RNS Number:1176P
Irish Life & Permanent PLC
21 July 2005
IRISH LIFE & PERMANENT PLC
Restatement of 2004 Full Year Results
Under International Financial Reporting Standards (IFRS)
and European Embedded Value (EEV)
Irish Life & Permanent today published the restatement of its full year results
under International Financial Reporting Standards ("IFRS") and European Embedded
Value ("EEV"). The impact of the restatements is summarised below.
ROI
GAAP EEV * IFRS
Eurom Eurom Eurom
Profit after Tax
Banking 92 102 102
Life 257 249 175
Associate and other 62 76 76
Total 411 427 353
Shareholders Equity 2,301 2,329 1,829
Life New Business Contribution 52 58 n/a
Commenting on the restatements Group Finance Director Peter Fitzpatrick said
"The changes have no impact on the Group's underlying capital strength and in
particular on its fundamental economics and cash flows. The IFRS accounting
principles as they relate to the Group's life insurance business do not present
a reasonable picture of the real underlying value of a fast growing successful
business. However the supplemental financial information which we are presenting
under EEV principles will enhance understanding and comparability of our life
business."
European Embedded Value
The Group believes that embedded value reporting provides users of its financial
information with a truer measure of the underlying profitability of the Group's
long term insurance business than statutory IFRS reporting. Investors will
continue to place considerable reliance on supplementary embedded value
information. The Group is adopting the EEV methodology as the basis for the
supplementary embedded value information which it will provide in its 2005
results. Previously the Group prepared embedded value information on the
achieved profits basis. The adoption of the EEV methodology for its life
assurance activities and the inclusion of the Group's banking and other
activities on an IFRS basis, results in an increase of Euro28m (1%) in shareholders
equity to Euro2,329m, an uplift of 12% in the life new business contribution to
Euro58m and an increase of 4% in reported profit after tax to Euro427m compared with
the previously reported ROI GAAP results for the year ending 31 December 2004.
The main impact on the re-stated life results arises from the effect of changes
to the assumed level of solvency capital, changes in the risk discount rate and
an explicit valuation of the time value of financial options and guarantees.
International Financial Reporting Standards
From 1 January 2005 the Group, together with all other European Union listed
companies is required to prepare its primary financial statements in accordance
with International Financial Reporting Standards ("IFRS") as adopted for use in
the European Union. The IFRS basis replaces the current ROI GAAP basis of
preparation of the primary financial statements.
Adoption of IFRS results in a reduction of Euro58m or 14% in reported profits after
tax for 2004 while shareholders equity is reduced by Euro472m or 21%. These changes
are principally due to the IFRS accounting treatment of "investment" contracts
which were previously accounted for on an embedded value basis under ROI GAAP.
In accordance with the accounting standards issued by the IASB the Group's
primary consolidated financial statements for the 2005 interim results to be
announced on 7 September will adopt the IFRS basis. Restated results for the
first half of 2004 on the IFRS and EEV basis will be published 25 August.
Further details on each of these developments is set out in the attached
documents, which form part of this announcement.
"Transition to IFRS - Restatement of 2004 Financial Information"
"Transition to EEV - Restatement of 2004 Financial Information"
For further information contact:
Name Telephone No. Mobile No. Email address
Barry Walsh 353 1 7042678 087 681 8157 barry.walsh@irishlife.ie
Head of Investor
Relations
David McCarthy 353 1 8563050 087 256 7292 david.mccarthy@irishlife.ie
Group CFO
Media:
Tom Byrne 353 1 6788099 086 810 4224 tom@mrpakinman.ie
MRPA Kinman
Transition to IFRS
Restatement of 2004 financial information
Introduction
From 1 January 2005 Irish Life & Permanent plc ('the group'), together with all
other European Union listed groups, is required to prepare its consolidated
financial statements in accordance with International Financial Reporting
Standards ('IFRS') as adopted for use in the European Union.
IFRS brings into force phase 1 of the International Accounting Standard Board's
(IASB) insurance accounting project. In view of the phased implementation of
IFRS for insurance business the group believes that shareholders will continue
to place considerable reliance on embedded value information. Accordingly the
group has prepared a separate document outlining the group financial information
with life assurance business based on embedded value earnings calculated using
the EEV principles developed by the European CFO forum.
This document presents and explains the key adjustments required to restate the
2004 ROI GAAP published financial information for the group on an IFRS basis. It
is important to note that while IFRS changes the timing of earnings recognition
particularly for life assurance business, it does not impact on business
fundamentals or cash flows which support capital and dividend payments.
Previously reported ROI GAAP information has been reformatted to assist with the
IFRS presentation. The presentation format shows the reformatted ROI GAAP
financial results together with the restated preliminary IFRS information on two
separate bases.
a. Statutory Basis
The IASB has given transitional arrangements in particular in respect of IAS
32 ' Financial instruments: disclosure and presentation', IAS 39 'Financial
instruments: recognition and measurement' and IFRS 4 'Insurance contracts'
which allow 2004 results for areas covered by these standards to be reported
on an ROI GAAP basis. This includes accounting policies for loans and
advances, debt securities, derivatives and the insurance business.
b. Pro-forma Basis
The pro-forma basis provides more meaningful comparative information by
restating the 2004 income statement and the balance sheet at 1 January 2005
to include the main impacts of IAS 32, IAS 39 and IFRS 4. It excludes the
income statement impact of derivative hedging accounting rules which were
only applied by the group from 1 January 2005.
The possibility exists that this preliminary consolidated financial information
may require adjustment before the accounts for the year ended 31 December 2005
are published because of subsequent revision or changes to the standards or the
guidance on their application.
Overview
Profit after taxation
A detailed reconciliation of the previously reported ROI GAAP profit after tax
to the preliminary IFRS statutory and pro-forma profit after taxation is set out
on pages 19 to 20. This reconciliation is summarised below.
Eurom
Previously reported ROI GAAP 411
Statutory adjustments
EEV adjustments (a) (10)
Tax adjustments (b) (7)
Goodwill (c) 11
Own share adjustment (d) (6)
Other (6)
393
Pro-forma adjustments
Shareholders' value of in-force business (e) (66)
Deferred income and acquistion costs (e) 8
Effective yield (f) 17
Other 1
Preliminary IFRS pro-forma profit 353
a. Effect of changes to the assumed level of solvency capital, changes in the
risk discount rate and an explicit valuation of the time value of options
and guarantees.
b. Taxation adjustments principally due to provision of deferred tax on
unit-linked business on an undiscounted basis compared to the previous
discounted basis.
c. Goodwill previously amortised to the income statement now not permitted under
IFRS 38 but is replaced by an annual impairment review where a nil charge
arises for the group.
d. The adjustment made in respect of changes in the market value of own shares
held for the benefit of unit-linked policyholders is no longer permitted
under IFRS.
e. IFRS 4 adjustments in respect of investment contracts previously accounted
for under embedded value, now accounted for under the IAS 39 and IAS 18
rules.
f. Cost and income arising on banking loan assets previously recognised on an
incurred basis or amortised over three years which are now required, under
IAS 39, to be amortised over the expected life of the loan.
Shareholders' equity
A detailed reconciliation of the previously reported ROI GAAP shareholders'
equity to the preliminary IFRS statutory and pro-forma profit shareholders'
equity is set out on pages 21 to 24. This reconciliation is summarised below.
Eurom
Previously reported under ROI GAAP 2,301
Statutory IFRS adjustments
Pension costs (i) (166)
Dividend recognition (ii) 104
EEV adjustments (iii) (51)
Goodwill (iv) 11
Own share adjustment (v) (34)
Other 3
2,168
Pro-forma adjustments
Shareholders' value of in-force business (vi) (514)
Deferred acquisition costs (vi) 151
Deferred income (vi) (168)
Other IFRS 4 (vi) 59
Effective yield (vii) 77
Impairment provisions (viii) 50
Other 6
Preliminary IFRS pro-forma shareholders' equity 1,829
i. Recognition of pension costs under IAS 19
ii. Proposed dividends no longer recognised until approved by shareholders under
IFRS.
iii. Effect of changes to the assumed level of solvency capital, changes in the
risk discount rate and an explicit valuation of the time value of options
and guarantees.
iv. Goodwill previously amortised to the income statement now not permitted
under IFRS 38.
v. Liability adjustment in respect of own shares held for the benefit of
unit-linked policyholders is not permitted under IFRS.
vi. IFRS 4 adjustments in respect of the shareholders' value of in-force
business, deferred acquisition costs, deferred income and other reserve
adjustments arising on investment contracts previously accounted for under
embedded value, now accounted for under IAS 39 and IAS 18.
vii. Cost and income arising on banking loan assets previously recognised on an
incurred basis or amortised over three years now required under IAS 39 to be
amortised over the expected life of the loan.
viii. Write-back of general provisions for bad and doubtful debts no longer
permitted under IAS 39.
Consolidated Preliminary Income Statement
Year ended 31 December 2004
ROI GAAP as IFRS IFRS
reformatted Statutory Pro-forma
Eurom Eurom Eurom
Interest
receivable 847 843 843
Interest payable (498) (491) (491)
349 352 352
Fees and
commission income 45 60 60
Fees and
commission
expenses (41) (41) (6)
Net trading income 6 6 6
Premiums on
insurance
contracts 3,622 3,557 442
Reinsurers share
of premiums on
insurance
contracts - - (138)
Net investment
return 1,838 1,680 1,672
Fees from
investment
contracts and fund
management - 15 167
Change in
shareholder value
of in-force 123 154 26
Other income 10 10 7
Net operating
income 5,952 5,793 2,588
Claims on
insurance
contracts (1,336) (1,234) (375)
Reinsurers share
of claims on
insurance
contracts - - 91
Change in
insurance
contracts
liabilities (3,659) (3,581) (32)
Change in
investment
contract
liabilities - - (1,387)
Administrative and
acquisition
expenses (528) (482) (488)
Depreciation and amortisation
Property and
equipment - (30) (30)
Intangible assets
- software - (10) (10)
Intangible assets
- goodwill
impairment/amortis
ation (12) - -
Impairment losses
on loans and
advances (9) (9) (10)
Taxation
attributable to
life assurance
activities (35) - -
Net operating
expenses (5,579) (5,346) (2,241)
Tax attributable
to the profit on
life assurance
activities 27 - -
Operating profit 400 447 347
Share of operating
profits of
associated
undertakings 65 56 56
Profit on the sale
of property and
equipment 2 2 2
Profit on the
disposal of IEM 19 19 19
Profit on ordinary
activities before
taxation 486 524 424
Taxation based on
policyholder
returns - (86) (58)
Profit on ordinary
activities before
taxation related
to equity holders 486 438 366
Total taxation
expense (74) (137) (76)
Less : taxation
based on
policyholder
returns - 86 58
Taxation related
to equity holders (74) (51) (18)
Profit for the
year on continuing
activities 412 387 348
Profit on
discontinued
activities after
taxation - 8 7
Profit for the
year 412 395 355
Minority interests
share of profit (1) (2) (2)
Profit
attributable to
shareholders 411 393 353
Earnings per share
on continuing
activities (cent) 156.4 146.4 131.7
Fully diluted
earnings per share
on continuing
activities (cent) 155.4 145.5 130.9
Consolidated Preliminary Balance Sheet
ROI GAAP as reformatted IFRS
31 Dec 2004 31 Dec 2004 1 Jan 2005
Life
Banking Assurance Total Statutory Pro-forma
Eurom Eurom Eurom Eurom Eurom
Assets
Cash and
balances with
central banks 128 98 226 176 176
Items in
course of
collection - - - 67 67
Loans and
receivables to
banks 2,824 597 3,421 4,508 4,508
Loans and
receivables to
customers 18,810 5 18,815 20,911 21,133
Debt
securities 3,223 1,748 4,971 8,371 8,388
Equity shares 144 144 10,134 10,123
Investment
properties 21 93 114 1,736 1,736
Derivatives - - - 117 189
Interest in
associated
undertakings 130 - 130 136 136
Goodwill and
other
intangible
assets - - 186 251 251
Property and
equipment 211 70 281 318 318
Shareholder
value of
-inforce
business - 993 993 1,143 532
Deferred
acquisition
costs - - - - 182
Reinsurance
assets - 1,444 1,444 1,444 1,738
Net post
retirement
benefit asset - - - 65 65
Other assets 140 193 333 93 98
Prepayments
and accrued
income 238 32 270 325 256
Assets held to
cover linked
liabilities - 16,393 16,393 - -
Securitised
assets -
mortgage
assets 2,225 - 2,225 - -
Less
non-recourse
funding (2,193) - (2,193) - -
Total assets 25,757 21,810 47,753 49,795 49,896
Liabilities
Deposits by
banks 1,082 - 1,082 1,250 1,249
Customer
accounts 11,927 - 11,927 11,587 11,597
Debt
securities in
issue 10,944 - 10,944 10,928 10,879
Non-recourse
funding - - - 2,193 2,193
Derivatives - - - 2 131
Insurance
contract
liabilites - 19,873 19,873 19,803 3,850
Investment
contract
liabilities - - - - 16,158
Outstanding
insurance and
investment
claims - - - 115 115
Net post
retirement
benefit
liability - - - 169 169
Current tax
liabilities - - - 44 44
Deferred tax
liabilities 10 - 10 181 109
Other
liabilities 66 261 327 168 169
Deferred front
end fees - - - - 203
Accruals and
deferred
income 198 44 242 242 242
Subordinated
liabilities 934 - 934 934 951
Dividends 104 - 104 - -
25,265 20,178 45,443 47,616 48,059
Shareholders
Equity
Share capital 86 86 86
Share premium 52 52 52
Profit and
loss account 448 343 468
Non-distributa
ble reserves 1,695 1,561 1,094
Other reserves 84 126 129
2,365 2,168 1,829
Own shares
held for the
benefit of
life assurance
policyholders (64) - -
Shareholders
equity
excluding
minority
interest 2,301 2,168 1,829
Minority
interest 9 11 8
Shareholders
equity
including
minority
interest 2,310 2,179 1,837
Total
liabilities
and equity 47,753 49,795 49,896
Consolidated Preliminary Statement of Recognised Income and Expenses
Summarised Preliminary Segmental Analysis (Pro-forma)
ROI GAAP as IFRS IFRS
reformatted Statutory Pro-forma
31 Dec 31 Dec 31 Dec
2004 2004 2004
Eurom Eurom Eurom
Revaluation of
property &
equipment (2) 4 4
Change in
investment/ins
urance
contract
liabilities
arising from
revaluation of
property &
equipment - (1) (1)
Net amount
recognised
directly in
equity (2) 3 3
Profit for the
year 412 395 355
Total
recognised
income and
expenses for
the year 410 398 358
Minority
interests (1) (2) (2)
Attributable
to
equityholders 409 396 356
Movement in
cost of own
shares (10) (10) (10)
Dividends paid (148) (142) (142)
251 244 204
Summarised Preliminary Segmental Analysis (Pro-forma)
Year ended 31 December 2004
Insurance & Consolidation
Banking Investment Associate Other Adjustments Total
Eurom Eurom Eurom Eurom Eurom
Net interest
receivable 349 - - 1 2 352
