was revoked. Assets are now subject to IAS 39 –Financial Instruments: Recognition and Measurement and IAS 32 –Financial Instruments: Disclosure and Presentation. As a result, shares held by policyholders in group companies are accounted for as equity instruments. In terms of IAS 32 the cost price of any SBG and Liberty Holdings’ shares held by policyholders within Liberty Life is now eliminated against equity and any current period changes in fair value are eliminated from the income statement. In terms of actuarial principles, the insurance operation maintains a matching position to ensure the risk profile of liabilities to policyholders is matched by the underlying shares. The classification of policyholders’ investments in group company shares as treasury shares for accounting purposes does not consider the relationship between the policyholders’ liabilities and shares held to meet these liabilities and consequently the corresponding policyholder liability is not similarly adjusted. This introduces a mismatch between assets and liabilities which is charged against equity.

Application of IAS 32 to these shares reduces equity and investments by R3 703 million in the opening 2005 balance sheet. As the effective interest held by the group in Liberty Life is approximately 30%, R951 million of the equity reduction is allocated to ordinary shareholders, with the remaining 70% allocated against minority interests.

The statement on earnings per share, IAS 33, requires that the weighted number of shares should be calculated after deducting the total number of deemed treasury shares. It does not contemplate minority portions of treasury shares and consequently 100% of the number of shares is eliminated.

The result of the above is that 30% of the value of these treasury shares is eliminated against ordinary shareholders’ equity, 30% of the fair value adjustments is eliminated against earnings attributable to ordinary shareholders with the remaining 70% eliminated against earnings attributable to minorities. In contrast, 100% of the weighted number of treasury shares is eliminated for purposes of per share calculations.

Note 11: IAS 39 – Financial instrument reclassifications

The group has elected the exemption not to restate its comparatives for IAS 32 – Financial Instruments: Disclosure and Presentation and IAS 39 – Financial Instruments: Recognition and Measurement. SBG has therefore applied SA GAAP applicable at 31 December 2004 to financial instruments in its 2004 numbers disclosed as comparatives for the 2005 results.

For entities that were already complying with International Accounting Standards, the transitional provisions in IFRS 1 do not apply. Therefore, as a result of the IAS 39 transitional provisions, certain African entities retrospectively reclassified financial assets and liabilities from 1 January 2004.

As at 1 January 2005 Liberty Life has reclassified certain shareholder-designated financial instruments from available-for-sale to fair value through profit or loss. This resulted in a reclassification from an available-for-sale reserve to retained surplus at 1 January 2005. There is no impact on total equity. In the future, all unrealised fair value adjustments on these assets will be included directly in the income statement.

Note 12: IAS 39 – Fair value adjustments for day one profits

Unquoted financial instruments acquired were previously recognised at cost and any profit or loss on remeasurement to fair value based on valuation models was accounted for on the date of such remeasurement (day two).

The IAS 39 revision to Financial Instruments: Recognition and Measurement, issued in February 2005, provided further criteria on the recognition of gains or losses on initial recognition of financial instruments. Where pricing models use inputs that are based on observable market indicators only, all profits or losses are recognised on initial recognition. Any gain or loss on initial recognition, based on unobservable market indicators, is deferred and recognised over the life of the instrument on a straight-line basis.

As a result of the IAS 39 revision a net decrease to trading assets is reflected in the 2005 opening balance sheet with a corresponding decrease in equity.

Note 13: IFRS 4 – Insurance classifications

Liberty Life has re-examined the classification of all their contracts between investment and insurance under the IFRS 4 definition criteria. This resulted in a net reclassification from investment policyholders’ liabilities to insurance policyholders’ liabilities at 1 January 2005.

For the majority of the reclassifications, where investment contracts are reclassified as insurance contracts, this reclassification has no effect as contracts were previously valued on a fair value basis consistent with IAS 39 and the FSV methodology. Where an insurance contract is reclassified to an investment contract, negative rand reserves that were previously allowed under FSV techniques in terms of SA GAAP are now reversed, leading to a decrease in equity.

Disclosure reclassifications

Note 14: Reclassification of insurance

Balance sheet

At 31 December 2004 Liberty Life has separated the fair value of the reinsurance portion of insurance contracts from policyholders' liabilities under insurance contracts and disclosed it as an asset.

Derivative financial liabilities were previously netted off against derivative financial assets. These have been reclassified as derivative financial instruments within liabilities.

Balance sheet items for the life insurance operations were previously separately disclosed. These items have been reclassified to the corresponding banking operations’ line items where appropriate.

Income statement

Net income before goodwill relating to insurance operations has been reclassified for the year ended 31 December 2004 to appropriate new line items.

Note 15: IAS 1 – Reclassification of exceptional items

Within banking operations, exceptional items previously disclosed separately have been re-allocated to appropriate line items in the income statement for the year ended 31 December 2004.