Other
non-interest
income 44 - - 26 (10) 60
Net premiums
on insurance
contracts - 304 - - - 304
Net investment
return 1 1,674 - - (2) 1,673
Fees from
investment
contracts and
fund
management - 143 - 14 10 167
Change in
shareholder
value of
in-force - 25 - - 25
Other income - - 7 - 7
Net operating
income 394 2,146 - 48 - 2,588
Net claims on
insurance
contracts - (284) - - - (284)
Change in
insurance/inve
stment
contract
liabilities - (1,419) - - - (1,419)
Administrative
and
acquisition
expenses (224) (217) - (47) - (488)
Depreciation
and
amortisation (21) (18) - (1) - (40)
Impairment
losses on
loans and
advances (10) - - - - (10)
Net operating
expenses (255) (1,938) - (48) - (2,241)
Operating
profit 139 208 - - - 347
Share of
operating
profits of
associated
undertakings - - 56 - - 56
Profit on the
sale of fixed
assets - - - 2 - 2
Profit on the
disposal of
IEM - - - 19 - 19
Profit on
ordinary
activities
before
taxation 139 208 56 21 - 424
Taxation based
on
policyholder
returns - (58) - - (58)
Profit on
ordinary
activities
before
taxation
related to
equity holders 139 150 56 21 - 366
Total taxation
expense (37) (38) - (1) - (76)
Less :
taxation based
on
policyholder
returns - 58 - - - 58
Taxation
related to
equity holders (37) 20 - (1) - (18)
Profit for the
year on
continuing
activities 102 170 56 20 - 348
Profit on
discontinued
activities
after taxation - 7 - - - 7
Minority
interests
share of
profit - (2) - - - (2)
Profit
attributable
to
shareholders 102 175 56 20 - 353
Reconciliation of ROI GAAP Profit to Preliminary IFRS Profit by Segment
Year ended 31 December 2004
Insurance & Associate
Notes Banking Investment & Other Total
Eurom Eurom Eurom Eurom
Profit before taxation
ROI GAAP Profit before 122 289 75 486
taxation
Reclassifications 6 (4) (2) -
ROI GAAP Profit before taxation as 128 285 73 486
previously reported
Statutory IFRS
Adjustments
Discontinued activities (a) - (14) - (14)
Share of associate profit (b) - - (9) (9)
Revaluation of investment (c) (2) - - (2)
property
Revaluation of property and (d) - (3) - (3)
equipment
Goodwill and intangibles (e) - - 12 12
Share based payments (f) - (1) - (1)
Pension costs (g) (6) (7) 1 (12)
Taxation adjustments (h) - (3) - (3)
EEV adjustments (i) - (10) - (10)
Own shares adjustment (j) - (6) - (6)
Preliminary IFRS statutory 120 241 77 438
profit before taxation
Pro-forma Adjustments
Impairment provisions (m) 1 - - 1
Effective yield (n) 19 - - 19
IFRS 4 (o)
Shareholder value of - (101) - (101)
in-force business
Deferred acquisition costs, income and 9 - 9
reserve adjustments -
Elimination of inter-group (1) 1 - -
insurance
Preliminary IFRS pro-forma 139 150 77 366
profit before taxation
Taxation
ROI GAAP taxation charge as (36) (26) (12) (74)
previously reported
Change to tax charge arising from 1 11 11 23
statutory restatements
Change to tax charge arising from (2) 35 - 33
pro-forma restatements
Preliminary IFRS pro-forma (37) 20 (1) (18)
taxation charge
Discontinued
activities - 7 - 7
Minority
interest - (2) - (2)
Preliminary
IFRS pro-forma
profit after
taxation 102 175 76 353
Changes in accounting policies: key differences from ROI GAAP
Statutory Basis
a. Basis of consolidation
Under ROI GAAP the group followed the format prescribed under the Companies Acts
and the European Communities (Credit Institutions: Accounts) Regulations 1992
modified where necessary to present a true and fair view of the financial
results of the group. Specifically the formats recognised the differences
between accounting for banking and life assurance activities and presented
banking and life assurance operations separately in both the profit and loss
account and the balance sheet.
Under IAS 27 'Consolidated and separate financial statements' all entities must
be consolidated on a line by line basis except in very limited circumstances. As
a result it is no longer permitted to present life assurance and banking
operations separately resulting in the following presentation changes:
1. Assets, liabilities and revenues of the life assurance operations are shown
under the appropriate heading with no separation between banking and life
operations. This incorporates analysing assets held to match unit-linked
policyholders over the relevant balance sheet headings.
2. All inter-company transactions must be eliminated including those between
life assurance operations and banking and other operations. These
transactions were not previously eliminated but presented within the
appropriate headings under the credit institutions and insurance
undertakings regulations.
3. Certain entities which were not consolidated under ROI GAAP must now be
consolidated including securitisation vehicles, special purpose vehicles and
unit trusts where appropriate.
Results of discontinued activities are shown as a single line item after profit
after taxation. Following the disposal of the group's UK life assurance
operations in June 2005, 2004 results have been restated to reflect this
presentation change.
Impact
This is a change in presentation on the face of the income statement and balance
sheet. There is no impact on shareholders' equity. The reclassification of
discontinued activities does result in a reduction of Euro14m in reported profit
before tax but there is no change to overall reported profits for the year.
a. Interest in associates
There is no change to the way in which the group's interest in its associate
and the group's share of its profit is calculated. However the adoption of
accounting policies consistent with those used by the group in preliminary
IFRS financial information results in a change to both the carrying value of
the associate and the profit for 2004.
In addition, the group's share of the associate's profit is shown as a
single item on a net of tax basis in the consolidated income statement.
Under ROI GAAP the group's share of profit was shown gross and the group's
share of the tax of associate was shown as part of the tax charge.
Impact
Changes in accounting policies consistent with the policies adopted by the
group increases the group's share of associate profits in 2004 by Euro2m and
shareholders' equity at 1 January 2005 by Euro6m.
The change in presentation of the tax charge has no impact on overall
profit, profit before taxation will reduce by Euro11m and the taxation charge
also reduces by Euro11m.
b. Investment Property
Properties occupied by the group which are held by the life assurance
operations were classified as investment property under ROI GAAP. Under IFRS
these properties are classified as property and equipment and accounted for
on the revaluation basis of IAS 16 'Property, plant and equipment'.
The group holds all investment property at fair value. Under IAS 40 '
Investment property' where property is measured at fair value, gains and
losses should be recognised in the income statement. In accordance with ROI
GAAP the group previously recognised revaluation gains and losses on
investment properties held by the banking operations directly in equity.
Impact
The reclassification of life assurance owner-occupied properties to property
and equipment is a presentation change only.
The change in recognition of gains and losses in investment property held by
banking activities has no balance sheet or shareholders' equity impact but
reduces 2004 profit for the year by Euro2m.
c. Property and equipment
As outlined under investment property, owner occupied properties held by
life assurance operations classed as investment property under ROI GAAP have
been reclassified as property and equipment and therefore must be
depreciated.
As under ROI GAAP all property and equipment is depreciated over its
estimated useful life. Freehold and leasehold property with unexpired terms
in excess of 50 years are measured at fair value with revaluation surpluses
taken directly to equity.
As permitted by IFRS 4 'Insurance Contracts' where owner occupied properties
are held on behalf of unit-linked policyholders the change in policyholder
liabilities as a result of the revaluation of property is also taken
directly to equity ("shadow accounting"). This offsets the revaluation
surpluses on those properties.
Impact
Depreciation of owner occupied properties previously classified as
investment properties has increased expenses in the income statement by Euro1m.
Revaluation gains of Euro3m and associated changes in technical provisions of
Euro1m previously recorded in the income statement have been taken directly to
equity. This has no impact on shareholders' equity.
A number of properties were revalued to comply with the fair value rules
under IAS 16 resulting in uplift in shareholder equity of Euro3m.
d. Goodwill and intangibles
Goodwill arising on acquisitions under ROI GAAP was amortised over its
estimated useful life (20 years). Under IFRS there is no systematic charge
but impairment reviews must be undertaken at least annually, with any
resulting impairments charged in the income statement.
Software development costs under ROI GAAP were classified as property and
equipment and depreciated over their estimated useful life. Under IFRS
software development costs are classified as an intangible asset and
amortised over their estimated useful life.
Impact
Goodwill amortisation of Euro12m charged against 2004 profits is reversed out
of the income statement. This gives a net increase in profits for 2004 and
shareholders' equity of Euro11m after allowing for the change of Euro1m in the
minority's share of goodwill.
As permitted under the transitional arrangements for implementing IFRS the
group has not restated accumulated goodwill amortisation before 1 January
2004.
e. Share-based payments
Under ROI GAAP no charge arose for share options granted at the market value
at the date of grant. Under IFRS 2 'Share based payments' the fair value of
the option as determined at the date of grant is expensed over the vesting
period where it is likely that options will vest.
Impact
As permitted under the transitional arrangements, IFRS 2 has only been
applied to options granted after 7 November 2002 which had not vested by 1
January 2005 and which are expected to vest. This gives rise to a charge of
Euro1m in the income statement and Euro1m reserve is included in shareholders'
equity at 31 December 2004.
f. Pension Costs
There is a significant change in how pension costs for defined benefit
pension schemes are recognised under IFRS and ROI GAAP.
Under ROI GAAP the group had adopted the SSAP 24 approach whereby the cost
of providing the benefits was spread over the service lives of the scheme
members. This resulted in the group recognising pension surpluses of Euro85m
(before tax) in the balance sheet.
IAS 19 'Employee benefits' requires the group to recognise in the income
statement the current service and past service cost and the change in the
present value of the scheme liabilities due to the passage of time net of
the expected return on the scheme assets.
The net obligation in respect of each pension scheme is recognised in the
balance sheet at 1 January 2004 - with assets and liabilities shown
separately.
The group has adopted the corridor approach under IAS 19 to determine the
treatment of actuarial gains and losses arising during the year. Under this
approach to the extent that the cumulative actuarial gains or losses remain
within a corridor, defined as the greater of 10% of the schemes assets or
liabilities, they are not reflected in the financial statements. If the
cumulative gains on losses exceed the 10% corridor, the excess is charged or
credited to the income statement over the average remaining service lives of
the active scheme members.
Impact
2004 profit before taxation reduces by Euro12m as a result of the higher costs
under IAS 19, after allowing for taxation the impact on profit for the year
is Euro2m.
The recognition of the net liability results in a reduction of Euro166m in
shareholders' equity, of which Euro74m (after tax) relates to the write-back of
the SSAP 24 surpluses and Euro92m (after tax) to the pension obligations under
IAS 19.
g. Taxation
There are a number of changes in the calculation of deferred taxation under
IFRS. These include:
1. No provision for deferred tax was made under ROI GAAP when assets were
revalued through revaluation reserves or where assets were disposed off and
capital gains tax roll-over relief applied. IAS 12 requires a provision to
be made in both these instances.
2. Under ROI GAAP, the movement in the deferred tax relating to assets backing
unit-linked liabilities is included as a change in technical provisions on a
discounted basis, under IAS 12 'Income tax' this is shown as part of the tax
charge on an undiscounted basis.
3. Shareholders' value of in-force business under ROI GAAP was shown net of
taxation. Under IFRS all assets must be shown gross of taxation and the
related tax shown as a separate asset or liability.
There is also a change in the way in which the tax charge for life assurance
operations is presented, although this has no impact on reported profits after
tax for the year.
The taxation charge for life assurance companies in Ireland includes taxation
attributable to policyholders. For this reason under ROI GAAP, profits on life
assurance operations were calculated net of tax and the resulting net profit was
grossed up at the effective corporation tax rate for the tax attributable to
shareholders equity interest, and this gross up was reported as the taxation
charge on profit.
Under IAS 12 taxation expense includes both tax attributable to policyholders
and to shareholders' equity. The income statement tax charge has therefore been
apportioned between the element attributable to policyholders and the element
attributable to shareholders' equity interest. This presentation remains under
discussion by the life assurance industry and is therefore subject to change
prior to publication of the group's first set of IFRS results.
Impact
Profit after taxation has fallen by Euro5m due to the application of undiscounted
tax provisions in respect of assets held on behalf of unit-linked policyholders
as it is not permitted to change the liability to the policyholder to reflect
this change. There is also a reduction in profit of discontinued activities of
Euro2m due to this application of the change to the discontinued UK insurance
operations.
Shareholders' equity reduces by Euro5m due to:
* Euro9m tax on revaluation gains on assets where no provision was required
under ROI GAAP.
* Euro4m deferred tax asset at end 2004 due to the elimination of the
discounting on unit-linked provisions.
a. European Embedded Values (EEV)
The group is adopting the European embedded values principles for interim
2005 reporting, accordingly the 2004 results have been restated on this
basis. Full details of the restatement are set out in the EEV restatement
document. The main impact of the results arises from the effect of changes
to the assumed level of solvency capital, changes in the risk discount rate
and an explicit valuation of the time value of options and guarantees.
Impact
Adopting the EEV principles reduces shareholders' value of in-force asset on
the balance sheet and therefore shareholders' equity by Euro51m. The change in
shareholder value of in-force business in the income statement falls by Euro10m
reducing profit for the year by Euro10m.
b. Purchases and sales of own shares
Under ROI GAAP, where the group holds own shares for the benefit of
unit-linked policyholders these shares were required to be shown as though
held as treasury shares. The cost was deducted from shareholders equity and
the unit-linked assets and liabilities restated accordingly. This deduction
was presented as a separate line within shareholders equity.
Under IFRS, the requirement to treat own shares held for the benefit of
unit-linked policyholder as though they are treasury shares remains. The
cost of the assets continue to be deducted from shareholders' equity,
however it not permitted to adjust the liability to the policyholder which
must be carried at market value.
Impact
2004 profit after tax reduces by Euro6m which represents the gain due to market
movements in 2004 on own shares held for the benefit of unit-linked
policyholders.
Shareholders' equity reduces by Euro34m, which is the difference between the
cost of the shares and the liability to the policyholders at the end of
2004.
The own share adjustment is no longer shown as a separate component of
shareholders' equity but rather the cost of own shares is deducted from
distributable reserves with the difference between cost and market value
reflected in non-distributable reserves.
c. Dividends paid and payable
Unlike under ROI GAAP, under IFRS ordinary dividends paid in the year are
not recognised on the face of the income statement.
In addition, under ROI GAAP proposed dividends were accrued in the balance
sheet, under IFRS, the group does not recognise dividends that have been
declared or proposed after the balance sheet date.
Impact
There is an increase in shareholder equity on transition as no liability is
recorded for the proposed final 2004 dividend (Euro104m).
d. Securitised assets
Under ROI GAAP securitised assets were presented using a linked presentation
whereby the securitised assets are shown separately on the balance sheet and
the non-recourse element of the funding is shown as a deduction from this
balance.
IFRS prohibits linked presentation as a result the gross securitised assets
will be shown within loans and receivables and the non-recourse funding
shown as a separate heading under liabilities.
Impact
This is a presentation change only in the balance sheet with no profit or
shareholders' equity change.
Pro-Forma Basis
e. Loan Impairment
Provision for bad and doubtful debts under ROI GAAP included both specific
provisions made in respect of impaired loans, when the recovery of a balance
was in doubt, and also general provisions. General provisions were made to
cover potential losses on loans which while not impaired at the balance
sheet date were known from experience to be present in any portfolio of
loans. Interest was not recognised on impaired loans.
Under IAS 39, loan impairment provisions can only be recognised on an
incurred loss basis if there is objective evidence that the group will be
unable to collect all amounts due on a loan. Accordingly general provisions
are no longer permitted. In addition, interest must be accrued in net
interest income on the impaired loan with the impairment provision increased
to reflect this interest.
Impact
The profit impact in 2004 of the reduced level of general provisioning is
Euro1m. The recognition of interest on impaired loans is a presentation change
only with the interest receivable being offset by a higher loan impairment
provision.
The impact on shareholders' equity of the release of the provisions after
allowing for tax is Euro50m.
f. Loan interest income and expense recognition
Under ROI GAAP interest income was recognised on an accruals basis over the
life of the loan with any discounts recognised as incurred. Fees and
commissions payable and any fees received in relation to the acquisition of
the loan were recognised in the accounting period in which they were
incurred, with the exception of commission paid to intermediaries in respect
of certain loans which was charged against profit over three years.
IAS 39 requires the recognition of income and costs relating to loan assets
on an effective interest basis. This spreads the interest income together
with the related fees and commission payable or receivable over the expected
life of the loan.
Impact
Profit before taxation for 2004 increases by Euro19m, with profit for the year
increasing by Euro17m after allowing for taxation of Euro2m as a result of the
spreading of the fees and commission payable together with the first year
interest rate discounts.
The cumulative impact on shareholders' equity is Euro77m.
g. IFRS 4
IFRS 4 introduces a revised definition of insurance contracts. Insurance
contracts are those life insurance contracts which transfer significant
insurance risk to the group. All other life insurance contracts are classed as
investment contracts and accounted for as financial instruments under IAS 39 '
Financial instruments: recognition and measurement' and investment management
service contracts under IAS 18 'Revenue'. Insurance contracts are accounted for
on the same basis as ROI GAAP.
Investment contracts accounted for under IAS 39 and IAS 18 include most of the
group's unit-linked life assurance business. The changes from ROI GAAP include:
1. Shareholder's value of in-force business asset on these contracts is no
longer recognised in the balance sheet.
2. Premium and claims are no longer included in the income statement but are
taken to the balance sheet as movements in the investment contract
liabilities.
3. Costs of new business to the extent that they are directly related to the
acquisition of new business (principally commission and other sales volume
related cost), can be deferred and amortised over the life of the contract.
4. Up front fees earned in respect of investment management services are
deferred and amortised over the life of the contract.
5. Options or guarantees embedded in investment contracts are valued on a market
consistent basis using stochastic models.
6. There are also a number of changes on the timing of recognition of
liabilities associated with the non-recognition of the shareholder value of
in-force business.
Impact
The net impact of the application of IAS 39 and IAS 18 to investment contracts
is to defer the recognition of income by not recognising the shareholder value
of in-force asset and through the deferral of front end fees.
The impact on profit for the year after minority interest and shareholders'
equity is summarised below
Profit Shareholders' equity
Eurom Eurom
Shareholder value of-in-force (129) (611)
Deferred acquisition costs 11 182
Deferred income 2 (203)
Other reserve changes (4) 68
Taxation 63 92
Discontinued activities (1)
Minority 3
(58) (469)
a. Financial investments
1. Classification
Financial investments include both debt securities and equity shares. Under
ROI GAAP the accounting policy for financial investments reflected the
purpose for which the instruments were held. All financial investments held
by the life assurance activities were measured at fair value with all
changes included in the income statement. There are no equities held by
banking activities.
Debt securities held by banking activities were largely held at amortised
cost except where securities were held for trading purposes. Income on
securities held at amortised cost was recognised on an accruals basis with
realised profits recognised immediately in the income statement. Debt
securities held for trading purposes were held at market value with realised
and unrealised gains and losses recognised in trading income.
Under IAS 32 and IAS 39 all debt securities and equity shares are classified
under one of the following categories.
* Held to maturity ('HTM')
* Available for sale ('AFS')
* Held for trading ('HFT') or held at fair value through profit and loss
('FVTPL').
The accounting policies for these investments are outlined below
All debt securities and equities held by life assurance activities are
classified as either HFT or FVTPL and consequently continue to be measured
at market value with all changes recognised in the income statement within
net investment return.
Debt securities held by banking operations fall into a number of categories.
HTM
Where debt securities are acquired with the ability and the intention to
hold to maturity, these investments will be classed as HTM. They are stated
at cost on the balance sheet and income recognised on an effective interest
basis.
AFS
Debt securities classed as AFS are stated in the balance sheet at fair value
with unrealised gains and losses net of tax reported as a separate reserve
within shareholders' equity. Realised profits and losses are recognised in
the income statement.
FVTPL
Debt securities held as FVTPL are shown on the balance sheet at fair value.
Income on an effective yield basis is shown as interest receivable with both
realised and unrealised gains shown as trading income in the income
statement.
1. Valuation
IFRS requires that the fair value of listed investments be calculated on a
bid basis rather than the previous mid market or offer basis used by the
group. Where these investments are held on behalf of unit-linked
policyholders, there is a corresponding change in the measurement of the
liabilities.
Impact
At 1 January 2005 the fair value adjustment in respect of the reclassification
of debt securities to AFS reduces shareholders' equity by Euro1m.
The move to bid prices reduces the value of equities at 1 January 2005 by Euro9m,
there is a corresponding change in the value of insurance and investment
contract liabilities so there is no impact on shareholders' equity.
a. Derivatives
The group's banking activities use derivatives for both hedging purposes and
trading purposes while the group's life assurance activities use derivatives
as one element of efficient portfolio management.
Under ROI GAAP derivatives held for trading purposes or by life assurance
activities were included at market value with changes in the value reported
as income. Profits or losses on derivatives entered into for hedging
purposes were recognised in accordance with the underlying transaction.
IAS 39 requires that all derivatives are included in the balance sheet at
fair value and that assets and liabilities can only be offset if there is a
legal right of set-off.
The group uses fair value hedging as defined under IAS 39 within its banking
operations. A fair value hedge is a derivative which hedges the exposure to
changes in the fair value of a recognised asset, liability or commitment. To
qualify as a fair value hedge the effectiveness criteria as set out in IAS
39 must be met. The interest income or expense on derivatives classed as
fair value hedges is included in interest receivable or payable. Movements
in the fair value of the hedge, together with the change in the fair value
of the item being hedged, are included as other income.
Income, gains and losses on other derivatives held by banking operations are
included in trading income while the return on derivatives held by the life
assurance activities is included in net investment return.
Impact
As fair value hedging was only adopted by the group on 1 January 2005 there
is no impact on 2004 profits. Shareholders' equity increases by Euro3m which is
the cumulative gain after taxation on hedges and related assets on that
date.
b. Earnings per share (EPS)
Under ROI GAAP the group showed EPS based ordinary shares in issue both
including and excluding own shares held on behalf of life assurance unit-linked
policyholders. IFRS does not permit alternative EPS to be shown on the face of
the income statement and therefore EPS as required under IFRS is based on
ordinary shares in issue excluding own shares held on behalf of policyholders.
In addition under ROI GAAP, EPS was based on total profit after tax, whereas
under IFRS EPS is based on profit after tax on continuing operations with EPS on
discontinued operations shown separately.
Special purpose independent audit report
SPECIAL PURPOSE INDEPENDENT AUDIT REPORT OF KPMG TO THE DIRECTORS OF IRISH LIFE
AND PERMANENT, P.L.C. ("THE COMPANY") ON ITS PRELIMINARY INTERNATIONAL FINANCIAL
REPORTING STANDARDS ("IFRS") FINANCIAL INFORMATION
In accordance with the terms of our engagement letter dated 18 July 2005, we
have audited the accompanying consolidated preliminary IFRS financial
information of the company and its subsidiaries ("the group") as at 31 December
2004 and 1 January 2005, the related consolidated preliminary IFRS income
statement and balance sheet and the statement of recognised income and expenses
for the year ended 31 December 2004 set out on pages 4 to 6, notes to the
financial information as set out on pages 7 to 16 and 19 to 24 and the related
basis of preparation and provisional accounting policies as set out on pages 25
to 34 (hereinafter referred to as 'the preliminary IFRS financial information').
The preliminary IFRS financial information has been prepared by the group as
part of its transition to IFRS and as described on page 25 to 26 to establish
the financial position and results of operations of the group in order to
provide the comparative financial information and necessary opening adjustments
at 1 January 2005 expected to be included in the first complete set of
consolidated IFRS financial statements of the group for the year ended 31
December 2005.
Respective responsibilities of Directors and KPMG
The directors of the company have accepted responsibility for the preparation of
the preliminary IFRS financial information which has been prepared as part as
part of the group's conversion to IFRS. As explained in the basis of preparation
note on page 25 the preliminary IFRS financial information has been prepared on
the basis of the recognition and measurement criteria of IFRS in issue that are
either adopted by the EU and effective, or are expected to be adopted and
effective (or available for early adoption) at 31 December 2005. Our
responsibilities as independent auditors, are established in Ireland by the
Auditing Practices Board, our profession's ethical guidance and the terms of our
engagement.
Under the terms of engagement we are required to report to you our opinion as to
whether the preliminary IFRS financial information has been properly prepared,
in all material respects, in accordance with the respective provisional
accounting policies and the basis of preparation. We also report to you if, in
our opinion, we have not received all the information and explanations we
require for our audit.
We read the other information accompanying the preliminary IFRS financial
information and consider whether it is consistent with the preliminary IFRS
financial information. We consider the implications for our report if we become
aware of any apparent misstatements or material inconsistencies with the
preliminary IFRS financial information.
Our report has been prepared for the company solely in connection with the
group's conversion to IFRS. Our report was designed to meet the agreed
requirements of the company determined by the company's needs at the time. Our
report should not therefore be regarded as suitable to be used or relied on by
any party wishing to acquire rights against us other than the company for any
purpose or in any context. Any party other than the company who chooses to rely
on our report (or any part of it) will do so at its own risk. To the fullest
extent permitted by law, KPMG will accept no responsibility or liability in
respect of our report to any other party.
Basis of audit opinion
We conducted our audit having regard to Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the preliminary IFRS
financial information. It also includes an assessment of the significant
estimates and judgements made by the directors in the preparation of the
preliminary IFRS financial information, and of whether the accounting policies
are appropriate to the group's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we consider necessary in order to provide us with sufficient
evidence to give reasonable assurance that the preliminary IFRS financial
information is properly prepared in accordance with the provisional accounting
policies and basis of preparation. In forming our opinion we also evaluated the
overall adequacy of the presentation of information in the preliminary IFRS
financial information.
Emphasis of matters
Without qualifying our opinion, we draw your attention to the following matters:
* The basis of preparation set out on pages 25 to 26 explains why there is a
possibility that the preliminary IFRS financial information may require
adjustment before being used as the basis of preparing the final
consolidated IFRS financial statements as at 31 December 2005.
* Due to a number of new and revised standards included within the body of
standards that comprise IFRS, there is not yet a significant body of
established practice on which to draw in forming opinions regarding
interpretation and application. Therefore the full financial effect of
reporting under IFRS as it will be applied and reported on in the group's
first IFRS consolidated financial statements for the year ended 31 December
2005 may be subject to change.
* The presentation of the tax charges in the income statement is subject to
future change including those arising from developing practice in the
bancassurance industry.
* As described in the introduction on page 2 as part of its conversion to
IFRS, the group has prepared the preliminary IFRS financial information for
the year ended 31 December 2004 to establish financial position and results
of operations of the group necessary to provides the comparative financial
information expected to be included in the group's first complete set of
IFRS consolidated financial statements as at 31 December 2005. The
preliminary IFRS financial information does not include comparative
financial information for the prior period.
* As explained in the basis of preparation, no adjustments have been made
for any changes in estimates made at the time of approval of the 2004
consolidated financial statements under Irish generally accepted accounting
principles on which the preliminary IFRS financial information is based.
* IAS 32 'Financial Instruments: Disclosure and Presentation', IAS 39
'Financial Instruments: Recognition and Measurement' and IFRS 4 'Insurance
Contracts' have not been applied to the preliminary IFRS financial
information relating to 2004 as permitted by IFRS 1 'First-time Adoption of
International Financial Reporting Standards'. The 1 January 2005 preliminary
IFRS financial information has been prepared on the basis that IAS 32, IAS
39 and IFRS 4 has been applied.
Opinion
In our opinion, the accompanying preliminary IFRS financial information on pages
4 to 16 and 19 to 24 has been properly prepared, in all material respects, in
accordance with the basis of preparation and provisional accounting policies set
out on pages 25 to 34, which describe how IFRS has been applied under IFRS 1,
including the assumptions made by the directors of the company about the
standards and interpretations expected to be effective, and the policies
expected to be adopted, when they prepare the first complete set of consolidated
IFRS financial statements of the company for the year to 31 December 2005.
KPMG
Chartered Accountants
Dublin
Reconciliation of Preliminary IFRS Statutory Basis Income Statement for the year
ended 31 December 2004
Reconciliation of Preliminary IFRS Statutory Basis Income Statement for the year
ended 31 December 2004
ROI GAAP Consolidation Discontinued Associate Investment Property,
reformatted activities property equipment
Notes (a) (a) (b) (c) (d)
Eurom Eurom Eurom Eurom Eurom
Interest
receivable 847 (4) - - - -
Interest
payable (498) 7 - - - -
Fees and
commission
income 45 15 - - - -
Fees and
commission
expenses (41) - - - - -
Net trading
income 6 - - - - -
Premiums on
insurance
contracts 3,622 - (65) - - -
Net investment
return 1,838 (43) (106) - (6) (3)
Fees from
investment
contracts and
fund
management - 15 - - -
Change in
shareholder
value of
in-force 123 - (2) - - -
Other income 10 - - - - -
Net operating
income 5,952 (10) (173) 0 (6) (3)
Claims on
insurance
contracts (1,336) - 102 - - -
Reinsurers - - - - - -
share of
claims on
insurance
contracts
Change in
insurance
contracts
liabilities (3,659) - 52 - - 1
Administrative
and
acquisition
expenses (528) 11 5 - 4 39
Depreciation
and
amortisation
Property and
equipment - - - - - (40)
Intangible - - - - - -
assets -
software
Intangible
assets -
goodwill
impairment/amo
rtisation (12) - - - - -
Impairment
losses on
loans and
advances (9) - - - - -
Taxation
attributable
to life
assurance
activities (35) (1) - - - -
Net operating
expenses (5,579) 10 159 0 4 (0)
Tax
attributable
to the profit
on life
assurance
activities 27 - - - - -
Operating
profit 400 - (14) - (2) (3)
Share of
operating
profits of
associated
undertakings 65 - - (9) - -
Profit on the
sale of
property and
equipment 2 - - - - -
Profit on the
disposal of
IEM 19 - - - - -
Profit on
ordinary
activities
before
taxation 486 - (14) (9) (2) (3)
Taxation based - - - - - -
on
policyholder
returns
Profit on
ordinary
activities
before
taxation
related to
equity holders 486 - (14) (9) (2) (3)
Total taxation
expense (74) - 4 11 - -
Less : - - - - - -
taxation based
on
policyholder
returns
Taxation
related to
equity holders (74) - 4 11 - -
Profit for the
year on
continuing
activities 412 - (10) 2 (2) (3)
Profit on
discontinued
activities
after taxation - - 10 - - -
Profit for the
year 412 - - 2 (2) (3)
Minority
interests
share of
profit (1) - - - - -
Profit
attributable
to
shareholders 411 - - 2 (2) (3)
Goodwill & Share Pension Taxation EEV Own IFRS
intangibles based costs shares Statutory
payments
Notes (e) (f) (g) (h) (i) (j)
Eurom Eurom Eurom Eurom Eurom Eurom Eurom
Interest
receivable - - - - - - 843
Interest
payable - - - - - - (491)
Fees and
commission
income - - - - - - 60
Fees and
commission
expenses - - - - - - (41)
Net trading
income - - - - - - 6
Premiums on
insurance
contracts - - - - - - 3,557
Net investment
return - - - - - - 1,680
Fees from
investment
contracts and
fund
management - - - - - - 15
Change in
shareholder
value of
in-force - - - 43 (10) - 154
Other income - - - - - - 10
Net operating
income 0 0 0 43 (10) - 5,793
Claims on
insurance
contracts - - - - - - (1,234)
Reinsurers - - - - - - -
share of
claims on
insurance
contracts
Change in
insurance
contracts
liabilities - - - 31 - (6) (3,581)
Administrative
and
acquisition
expenses - (1) (12) - - - (482)
Depreciation
and
amortisation
Property and
equipment 10 - - - - - (30)
Intangible
assets -
software (10) - - - - - (10)
Intangible
assets -
goodwill
impairment/amo
rtisation 12 - - - - - -
Impairment
losses on
loans and
advances - - - - - - (9)
Taxation
attributable
to life
assurance
activities - - - 36 - - -
Net operating
expenses 12 (1) (12) 67 - (6) (5,346)
Tax
attributable
to the profit
on life
assurance
activities - - - (27) - - -
Operating
profit 12 (1) (12) 83 (10) (6) 447
Share of
operating
profits of
associated
undertakings - - - - - - 56
Profit on the
sale of
property and
equipment - - - - - - 2
Profit on the
disposal of
IEM - - - - - - 19
Profit on
ordinary
activities
before
taxation 12 (1) (12) 83 (10) (6) 524
Taxation based
on
policyholder
returns - - - (86) - - (86)
Profit on
ordinary
activities
before
taxation
related to
equity holders 12 (1) (12) (3) (10) (6) 438
Total taxation
expense - - 10 (88) - - (137)
Less :
taxation based
on
policyholder
returns - - - 86 - - 86
Taxation
related to
equity holders - - 10 (2) - - (51)
Profit for the
year on
continuing
activities 12 (1) (2) (5) (10) (6) 387
Profit on
discontinued
activities
after taxation - - - (2) - - 8
Profit for the
year 12 (1) (2) (7) (10) (6) 395
Minority
interests
share of
profit (1) - - - - - (2)
Profit
attributable
to
shareholders 11 (1) (2) (7) (10) (6) 393
Reconciliation of Preliminary IFRS Pro-forma Basis Income Statement for the yearended 31 December 2004
Effective Financial
IFRS Impairment interest IFRS 4 instruments IFRS
Notes Statutory (m) (n) (o) (p) & (q) Pro-forma
Eurom Eurom Eurom Eurom Eurom Eurom
Interest
receivable 843 2 (2) - - 843
Interest
payable (491) - - - - (491)
Fees and
commission
income 60 - - - - 60
Fees and
commission
expenses (41) - 35 - - (6)
Net trading
income 6 - - - - 6
Premiums on
insurance
contracts 3,557 - - (3,115) - 442
Reinsurers
share of
premiums on
insurance
contracts - - - (138) - (138)
Net investment
return 1,680 - 2 (10) - 1,672
Fees from
investment
contracts and
fund
management 15 - - 152 - 167
Change in
shareholder
value of
in-force 154 - - (128) - 26
Other income 10 - (3) - - 7
Net operating
income 5,793 2 32 (3,239) - 2,588
Claims on
insurance
contracts (1,234) - - 859 - (375)
Reinsurers
share of
claims on
insurance
contracts - - - 91 - 91
Change in
insurance
contracts
liabilities (3,581) - - 3,549 - (32)
Change in
investment
contract
liabilities - - - (1,387) - (1,387)
Administrative
Expenses (482) - (13) 7 - (488)
Depreciation and
amortisation
Property and
equipment (30) - - - - (30)
Intangible
assets -
software (10) - - - - (10)
Impairment
losses on
loans and
advances (9) (1) - - - (10)
Net operating
expenses (5,346) (1) (13) 3,119 - (2,241)
Tax attributable to - - - - - -
the profit on life
assurance
activities
Operating
profit 447 1 19 (120) - 347
Share of
operating
profits of
associated
undertakings 56 - - - - 56
Profit on the
sale of fixed
assets 2 - - - - 2
Profit on the
disposal of
IEM 19 - - - - 19
Profit on
ordinary
activities
before
taxation 524 1 19 (120) - 424
Taxation based
on
policyholder
returns (86) - 28 - (58)
Profit on
ordinary
activities
before
taxation
related to
equity holders 438 1 19 (92) - 366
Total taxation
expense (137) - (2) 63 - (76)
Less :
taxation based
on
policyholder
returns 86 - - (28) - 58
Taxation
related to
equity holders (51) - (2) 35 - (18)
Profit for the
year on
continuing
activities 387 1 17 (57) - 348
Profit on
discontinued
activities
after taxation 8 - - (1) - 7
Profit for the
year 395 1 17 (58) - 355
Minority
interests
share of
profit (2) - - - - (2)
Profit
attributable
to
shareholders 393 1 17 (58) - 353
Reconciliation of IFRS Statutory Basis Balance Sheet as at 31 December 2004
ROI GAAP as Consolidation Associate Investment Property, Goodwill &
reformatted property equipment intangibles
Total Other Linked
Notes (a) (a) (b) (c) (d) (e)
Eurom Eurom Eurom Eurom Eurom Eurom
Assets
Cash and
balances with
central banks 226 (56) 6 - - - -
Items in
course of
collection - 67 - - - - -
Loans and
receivables
to 3,421 (311) 1,398 - - - -
banks
Loans and
receivables
to 18,815 (129) - - - - -
customers
Debt
securities 4,971 (112) 3,512 - - - -
Equity 144 89 9,901 - - - -
shares
Investment
properties 114 - 1,707 - (85) - -
Derivatives - - 117 - - - -
Interest in
associated
undertakings 130 - - 6 - - -
Goodwill and
other
intangible
assets 186 - - - - 51 14
Property and
equipment 281 - - - 85 (48) -
Shareholder
value of
in-force
business 993 - - - - - -
Deferred - - - - - - -
acquisition
costs
Reinsurance
assets 1,444 - - - - - -
Net post - - - - - - -
retirement
benefit
asset
Other 333 (144) (11) - - - -
assets
Prepayments
and accrued
income 270 (39) 99 - - - (2)
Assets held
to
cover linked 16,393 - (16,393) - - - -
liabilities
Securitised
assets -
mortgage
assets 2,225 - - - - - -
Less
non-recourse
funding (2,193) - - - - - -
-
Total 47,753 (635) 336 6 - 3 12
assets
Share Pension Taxation EEV Own Dividend Securitised IFRS
based costs shares recognition assets Statutory
payments
Notes (f) (g) (h) (i) (j) (k) (l)
Eurom Eurom Eurom Eurom Eurom Eurom Eurom Eurom
Assets
Cash and
balances with
central banks - - - - - - - 176
Items in
course of
collection - - - - - - - 67
Loans and
receivables
to - - - - - - - 4,508
banks
Loans and
receivables
to - - - - - - 2,225 20,911
customers
Debt
securities - - - - - - - 8,371
Equity - - - - - - - 10,134
shares
Investment
properties - - - - - - - 1,736
Derivatives - - - - - - - 117
Interest in
associated
undertakings - - - - - - - 136
Goodwill and
other
intangible
assets - - - - - - - 251
Property and
equipment - - - - - - - 318
Shareholder
value of
in-force
business - - 201 (51) - - - 1,143
Deferred - - - - - - - -
acquisition
costs
Reinsurance
assets - - - - - - - 1,444
Net post
retirement
benefit asset - 65 - - - - - 65
Other - (85) - - - - - 93
assets
Prepayments
and accrued
income - (3) - - - - - 325
Assets held - - - - - - - -
to cover
linked
liabilities
Securitised
assets -
mortgage
assets - - - - - - (2,225) -
Less
non-recourse
funding - - - - - - 2,193 -
Total - (23) 201 (51) - - 2,193 49,795
assets
Reconciliation of IFRS Statutory Basis Balance Sheet as at 31 December 2004
Consolidation Associate Investment Property, Goodwill &
property equipment intangibles
Total Other Linked
Notes (a) (a) (b) (c) (d) (e)
Eurom Eurom Eurom Eurom Eurom Eurom
Liabilities
Deposits by
banks 1,082 (135) 303 - - - -
Customer
accounts 11,927 (340) - - - - -
Debt
securities in
issue 10,944 (16) - - - - -
Non-recourse - - - - - - -
funding
Derivatives - - 2 - - - -
Insurance
contract
liabilities 19,873 (115) - - - - -
Investment - - - - - - -
contract
liabilities
Outstanding
insurance and
investment
claims - 115 - - - - -
Net post - - - - - - -
retirement
benefit
liability
Current tax
liabilities - 44 - - - - -
Deferred tax
liabilities 10 - - - - - -
Other
liabilities 327 (188) 31 - - - -
Deferred front - - - - - - -
end fees
Accruals and
deferred
income 242 - - - - - -
Other - - - - - - -
provisions
Subordinated
liabilities 934 - - - - - -
Dividends 104 - - - - - -
45,443 (635) 336 - - - -
Shareholders
Equity
Share capital 86 - - - - - -
Share premium 52 - - - - - -
Profit and
loss account 448 - - - (2) (1) 11
Non-distributa
ble reserves 1,695 - - 6 (45) - -
Other reserves 84 - - - 47 3 -
2,365 - - 6 - 2 11
Own shares
held for the
benefit of
life assurance
policyholders (64) - - - - - -
Shareholders
equity
excluding
minority
interest 2,301 - - 6 - 2 11
Minority
interest 9 - - - - 1 1
Shareholders
equity
including
minority
interest 2,310 - 6 - 3 12
Total
liabilities
and equity 47,753 (635) 336 6 - 3 12
Reconciliation of IFRS Statutory Basis Balance Sheet as at 31 December 2004
Share Pension Taxation EEV Own Dividend Securitised IFRS
based costs shares recognition assets Statutory
payments
Notes (f) (g) (h) (i) (j) (k) (l)
Eurom Eurom Eurom Eurom Eurom Eurom Eurom Eurom
Liabilities
Deposits by
banks - - - - - - - 1,250
Customer
accounts - - - - - - - 11,587
Debt
securities in
issue - - - - - - - 10,928
Non-recourse
funding - - - - - - 2,193 2,193
Derivatives - - - - - - - 2
Insurance
contract
liabilities - - 11 - 34 - - 19,803
Investment - - - - - - - -
contract
liabilities
Outstanding
insurance and
investment
claims - - - - - - - 115
Net post
retirement
benefit
liability - 169 - - - - - 169
Current tax
liabilities - - - - - - - 44
Deferred tax
liabilities - (24) 195 - - - - 181
Other
liabilities - (2) - - - - - 168
Deferred front - - - - - - - -
end fees
Accruals and
deferred
income - - - - - - - 242
Other - - - - - - - -
provisions
Subordinated
liabilities - - - - - - - 934
Dividends - - - - - (104) - -
- 143 206 - 34 (104) 2,193 47,616
Shareholders
Equity
Share - - - - - - - 86
capital
Share - - - - - - - 52
premium
Profit and
loss account (1) (152) - - (64) 104 - 343
Non-distributa
ble reserves - (14) 4 (51) (34) - - 1,561
Other reserves 1 - (9) - - - - 126
- (166) (5) (51) (98) 104 - 2,168
Own shares
held for the
benefit of
life
assurance - - - - 64 - - -
policyholders
Shareholders
equity
excluding
minority
interest - (166) (5) (51) (34) 104 - 2,168
Minority
interest - - - - - - - 11
Shareholders
equity
including
minority
interest - (166) (5) (51) (34) 104 - 2,179
Total
liabilities
and equity - (23) 201 (51) - - 2,193 49,795
Reconciliation of IFRS Pro-forma Basis Balance Sheet as at 1 January 2005
Effective Financial
IFRS Impairment interest IFRS 4 instruments IFRS
Notes Statutory (m) (n) (o) (p) & (q) Pro-forma
Eurom Eurom Eurom Eurom Eurom Eurom
Assets
Cash and
balances with
central banks
176 - - - - 176
Items in
course of
collection 67 - - - - 67
Loans and
advances to
banks 4,508 - - - - 4,508
Loans and
advances to
customers 20,911 57 144 - 21 21,133
Debt
securities 8,371 - - - 17 8,388
Equity 10,134 - - - (11) 10,123
shares
Investment
properties 1,736 - - - - 1,736
Derivatives 117 - - - 72 189
Interest in
associated
undertakings 136 - - - - 136
Goodwill and
other
intangible
assets 251 - - - - 251
Property and
equipment 318 - - - - 318
Shareholder
value of
-inforce
business 1,143
- - (611) - 532
Deferred
acquisition
costs - - - 182 - 182
Reinsurance
assets 1,444 - - 294 - 1,738
Net post
retirement
benefit asset 65 - - - - 65
Other 93 - - 5 - 98
assets
Prepayments
and accrued
income 325 - (69) - - 256
Assets held - - - - - -
to cover
linked
liabilities
Securitised - - - - - -
assets -
mortgage
assets
Less - - - - - -
non-recourse
funding
Total 49,795 57 75 (130) 99 49,896
assets
Reconciliation of IFRS Pro-forma Basis Balance Sheet as at 1 January 2005
Effective Financial
IFRS Impairment interest IFRS 4 instruments IFRS
Statutory (m) (n) (o) (p) & (q) Pro-forma
Eurom Eurom Eurom Eurom Eurom Eurom
Liabilities
Deposits by
banks 1,250 - - - (1) 1,249
Customer
accounts 11,587 - - - 10 11,597
Debt
securities in
issue 10,928 - - - (49) 10,879
Non-recourse
funding 2,193 - - - - 2,193
Derivatives 2 - - - 129 131
Insurance
contract
liabilites 19,803 - - (15,952) (1) 3,850
Investment
contract
liabilities - - - 16,167 (9) 16,158
Outstanding
insurance and
investment
claims 115 - - - - 115
Net post
retirement
benefit
liability 169 - - - - 169
Current tax
liabilities 44 - - - - 44
Deferred tax
liabilities 181 9 11 (92) - 109
Other
liabilities 168 (2) (13) 16 - 169
Deferred front
end fees - - - 203 - 203
Accruals and
deferred
income 242 - - - - 242
Subordinated
liabilities 934 - - - 17 951
Dividends - - - - - -
47,616 7 (2) 342 96 48,059
Shareholders Equity
Share capital 86 - - - - 86
Share premium 52 - - - - 52
Profit and
loss account 343 50 77 (2) - 468
Non-distributa
ble reserves 1,561 - - (467) - 1,094
Other reserves 126 - - 3 129
2,168 50 77 (469) 3 1,829
Own shares held for - - - - - -
the benefit of life
assurance
policyholders
Shareholders
equity
excluding
minority
interest 2,168 50 77 (469) 3 1,829
Minority
interest 11 - - (3) - 8
Shareholders
equity
including
minority
interest 2,179 - 77 (472) 3 1,837
Total
liabilities 49,795 57 75 (130) 99 49,896
Appendix 1 - Basis of preparation of 2004 comparatives
The preliminary consolidated financial information presented comprises the
preliminary consolidated balance sheet as at 31 December 2004, the preliminary
income statement for the year ended 31 December 2004 and the preliminary
statement of recognised income and expenses.
The preliminary consolidated financial information does not constitute the
company's statutory accounts for the year ended 31 December 2004 which were
prepared in accordance with Irish Generally Accepted Accounting Standards ("ROI
GAAP"). As required by European Union (EU) law from 1 January 2005 the group
financial statements will be prepared in accordance with International Financial
Accounting Standards ("IFRS") as adopted for use within the EU.
The preliminary consolidated information which has been prepared based on the
recognition and measurement requirements of the IFRS issued by the International
Accounting Standards Board (IASB) and adopted by the EU which are expected to
apply at 31 December 2005. Certain IFRS that will be effective or available for
early adoption at 31 December 2005 are still subject to change and to the issue
of additional interpretation. Accordingly the group's accounting policies and
consequently the financial information presented may change prior to the
publication of the group's 2005 annual report.
Previously published ROI GAAP information has been reformatted to assist in the
presentation of the IFRS information.
The IFRS preliminary financial information is shown on two separate bases, the
first basis ("statutory basis") shows the 2004 comparatives adopting all the
recognition and measurement principles of the IFRS standards with the exception
of IAS 32, IAS 39 and IFRS 4 where transitional arrangements have been permitted
by the IASB. These concessions allow the group to continue to report
comparatives for areas covered by these standards on a ROI GAAP basis for 2004
only. The second basis ("pro-forma basis") provides more meaningful comparative
information by showing the 2004 IFRS financial information including the impact
on the financial information of the recognition and measurement principles of
IAS 32, IAS 39 and IFRS 4, with the exception of the income statement impact of
derivative hedge accounting where the necessary documentation was not in place
prior to the standard being agreed in late 2004.
Under IFRS 4, existing accounting policies continue to apply to insurance
contracts but there is an option to make improvements to accounting policies if
the resulting financial statements are more relevant to the needs of the user.
Accordingly earnings generated on insurance contracts are prepared in accordance
with the European Embedded Value (EEV) principles issued in May 2004 by the
European CFO Forum. The group has also adopted FRS 27 'Life Assurance' which was
issued by the UK Accounting Standards Board (ASB) in December 2004.
In October 2004, the EU adopted a carved out version of IAS 39 which restricted
the use of the fair value option for financial liabilities. It is expected that
recent amendments made to IAS39 will result in the EU endorsing a revised
version of IAS39 which would allow the use of the fair value option in certain
circumstances and the group would avail of this option. In the meantime the
group has followed the guidance issued which clarifies that liabilities which
under the EU insurance accounts directive were permitted to be measured at fair
value can continue to be measured on this basis.
Estimates and assumptions
Certain amounts recorded include estimates and assumptions made by management
about insurance liability reserves, investment valuations, interest rates,
demographic and other factors. Actual results may differ from the estimates
made. Where estimates had been made under ROI GAAP, consistent estimates (after
adjustments to reflect any difference in accounting policies) have been made on
transition to IFRS. Judgements affecting the group's balance sheet have not been
revisited with the benefit of hindsight.
First time adoption of IFRS
The group is required to determine its IFRS accounting policies and apply them
retrospectively to establish its opening balance sheet under IFRS. However IFRS
1 "First-time Adoption of International Financial Reporting Standards" allows a
number of exemptions on adoption of IFRS for the first time. The date of
transition to IFRS for the group is 1 January 2004.
The group has taken advantage of the following exemptions as permitted by IFRS
1:
Business combinations
For business combinations before 1 January 2004 the group has elected not to
apply the provisions of IFRS 3 "Business Combinations" retrospectively.
Accordingly no adjustments have been made for historical business combinations
and accumulated amortisation on goodwill arising before 1 January 2004 has not
been reversed.
Cumulative translation differences
Cumulative translation differences of foreign operations have not been restated
on an IFRS basis. These are deemed to be zero at the date of transition.
Employee defined benefit obligations
All cumulative actuarial gains and losses have been recognised in equity at 1
January 2004.
IAS 32, IAS 39 and IFRS 4
In preparing the statutory information the group has availed of the exemptions
under IAS 32, IAS 39 and IFRS 4 not to restate comparative amounts for 2004.
IFRS 2
The provisions of IFRS 2 in respect of share-based payment plans have not been
applied to options and awards granted on or before 7 November 2002 which had not
vested by 1 January 2005.
Appendix 2 - Significant Provisional Group Accounting Policies
Statutory Basis
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
Irish Life & Permanent plc and its subsidiaries.
Subsidiaries are those entities (including special purpose entities and unit
trusts) over which the group directly or indirectly has the power to govern the
operating and financial policies in order to gain economic benefits. In
assessing control potential voting rights that are exercisable or convertible
are taken into account. The financial statements of subsidiaries are included in
the consolidated financial statements from the date that control commences until
the date that control ceases.
The result of subsidiaries acquired other than the combination of Irish
Permanent plc and Irish Life plc are included in the consolidated income
statement from the date of acquisition. Profits or losses on subsidiary
undertakings sold or acquired during the period are included in the consolidated
results up to the date of disposal or from the date of gaining control.
The combination of the businesses of Irish Life plc and Irish Permanent plc has
been included in the consolidated financial statements using merger accounting
rules. The merger adjustment, which is the difference between the fair value of
the shares issued to effect the merger and the nominal value of the shares
acquired, is dealt with on consolidation through reserves.
All significant inter-company transactions and balances are eliminated on
consolidation.
Interest in associates
Associates are entities over which the group has significant influence but which
it does not control. Consistent with IAS 28 "Investment in Associates", it is
presumed that the group has significant influence where it has between 20% and
50% of the voting rights in the entity.
Interests in associates are accounted for on consolidation under the equity
method. The investment in the associate is initially recorded at cost and
increased or decreased each year by the group's share of the post acquisition
profit or loss of the associate and other movements recognised directly in the
equity of the associated undertaking.
Foreign currencies
The consolidated financial statements are presented in euro which is the group's
presentation currency.
Foreign currency transactions are translated into euro at the exchange rate
prevailing at the date of the transaction. Monetary assets and liabilities
denominated in foreign currency are translated at the exchange rates prevailing
at the balance sheet date. Exchange movements on these are recognised in the
income statement.
The results and financial position of group entities which have a functional
currency different from euro are translated into euro as follows:
* Assets and liabilities are translated at the rates of exchange ruling at
the balance sheet date.
* Income and expenses are translated at the average exchange rates for the
period.
* All resulting exchange differences are recognised as a separate component
of reserves.
On consolidation exchange differences arising from the translation of the net
investment in overseas subsidiaries and of the borrowings and currency
instruments designated as hedges of such subsidiaries are taken to reserves
where the hedge is deemed to be effective. The ineffective portion of any net
investment hedge is recognised in the income statement immediately.
All other exchange differences are included in the income statement.
Investment properties
Investment property consists of land and buildings which are held for long-term
rental yields and capital growth. Investment property is carried at fair value
with changes in fair value included in the income statement within the net
investment return. Valuations are undertaken at least annually by external
chartered surveyors at open market value in accordance with guidance set down by
the relevant professional bodies.
Operating leases
Expenditure on operating leases is charged to the income statement on a straight
line basis over the lease period.
Finance leases
Assets leased to customers that transfer substantially all the risk and rewards
incidental to ownership to the customer are classified as finance leases. They
are recorded at an amount equal to the net investment in the lease, less any
provisions for impaired rentals, within loans and advances to customers. Leasing
income is credited to interest income on an actuarial before tax investment
basis.
Securitised assets
The group has entered into funding arrangements to finance specific loans and
receivables to customers. All such financial assets are held on the group
balance sheet and a liability recognised for the proceeds of the funding
transaction.
Under FRS 5, these were previously shown in the balance sheet using a linked
presentation, whereby the non-recourse element of the funding was shown as a
deduction from the loan balance.
Reinsurance
The group cedes insurance premiums and risk in the normal course of business in
order to limit the potential for loss. Outward reinsurance premiums are
accounted for in the same period as related premiums for the business being
re-insured. Reinsurance assets include amounts due from reinsurance companies in
respect of paid and unpaid losses and ceded future life and investment policy
benefits. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured policy.
Reinsurance is recorded gross in the consolidated balance sheet unless a right
of set-off exists.
Property and equipment
Leasehold premises with unexpired terms of less than 50 years and all other
equipment are stated at cost less accumulated depreciation and impairment
losses. Depreciation is calculated to write off the costs of such assets to
their residual value over their estimated useful lives, which are assessed
annually by the directors.
Freehold premises and leasehold premises with unexpired terms in excess of 50
years are revalued annually by the directors and at least every five years by
external valuers. The resulting increase in value is transferred to a
revaluation reserve. The revalued premises, excluding the land element, are
depreciated to their residual values over their estimated useful lives, which
are assessed annually by the directors.
Freehold premises which are occupied by the group may be held for the benefit of
unit-linked life assurance policyholders. Revaluation of these assets therefore
results in a corresponding change in the liability to the policyholder. As
permitted under the shadow accounting provisions of IFRS 4, the change in
liability to the policyholder is also transferred to a separate reserve on the
balance sheet.
Subsequent costs are included in the asset's carrying amount, only when it is
probable that future economic benefits associated with the item will flow to the
group and the cost of the item can be measured reliably.
Property and equipment is assessed for impairment where there is an indication
of impairment. Where impairment exists, the carrying amount of the asset is
reduced to its recoverable amount and the impairment loss recognised in the
income statement. The depreciation charge for the asset is then adjusted to
reflect the asset's revised carrying amount.
Intangible Assets
Goodwill
The excess of the cost of a business combination over the interest in the net
fair value of the identifiable assets, liabilities and contingent liabilities at
the date of acquisition, of subsidiary undertakings, associated undertakings and
other businesses, arising is capitalised as goodwill.
Goodwill arising on the acquisition of shares in subsidiary and associated
undertakings prior to 31 December 1996 was written off against reserves in the
year of acquisition.
Goodwill arising on acquisitions between 31 December 1996 and 1 January 2004 was
recognised on the balance sheet and amortised on a straight line basis over its
estimated useful life. The group has availed of the transitional arrangements
under IFRS 1 and accordingly the unamortised goodwill at 1 January 2004 is
recognised on the balance sheet, and accumulated amortisation on goodwill
arising before 1 January 2004 has not been reversed.
From 1 January 2004, goodwill is carried in the balance sheet at cost less any
accumulated impairment losses. Goodwill is subject to an impairment review at
least annually and if events or changes in circumstances indicate that the
carrying amount may not be recoverable it is written down through the income
statement by the amount of any impairment loss identified in the year.
Software
Computer software is stated at cost, less amortisation and provision for
impairment, if any. The external costs and identifiable internal costs of
acquiring and developing software are capitalised where it is probable that
future economic benefits that exceed its cost will flow from its use over more
than one year.
Capitalised computer software is amortised over three to seven years.
Shareholders' value of in-force business
The shareholders' value of in-force business is the present value of future
statutory surpluses attributable to shareholders expected to arise from the
contracts which have been classified as insurance contracts. The shareholders'
interest in the value of the in-force business is included as an asset on the
balance sheet and the movement in this asset is reflected in the income
statement.
The value of in-force business calculated in accordance with embedded value
methods, applying EEV principles and reflecting the provisions of FRS 27 is
determined by the group in consultation with independent actuaries Watson Wyatt
LLP.
Assumptions regarding future rates of mortality, morbidity, persistency,
taxation, investment returns and expense levels are based on the recent
experience of the business, taking account of current economic conditions.
The risk discount rate used to calculate the shareholders' value of in-force
business is a combination of a discount rate to reflect the time value of money
and a risk margin to make prudent allowance for the risk that experience in
future years may differ from the assumptions.
Pension obligations
The group has both defined benefit and defined contribution schemes.
The group's net obligation in respect of the defined benefit schemes is
calculated separately for each scheme. The net obligation represents the present
value of the obligation to employees in respect of service in the current or
prior period less the fair value of the plan assets. The obligation is
actuarially calculated annually by external actuaries using the projected unit
method. The present value of the obligation is determined by discounting the
estimated future cash flows. This discount rate is based on the market yield of
high quality corporate bonds that have maturity dates approximating to the terms
of the pension liability.
Actuarial gains and losses at 1 January 2004 have been taken directly to
reserves. As permitted under IAS 19, the corridor approach has been adopted for
actuarial gains and losses arising since that date. Under the corridor approach
actuarial gains and losses are recognised only where the unrecognised gains or
losses exceed the greater of:
10% of present value of the defined benefit obligations at the balance sheet
date or 10% of the fair value of the scheme assets at the balance sheet date
The limits are applied separately to each scheme, with any resulting excess gain
or loss recognised in the income statement over the expected remaining service
lives of the active members of that scheme.
The current and past service cost, the interest cost of the scheme liabilities
and the expected return on scheme assets are recognised in the income statement
in the period in which they are incurred.
The group pays contractual contributions in respect of defined contribution
plans. These contributions are recognised as employee expenses when they are
due.
Share options
The group operates a number of share option schemes based on non-market vesting
criteria. The group has availed of the transitional arrangements under IFRS 1
and no charge is included for share options granted before 7 November 2002 which
had not vested by 1 January 2005. For all other options, the fair value of the
options is determined at the date of grant and expensed in the income statement
over the period during which the employees become unconditionally entitled to
the options. The expense is credited to a separate reserve in the balance sheet.
At each period end the group revises its estimate of the number of options that
it expects to vest and any adjustment relating to current and past vesting
period is charged to the income statement. Share options are all equity settled.
Taxation
Taxation comprises both current and deferred tax. Taxation is recognised in the
income statement except where it relates to an item which is recognised in
equity.
Corporation tax payable is provided on taxable profits at current taxation
rates.
Deferred tax is provided using the liability method on all temporary differences
without discounting with deferred tax assets being recognised when it is
probable that future taxable profits will be available against which the asset
can be utilised.
Deferred tax liabilities and assets are offset only where there is both the
legal right and the intention to settle on a net basis or to realise the asset
and settle the liability simultaneously.
The total tax expense for the period includes tax which is not related to
profits earned by equity holders for the period being the tax attributable to
life policyholders. The tax charge in the income statement has therefore been
apportioned between the element attributable to policyholders and the element
attributable to equity holders' profits.
Dividends
Final dividends on ordinary shares are recognised in equity in the period in
which they are approved by the company's shareholders. Interim dividends are
recognised in equity in the period in which they are declared.
Purchases and sales of own shares
As permitted under Irish legislation, a subsidiary of the group holds Irish Life
& Permanent plc shares on behalf of life assurance policyholders. These shares
are required to be treated as though they were purchased by the company for its
own benefit and treated as treasury shares and therefore treated as a deduction
in arriving at shareholders' equity rather than as an asset.
Under IFRS the cost of the shares is required to be deducted from shareholders'
equity, However, as the shares are held on behalf of policyholder the liability
to the policyholder is carried at fair value. As a result shareholders' equity
is reduced by the market value of the shares while movements in market value
during the year result in a gain or loss in the income statement.
Netting
Assets and liabilities are shown net where there is a legal right to offset and
there is an intention and an ability to settle on a net basis.
Other accounting policies
All other accounting policies applied in the statutory basis are unchanged from
the accounting policies applied under ROI GAAP as outlined in the 2004 annual
report.
Pro-forma Basis
Financial Investments
The group classifies its financial investments on initial recognition as held
for trading ("HFT"), designated at fair value through profit and loss ("FVTPL"),
available for sale ("AFS"), held to maturity ("HTM") or loans and receivables.
Debt Securities
Debt securities may be classified as HFT, FVTPL, AFS or HTM.
Debt securities classified as HFT or FVTPL are measured at fair value.
All debt securities held as part of the group's life assurance operations are
classified as HFT. Realised and unrealised gains together with income earned on
these assets are shown as net investment return in the income statement.
Where the group's banking operations holds debt securities as HFT or FVTPL,
income on an effective interest basis is recorded in the income statement as
interest receivable with realised and unrealised gains shown as trading income
in the income statement.
Debt securities classified as HTM are measured at amortised cost on an effective
interest basis less any allowance for impairment. Income on these investments is
recorded on an effective interest basis as interest receivable in the income
statement.
Debt securities classified as AFS are measured at fair value with unrealised
gains and losses recognised in a separate reserve within equity. Realised gains
and losses, impairment losses and foreign exchange movements are reflected in
the income statement. Income on debt securities classified as AFS is recognised
on an effective interest basis and included as interest receivable in the income
statement.
Equities
Equities are classified as HFT. Realised and unrealised gains together with
dividend income on equities are reported as net investment return in the income
statement.
Loans and receivables
Loans and receivables are held at amortised cost less allowance for incurred
impairment losses. Income is recognised on an effective interest basis as
interest receivable in the income statement.
Where loans and receivables are part of a fair value hedging relationship the
accumulated change in the fair value resulting from the hedged risk is
recognised together with the movements in the fair value of the related hedging
instrument in the income statement.
The fair values of quoted financial investments are based on current bid prices.
Fair values for financial investments for which no active market exists are
measured using valuation techniques such as discounted cash flow models, option
pricing models and reference to other similar listed investments.
Impairment provisions
The group assesses impairment of financial assets at each balance sheet date on
a case by case basis for assets that are individually significant and
collectively for assets that are not individually significant.
Assets are impaired only if there is objective evidence that the result of one
of more events that have occurred after the initial recognition of the asset
have had an impact on the estimated future cash flows of the assets. For
individual assets this includes changes in the payment status of the
counterparty. Collective assessment groups together assets that share similar
risk characteristics and applies a collective methodology based on existing risk
conditions or events which have a strong correlation with a tendency to default.
This impairment is calculated by comparing the present value of the cash flows
discounted at the effective interest rate applicable to the asset (after taking
into account security held) with the carrying value in the balance sheet.
Where loans are impaired the written down value of the impaired loan is
compounded back to the net realisable balance over time using the original
effective interest rate. This is reported through interest receivable within the
income statement and represents the unwind of the discount.
A write-off is made when all or part of a loan is deemed uncollectible or
forgiven. Write-offs are charged against previously established provisions for
impairment or directly to the income statement.
Derivative instruments
Derivative instruments are used in both the group's banking and life assurance
operations and primarily comprise interest rate swaps, cross currency swaps,
future rate agreements, futures and options. All derivatives are held on the
balance sheet at fair value. Fair values are obtained from quoted prices
prevailing in active markets where available. Otherwise valuation techniques
including discounted cash flows and option pricing models are used to value the
instruments.
Gains and losses arising from derivatives are recognised in the income statement
in the relevant heading depending on the purpose of the derivative.
Derivatives are used to hedge the group's banking operations. Where derivatives
are used as hedges, formal documentation is drawn up at inception of the hedge
specifying the hedging strategy, the component transactions and the methodology
that will be used to measure effectiveness. Monitoring of hedge effectiveness is
carried out on an on-going basis. Movements in the fair value of derivative
hedge positions together with the fair value movement in the underlying
financial instrument being hedged are reflected in the income statement.
Financial liabilities
Financial liabilities include deposits, debt securities issued and subordinated
debt issued.
Financial liabilities are carried at amortised cost calculated on an effective
interest basis.
Financial liabilities are held at fair value where the liabilities are part of a
hedging relationship. The change in the fair value of the liability is
recognised together with the movement in the fair value of the derivative
positions hedging the liability in the income statement in the line net profit
or loss arising on hedging. Interest expense on an effective interest basis is
recorded in the income statement as interest payable.
Product classifications
In accordance with IFRS 4, the group's life assurance products are classified
for accounting purposes as either insurance contracts or investment contracts at
inception of the contract. Insurance contracts are contracts which transfer
significant insurance risk. Contracts which do not include significant insurance
risk are investment contracts. The group has a small closed book of insurance
contracts which have a discretionary participating feature, all of these
contracts also have significant insurance risk and are therefore classified as
insurance contracts.
Shareholders' value of in-force business
As permitted under IFRS 4, insurance contracts are accounted for in accordance
with embedded value methods, applying EEV principles and reflecting the
provisions of FRS 27.
The shareholders' value of in-force business is the present value of future
statutory surpluses attributable to shareholders expected to arise from the
contracts which have been classified as insurance contracts. The shareholders'
interest in the value of the in-force business is included as an asset on the
balance sheet and the movement in this asset is reflected in the income
statement.
The value of in-force business calculated in accordance with EEV principles is
determined by the group in consultation with independent actuaries Watson Wyatt
LLP.
Assumptions regarding future rates of mortality, morbidity, persistency,
taxation, investment returns and expense levels are based on the recent
experience of the business, taking account of current economic conditions.
The risk discount rate used to calculate the shareholders' value of in-force
business is a combination of a discount rate to reflect the time value of money
and a risk margin to make prudent allowance for the risk that experience in
future years may differ from the assumptions.
Insurance contract liabilities
Insurance contract liabilities are measured on the same basis as under ROI GAAP.
The liabilities are determined by the appointed actuaries. The liabilities
include statutory surpluses which have not been allocated to policyholders as
well as an assessment of the cost of any future options and guarantees contained
within the insurance contracts measured on a market consistent basis. Changes in
the liabilities are included in the income statement.
Statutory surpluses are determined by the appointed actuaries following their
annual investigation. The boards of directors, acting upon the advice of the
appointed actuaries, allocate a proportion of the statutory surplus to
policyholders through an appropriation of declared bonuses.
Liability adequacy tests
The group performs liability adequacy tests on its insurance contract
liabilities to ensure that the carrying amount of the liabilities is sufficient
to cover estimated future cash flows. When performing the liability adequacy
tests the group discounts all contractual cash flows and compares this amount to
the carrying value of the liability. Any deficiency is immediately charged to
the income statement.
Investment contract liabilities
Unit-linked investment contracts are measured with reference to the value of the
underlying net asset value of the group's unitised investment funds at the
balance sheet date. Non-linked investment contracts are measured based on the
value of the liability to the policyholder at the balance sheet date.
Deposits and withdrawals are accounted for directly in the balance sheet as
movements in the investment contract liabilities.
Premium income and claims recognition
Premiums in respect of insurance contracts are accounted for in the same period
in which the liabilities arising from those premiums are established.
Claims are accounted for when paid or payable, or if earlier, on the date when
the policy ceases to be included within the calculation of insurance contract
liabilities.
Premiums and claims in respect of investment contracts are not included in the
income statement but are reported as deposits to and withdrawals from investment
contract liabilities in the balance sheet.
Revenue from investment contracts
Fees charged in respect of investment contracts are recognised when the service
is provided. Initial fees, which exceed the level of recurring fees are deferred
and amortised over the anticipated period in which services will be provided.
Fees charged for investment management services for institutional fund
management are also recognised over the period of the service.
Interest receivable and payable
Revenue on assets classified as HTM, AFS or FVTPL as well as loans and deposits
is recognised on an effective interest basis. This calculation takes into
account interest received or paid, fees and commissions and incremental
transaction costs. The effective interest rate is the rate that discounts the
expected future cash flows over the expected life of the instrument to the net
carrying amount of the financial asset or liability at initial recognition.
Acquisition costs
The costs directly associated with the acquisition of new investment management
service contracts are deferred to the extent that they are expected to be
recoverable out of future revenues to which they relate.
Such costs are amortised through the income statement over the period in which
the revenues on the related contracts are expected to be earned, at a rate
commensurate with those revenues.
Deferred acquisition costs are reviewed by category of business at the end of
each financial year. Should the circumstances, which justified the deferral of
costs no longer apply, costs to the extent that they are believed irrecoverable
are written off.
For insurance contracts, acquisition costs to the extent that they are
deferrable are reflected within the shareholders value of in-force business.
Other income and expense recognition
Unless included in the effective interest calculation, fees and commissions
receivable and payable are recognised on an accruals basis.
Expenses are recognised on an accruals basis.
Sales and repurchase agreements (including stock borrowing and lending)
Investment and other securities may be lent for a fee or sold subject to a
commitment to repurchase them. Such securities are retained on the balance sheet
when substantially all the risk and rewards of ownership remain with the group.
The liability to the counterparty is included separately on the balance sheet as
appropriate.
Similarly, securities purchased with a commitment to resell, or where the group
borrows securities but does not acquire the risks and rewards of ownership, the
transactions are treated as collateralised loans, and the securities are not
included in the balance sheet.
The difference between the sale and repurchase price is accrued in the income
statement over the life of the agreements using the effective interest rate, the
fee earned on stock lending is accrued in the income statement. Securities lent
to counterparties are also retained in the financial statements.
Securities borrowed are not recognised in the financial statements, unless these
are sold to third parties, at which point the obligation to repurchase the
securities is recorded as a trading liability at fair value and any subsequent
gain or loss included in net trading income.
Transition to EEV
Restatement of 2004 financial information
Consolidated Income Statement - Supplementary Information (EEV Pro-forma basis)
Year ended 31 December 2004
ROI GAAP as
reformatted Pro-forma
Eurom Eurom
Operating profit on continuing operations
Insurance and investment business 202 192
Banking 128 139
Other (2) 0
328 331
Share of associate 65 56
Operating profit before tax
on continuing operations 393 387
Short term investment
fluctuations 27 26
Effect of economic
assumption changes 44 30
Goodwill amortisation (12) 0
Other charges/credits 21 21
Profit before tax 473 464
Taxation (71) (45)
Profit for the period on
continuing operations 402 419
Profit after tax on
discontinued operations 10 10
Profit for the year after
income tax 412 429
Minority interest (1) (2)
Profit attributable to
equity holders 411 427
Earnings per share
including own shares held
for the benefit of life assurance
policyholders (cent) 152.5 158.4
Operating earnings per
share including own shares
held for the benefit of life assurance
policyholders (cent) 120.0 124.0
Consolidated Balance Sheet - Supplementary Information ( EEV Pro-forma basis)
As at 1 January 2005
ROI GAAP as
reformatted Pro-forma
Eurom Eurom
Assets
Cash and other receivables 226 243
Investments 5,230 20,436
Loans and receivables 22,268 25,641
Investment in associate 130 136
Reinsurers' share of provisions 1,444 1,738
Shareholder value of in-force business 993 940
Net post retirement asset - 65
Other assets 467 569
Other debtors 602 355
Assets held to match unit-linked liabilities 16,393 -
Total assets 47,753 50,123
Liabilities
Customer accounts 13,009 12,846
Debt securities in issue 10,944 10,879
Non-recourse funding - 2,193
Derivatives - 131
Technical provisions for insurance contracts 19,873 3,850
Investment contract liabilities - 16,193
Outstanding insurance and investment claims - 115
Net post retirement benefit liability - 169
Other liabilities 579 457
Subordinated liabilities 934 951
Dividends 104 -
45,443 47,784
Share capital 86 86
Share premium 52 52
Revenue reserves 448 532
Non-distributable reserves 1,695 1,594
Capital reserves 84 129
Own shares held for the benefit of life assurance (64) (64)
policyholders
Shareholders' equity 2,301 2,329
Minority interest 9 10
2,310 2,339
Total liabilities 47,753 50,123
Consolidated Supplementary Statement of Recognised Income and Expense
Year ended 31 December 2004
ROI GAAP as
reformatted Pro-forma
Eurom Eurom
Revaluation of property & equipment (2) -
Net amount recognised directly in equity (2) -
Profit for the year after income tax 412 429
Total recognised income and expense for
the year 410 429
Minority interests (1) (2)
Attributable to equityholders 409 427
Movement in cost of own shares (10) (10)
Dividends paid (148) (142)
251 275
EEV Basis Methodology
Year ended 31 December 2004
Basis of Preparation
Earnings generated by the Group's life assurance business have previously been
presented in the primary financial statements in accordance with the Association
of British Insurers' paper of December 2001 'Supplementary Reporting for Long
Term Insurance Business (The Achieved Profits Method)', referred to in this note
as the "ROI GAAP" basis. These earnings are now prepared for the primary
financial statements on an IFRS basis. It is the view of the Directors that
additional information is required in order to provide shareholders with more
realistic information on the financial position and current performance of the
Group than is provided within the primary financial statements. Accordingly,
preliminary supplementary financial information ("supplementary information")
has been prepared in relation to the Group's Balance Sheet and Income
statements. For all business other than that specifically referred to below, the
statements incorporate the same values and earnings included in the primary
financial statements, determined using the IFRS bases.
This section sets out the methodology used to produce the supplementary
information. The Directors acknowledge their responsibility for the preparation
of the supplementary information. The statements have been prepared in
accordance with the European Embedded Value (EEV) Principles issued in May 2004
by the European Chief Financial Officers' Forum. The methodology produces an
Embedded Value (EV) as a measure of the consolidated value of shareholders'
interests in the business covered by the EEV Principles.
The Group has prepared the supplementary information for the year ended 31
December 2004 in order to provide the comparative supplementary information
expected to be included in the Group's first set of complete supplementary
information in the annual report for the year ending 31 December 2005. The
supplementary information may require adjustment before it is so included. This
is due to continuing work on the guidance associated with the EEV principles,
the evolution of practice in relation to the new methodology and continued
development of IFRS standards by the IASB together with further interpretative
guidance.
In accordance with IFRS 1, First Time Adoption of International Financial
Reporting Standards, in arriving at the underlying preliminary IFRS information
that forms the starting point for the supplementary information, no adjustments
have been made for any changes in estimates made at the time of approval of the
ROI GAAP statutory financial statements on which the preliminary IFRS financial
information is based.
The supplementary information has been audited by KPMG and prepared in
conjunction with the Group's consulting actuaries - Watson Wyatt LLP.
Covered Business
The EEV Principles are applied to value "covered business" as defined by the
Principles. This includes individual and group life assurance and investment
contracts, pensions and annuity business written in Irish Life Assurance plc,
Irish Life International Limited and City of Westminster Assurance Company
Limited, and the investment management business written in Irish Life Investment
Managers.
All business other than the covered business is included in the supplementary
information on the same basis as that applied to the business in the primary
financial statements.
Under EEV, the same valuation approach is applied to both insurance and
investment contracts within the covered business.
Embedded Value
Embedded Value (EV) is the present value of shareholders' interests in the
earnings distributable from assets allocated to the covered business after
sufficient allowance is made according to the EEV Principles for the aggregate
risks in the covered business. The EV consists of the following components:
* free surplus allocated to the covered business
* required capital, less the cost of holding required capital
* present value of future shareholder cash flows from in-force covered
business (PVIF), including an appropriate deduction for the time value of
financial options and guarantees.
The value of future new business is excluded from the EV.
The cost of holding required capital is defined as the difference between the
amount of the required capital and the present value of future releases,
allowing for future investment returns, of that capital.
Free Surplus and Required Capital
Free surplus is defined as the market value of assets in the covered business
less supervisory liabilities less required capital. It is the market value of
any capital and surplus allocated to, but not required to support, the in-force
covered business at the valuation date.
The level of required capital reflects the amount of assets attributed to the
covered business in excess of that required to back regulatory liabilities whose
distribution to shareholders is restricted. The EEV Principles require this
level to be at least the level of solvency capital at which the local
supervisory authority is empowered to take action and any further amount that
may be encumbered by local supervisory restrictions. In light of this the
Directors have set the level of required capital to be 150% of the regulatory
minimum solvency margin requirement at the valuation date, including the
additional margin required under the Solvency 1 rules. The Directors consider
this to be a conservative level of capital to manage the covered business,
allowing for the supervisory basis for calculating liabilities, the insurance
and operational risks inherent in the underlying products and the methods used
to value financial options and guarantees included in those products.
New Business
New business premiums reflect income arising from the sale of new contracts
during the reporting period. Increases to premiums that are generated by
policyholders at their discretion are included in new business as they occur.
Increases to renewal premiums on group pension contracts are treated as new
business premiums.
The new business contribution is the present value of future shareholder
cashflows arising from the new business premiums written in the period less a
deduction if relevant for the time value of financial options and guarantees.
The contribution makes full allowance for the associated amount of required
capital and includes the value of expected renewals on new contracts.
The EEV Principles require a measure of the present value of future new business
premiums (PVNBP) to be calculated and expressed at the point of sale. The PVNBP
is equivalent to the total single premiums plus the discounted value of regular
premiums expected to be received over the term of the contracts using the same
economic and operating assumptions used for calculating the new business
contribution. The new business margin reported under EEV is defined as the ratio
of the new business contribution to PVNBP.
Projection Assumptions
Projections of future shareholder cash flows expected to emerge from covered
business are determined using realistic assumptions for each component of cash
flow and for each policy group. Future economic and investment return
assumptions are based on period end conditions. The assumed discount and
inflation rates are consistent with the investment return assumptions.
The assumptions for demographic elements, including mortality, morbidity,
persistency and expense experiences, reflect recent operating experiences and
are reviewed annually. Allowance is made for future improvements in annuitant
mortality based on experience and externally published data. Favourable changes
in operating experience are not anticipated until the improvement in experience
has been observed.
All costs relating to the covered business are allocated to that business. The
expense assumptions used for the projections therefore include the full cost of
servicing the business. The costs include future depreciation charges in respect
of certain fixed assets included in the free surplus. Certain group costs
allocated to the life company are not included within the cash flow projections
and are accounted for on an annual basis in the other group results.
Risk Discount Rate
The risk discount rate (RDR) is a combination of a base risk-free rate and a
risk margin, which reflects the residual risks inherent in the covered business,
after taking account of prudential margins in the supervisory liabilities, the
required capital and the specific allowance for financial options and
guarantees.
The Group has adopted a bottom-up approach to the determination of the risk
discount rate. Each element of risk is assessed in turn and a cost is reflected
as an addition to the base risk-free discount rate. The risk discount rate so
derived reflects the risk of volatility associated with the cashflows in the
embedded value model.
Key assumptions for the Irish covered business are set out below, showing rates
used at 31st December 2004 (31st December 2003 in brackets):
Base risk-free rate: 3.5% (4.2%) derived from gross
redemption yields on appropriate Irish gilt portfolio
Future investment return equity risk premium 3.0% (3.0%)
Future investment return property risk premium 2.0% (2.0%)
Total risk margin 3.2% (3.1%)
Risk discount rate 6.7% (7.3%)
The risk margin consists of a market risk margin of 1.1% (1.0% at 31.12.2003)
plus a non-market risk margin of 2.1% (2.1% at 31.12 2003). The market risk
margin neutralises the effect of assuming future investment returns in excess of
the base risk-free rate.
The non-market risk margin is based on an estimate of the impact of each of the
following risks:
* mismatch risk, credit risk, demographic risks including mortality,
morbidity, persistency and expense risks, operational risk and liquidity
risk.
An allowance is made for the diversification effect in that each of the risks is
not expected to occur simultaneously. Financial options and guarantees are
explicitly valued using a market-consistent approach and no further risk
allowance is included for these in the risk discount rate. The non market risk
margin was determined by the Directors following a review of the estimates
emerging from the above exercise.
Financial Options and Guarantees
Under the EEV Principles an allowance for the time value of financial options
and guarantees ("FOG") is required where a financial option exists which is
exercisable at the discretion of the policyholder. The time value of an option
reflects the additional value inherent in the option due to the potential for
the option to increase in value prior to its expiry date, usually due to
movements in the market value of assets. The value of an option based on market
conditions at the date of the valuation is referred to as the intrinsic value.
Allowance is made for the intrinsic value of FOGs in the supervisory liabilities
and the cost is reflected in the PVIF. An explicit deduction is made to the PVIF
to allow for the impact of future variability of investment returns on the cost
of FOGs (time value). The time value of FOGs is calculated using stochastic
models calibrated on a market consistent basis.
The main financial options and guarantees are described in the section on the
assumptions used in the calculation of the EV.
Service Companies
All services relating to the covered business are charged on a cost recovery
basis.
Tax
The projections take into account all tax that is expected to be paid under
current legislation, including tax that would arise if surplus assets within the
covered business were eventually to be distributed.
Analysis of Profit
The profit from the covered business is analysed into three main components:
* New business contribution
The contribution from new business written in the period is calculated as at
the point of sale using assumptions applicable at the start of the period.
This is then rolled forward to the end of the financial period using the
risk discount rate applicable at the start of the reporting period.
* Contribution from in-force business
The contribution from in-force business is calculated using opening
assumptions and comprises:
interest at the risk discount rate on the value of in-force business;
experience variances: when calculating embedded values it is necessary
to make assumptions regarding future experiences including persistency
(how long policies will stay in force), risk (mortality and morbidity),
future expenses and taxation. Actual experience may differ from these
assumptions. The impact of the difference between actual and assumed
experience for the period is reported as experience variances;
operating assumption changes: the assumptions on which embedded values
are calculated are reviewed regularly. Where it is considered
appropriate in the light of current or expected experience to change any
assumptions regarding expected future experience, the impact on total
value of in-force business of any such change is reported as an
"operating assumption change".
* Expected investment return
The expected investment earnings on the net assets attributable to
shareholders are calculated using the future investment return assumed at
the start of the period.
Two further items make up the total profit arising from the covered
business:
* Short term investment fluctuations
This is the impact on the EV of differences between the actual investment
return and the expected investment return assumptions assumed at the start
of the period.
* Effect of economic assumption changes
This is the impact on the EV of changes in external economic conditions
including the effect changes in interest rates have on risk discount rates
and future investment return assumptions.
Insurance and investment business continuing operations
Year ended 31 December 2004
Eurom Eurom
New business contribution 52 58
Profit from existing business
- Expected return 92 69
- Experience variances 18 11
- Operating assumption changes 42 39
Development expenditure (4) (4)
Expected investment return 2 19
Operating profit before tax 202 192
Short term investment fluctuations 26 26
Effect of economic assumption changes 44 30
Profit before tax 272 248
The expected investment return on the EEV basis includes the expected return on
required capital. This was previously included in the expected return from
existing business on the ROI GAAP basis.
New Business Margin
Eurom Eurom Eurom
Present value of new business premiums
Single Premium 1,029 1,601 2,630
Regular premium 207 207
Regular premium capitalisation factor 4.8 4.8
PVNBP 2,029 1,601 3,630
Annual Premium Equivalent (APE) 310 160 470
New business contribution (EEV basis) 46 12 58
New business margin
PVNBP 2.3% 0.8% 1.6%
APE 14.9% 7.6% 12.4%
New business includes Euro140m single premiums in respect of inflows to
institutional off-balance sheet funds which are included under covered business
under EEV.
Insurance and investment business continuing operations
Year ended 31 December 2004
Profit after tax
EEV ROI GAAP
Gross Tax Net Net
Eurom Eurom Eurom Eurom
Operating profit 192 (15) 177 174
Short term investment fluctuations 26 18 44 40
Effect of economic assumption changes 30 (10) 20 35
248 (7) 241 249
Operating profit after tax (EEV)
Net Worth VIF Total
Eurom Eurom Eurom
New business contribution (101) 148 47
Profit from existing business
- Expected return 138 (72) 66
- Experience variances (6) 18 12
- Operating assumption changes 76 (36) 40
Development expenditure (4) - (4)
Expected investment return 15 1 16
118 59 177
Shareholders' Equity (EEV pro-forma basis)
As at 1 January 2005
ROI GAAP
as
reformatted Pro-forma
Eurom Eurom
Insurance and Investment business 1,696 1,689
Banking 362 350
Other activities - 30
Associate Undertakings 130 136
Goodwill 186 198
2,374 2,403
Minority interest (9) (10)
Deduction in respect of own shares held for the (64) (64)
benefit
of life assurance policyholders
Shareholders' equity 2,301 2,329
Movement in shareholders' equity - Insurance and investment business (EEV)
Net Worth VIF Total
Eurom Eurom Eurom
Shareholders' equity as at 1 January 2004 750 837 1,587
Operating profit after tax on continuing 118 59 177
operations
Short term investment fluctuations 20 24 44
Effect of economic assumption changes 2 18 20
Profit after tax on discontinued operations 8 2 10
Capital movements (149) - (149)
Shareholders' equity as at 1 January 2005 749 940 1,689
The shareholders' equity as at 1 January 2005 (2004) includes required capital
of Euro488m (Euro426m) within the net worth. The shareholders' value of in-force is
net of a deduction of Euro112m (Euro97m) in respect of the cost of maintaining the
required capital.
Assumptions
Year ended 31 December 2004
Principal economic assumptions
The assumed future pre-tax returns on fixed interest securities are set by
reference to gross redemption yields available in the market at the end of the
reporting period. The corresponding return on equities and property is equal to
the fixed interest gilt assumption plus the appropriate risk premium. An asset
mix based on the assets held at the valuation date within policyholder funds has
been assumed within the projections. The table includes the assumptions for the
EEV calculations and the comparable rates used for the ROI GAAP calculations
using the Achieved Profits Method for the relevant periods.
EEV ROI GAAP EEV ROI GAAP
2004 2004 2003 2003
Equity risk premium 3.00% 2.00% 3.00% 2.00%
Property risk premium 2.00% 2.00% 2.00% 2.00%
Risk free rate 3.50% 3.60% 4.20% 4.25%
Investment return
Fixed interest 2.5% - 4.2% 2.5% - 4.2% 3.0% - 4.9% 3.0% - 4.9%
Equities 6.50% 5.60% 7.20% 6.25%
Property 5.50% 5.60% 6.20% 6.25%
Risk margin 3.20% 3.40% 3.10% 3.75%
Risk discount rate 6.70% 7.00% 7.30% 8.00%
Expense inflation 3.60% 3.60% 4.00% 4.00%
Other assumptions
The assumed future mortality, morbidity and persistency assumptions are based on
published tables of rates, adjusted by analyses of recent operating experience.
The management expenses attributable to life assurance business have been
analysed between expenses relating to the acquisition of new business and the
maintenance of business in-force. No allowance has been made for future
productivity improvements in the expense assumptions.
Projected tax has been determined assuming current tax legislation and rates.
EEV results are computed on a before and after tax basis.
UK business
The Group's UK business (City of Westminster Assurance) was sold in June 2005
and is being treated under discontinued operations in the Group's preliminary
financial information. The assumptions used for the UK business were left
unchanged from the previous basis as any difference would be immaterial in the
context of the Group's overall preliminary supplementary financial information.
The key assumptions used were:
EEV EEV ROI GAAP EEV ROI GAAP
2004 2004 2003 2003
Risk free rate 4.55% 4.55% 4.75% 4.75%
Risk margin 3.25% 3.25% 3.25% 3.25%
Risk discount rate 7.80% 7.80% 8.00% 8.00%
Treatment of financial options and guarantees (FOGs)
The main options and guarantees for which FOG costs have been determined are:
a. Investment guarantees on certain unit-linked funds, where the unit returns to
policyholders are smoothed subject to a minimum guaranteed return (in the
majority of cases the minimum guaranteed change in unit price is 0%, usually
representing a minimum return of the original premium). An additional
management charge is levied on policyholders investing in these funds,
compared to similar unit-linked funds without this investment guarantee.
This extra charge is allowed for in calculating the FOG cost;
b. Guaranteed Annuity Rates on a small number of products;
c. Return of Premium death guarantees on certain unit-linked single premium
products;
d. Guaranteed benefits for policies in the closed with-profit fund.
The main asset classes relating to products with options and guarantees are
European and International equities, Property, and government bonds of various
durations.
The Deloitte's TSM Streamline Market Consistent model is used to derive the cost
of FOGs. The model is calibrated to the yield curve and to the market prices of
equity options. Ten years of historical weekly data are used to derive the
correlation between the returns of different asset classes.
The model uses the difference between two inverse Gaussian distributions to
model the returns on each asset class. This allows the model to produce
fat-tailed distributions, and provides a good fit to historical asset return
distributions.
The statistics relating to the model used as at 31 December 2004 are set out in
the following table:
10 Year Return 20 Year Return
Mean1 StDev2 Mean StDev
European Assets (euro)
Bonds 3.90% 2.40% 4.30% 3.50%
Equities, Property 3.90% 21.90% 4.30% 23.00%
UK Assets (Sterling)
Bonds 4.60% 2.50% 4.50% 5.30%
Equities 4.60% 19.10% 4.50% 20.30%
1. The Market Consistent nature of the model means that that all asset classes
earn the risk free rate. No value is added by investing in riskier assets
with a higher expected rate of return. The Means quoted above reflect this.
2. Standard Deviations are calculated by accumulating a unit investment for n
years in each simulation, taking the natural logarithm of the result,
calculating the variance of this statistic, dividing by n and taking the
square root. The results are comparable to implied volatilities quoted in
investment markets.
Sensitivity calculations
A number of sensitivities have been produced on alternative assumption sets to
reflect the sensitivity of the continuing operations embedded value and the
continuing operations new business contribution to changes in key assumptions.
Relevant details relating to each sensitivity are:
- 1% variation in discount rate - a one percentage point increase/
decrease in the risk margin has been assumed in each case (meaning a 1%
increase in the risk margin at end 2004 would result in a 4.2% risk
margin)
- 1% variation in equity/property yields - a one percentage point
increase/decrease in the
equity/property assumed investment returns, excluding any related
changes to risk discount rates or valuation bases, has been assumed in
each case (meaning a 1% increase in equity returns would increase
assumed total equity returns from 6.5% to 7.5%)
- 10% variation in equity/property values - a ten percentage point
increase/decrease in the market value of equity/property assets
* 10% decrease in maintenance expenses, excluding any related changes to
valuation expense bases or potentially reviewable policy fees (meaning a 10%
reduction on a base assumption of Euro10 per annum would result in a Euro9 per
annum expense assumption)
- 10% improvement in assumed persistency rates, incorporating a 10%
reduction in lapse, surrender and premium cessation assumptions (meaning
a 10% reduction on a base assumption of 7% would result in a 6.3% lapse
assumption)
* 10% decrease in both mortality and morbidity rates, excluding any related
changes to valuation bases or potentially reviewable risk charging bases
(meaning if base experienced mortality is 90% of a standard mortality table
then for this sensitivity the assumption is set to 81% of the standard
table)
The sensitivities allow for any material impact on the cost of financial options
and guarantees caused by the changed assumption.
Sensitivity analyses continuing operations
(a) Economic Assumptions
As issued 1% higher risk 1% lower risk
EEV discount rate discount rate
Eurom Eurom Eurom
Effect on embedded value at 1 1,598 (80) 91
January 2005
Effect on new business
contribution 58 (13) 15
(b) Market Sensitivities - equity/property yields
As issued
1% higher equity 1% lower equity /
EEV property yields
/property yields
Effect on embedded value at 1 Eurom Eurom Eurom
January 2005 1,598 41 (38)
Effect on new business
contribution 58 4 (4)
(c) Market Sensitivities - equity/property values
As issued 10% increase in equity/ 10% decrease in equity
EEV property values /property values
Eurom Eurom Eurom
Effect on embedded value at 1 1,598 73 (76)
January 2005
(d) Operational Assumptions
10% improvement
As issued 10% decrease in in assumed 10% decrease in
EEV maintenance expenses persistency rates mortality and morbidity
Eurom Eurom Eurom Eurom
Effect on embedded value
at 1 January 2005
1,598 42 46 19
Effect on new business
contribution 58 7 7 2
Reconciliation of changes from ROI GAAP to EEV pro-forma basis
Insurance and Investment business
Year ended 31 December 2004
Operating profit before tax
Eurom
Operating profit (ROI GAAP) 215
Other activities not included as covered business (3)
UK operations presented as discontinued operations (10)
Operating profit before tax on continuing operations (ROI GAAP) 202
Cost of increase in required capital (2)
Changes in economic assumptions 13
Implementation of IAS 19 pension costs (9)
Amendments to tax gross up methodology (12)
Operating profit before tax on continuing operations (EEV basis) 192
New business contribution before tax
Eurom
New business contribution (ROI GAAP) 55
UK operations reclassified as discontinued activities (3)
New business contribution on continuing operations (ROI GAAP) 52
Cost of the increase in required capital (5)
Changes in economic assumptions 7
Implementation of IAS 19 pension costs (1)
Amendments to tax gross up methodology 5
New business contribution on continuing operations (EEV basis) 58
Reconciliation of change from ROI GAAP to EEV pro-forma basis
Insurance and Investment business
As at 1 January 2005
Shareholders' equity
Net Worth* VIF Total
Eurom Eurom Eurom
Shareholders' equity as at 1 January 2005 (ROI 703 993 1,696
GAAP)
Reclassification of other activities (30) - (30)
Cost of the increase in required capital - (35) (35)
Time value of FOGs - (26) (26)
Changes in economic assumptions - 39 39
IFRS changes 89 - 89
Implementation of IAS 19 pension costs (13) (2) (15)
Other EEV changes - (29) (29)
Shareholders' equity as at 1 January 2005 (EEV 749 940 1,689
basis)
* Net worth includes required capital
Reconciliation of change from ROI GAAP to EEV pro-forma basis
Insurance and Investment business
Net
worth VIF Total
Eurom Eurom Eurom
IFRS pro-forma shareholders' equity as at 1 January 1,297 532 1,829
2005
Move IFRS insurance VIF to after tax basis 105 (105) -
Shareholder value of in-force on investment - 535 535
contracts
Changes in presentation of cost of FOGs 21 (21) -
Deferred front end fees on investment contracts 203 - 203
Deferred acquisition costs on investment contracts (183) - (183)
Other IFRS reserve adjustments (89) - (89)
Unwind own shares IFRS adjustment 34 - 34
Impact of discounted unit-linked CGT provisions (4) (1) (5)
Deferred tax on IFRS adjustments 5 - 5
Shareholders' equity EEV pro-forma basis as at 1 1,389 940 2,329
January 2005
Special purpose Independent Audit Report of KPMG to directors of Irish Life &
Permanent plc on its European Embedded Value ("EEV") Supplementary Information
In accordance with the terms of our engagement letter we have audited the EEV
supplementary information of Irish Life & Permanent plc ("the Company") as at 1
January 2005, set out on pages 1 to 3. As described in the basis of preparation
on page 4 the EEV supplementary information has been prepared in accordance with
the European Embedded Value Principles issued in May 2004 by the European CFO
Forum ("the EEV Principles").
The preliminary EEV supplementary information has been prepared by the Group as
part of its transition to International Financial Reporting Standards ("IFRS").
The preliminary IFRS financial information included in the preliminary EEV
supplementary information has been prepared based on the recognition and
measurement principles of IFRS which are either adopted by the EU and effective
or expected to be adopted by the EU and effective by 31 December 2005 including
the "pro-forma" impact of IAS32 - "Financial Instruments Disclosure and
Presentation and IAS 39 - "Financial Instruments: Recognition and Measurement".
Respective responsibilities of directors and independent auditors
As described on page 4, the directors of the Company have accepted
responsibility for the preparation of the EEV supplementary information in
accordance with the EEV Principles. Before conversion to IFRS, Irish Life &
Permanent prepared EV information in its ROI accounts in accordance with
guidance issued in December 2001 by the association of British Insurers entitled
"Supplementary Reporting for Long Term Business "The Achieved Profits Method"
(or the Achieved Profits Basis"). However , given the move to IFRS, the
Directors have prepared preliminary EEV Supplementary Information. Our
responsibilities, as independent auditors, are established in Ireland by the
Auditing Practices Board, our profession's ethical guidance and the terms of our
engagement.
Under the terms of engagement we are required to report to you our opinion as to
whether the EEV supplementary information has been properly prepared, in all
material respects, in accordance with the basis of preparation set out in the
methodology section on pages 4 to 8 of the EEV supplementary information. We
also report to you if, in our opinion, we have not received all the information
and explanations we require for our audit.
Our report has been prepared for the Company solely in connection with the
Company's preparation of its supplementary information on an EEV basis.
We read the other information accompanying the EEV supplementary information and
consider whether it is consistent with the EEV supplementary information. We
consider the implications for our report if we become aware of any apparent
mis-statements or material inconsistencies with the EEV supplementary
information.
Our report was designed to meet the agreed requirements of the Company
determined by the Company's needs at the time. Our report should not therefore
be regarded as suitable to be used or relied on by any party wishing to acquire
rights against us other than the Company for any purpose or in any context. Any
party other than the Company who chooses to rely on our report (or any part of
it) will do so at its own risk. To the fullest extent permitted by law, KPMG
will accept no responsibility or liability in respect of our report to any other
party.
Basis of audit opinion
We conducted our audit having regard to Auditing Standards by the Auditing
Practices Board in Ireland. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the EEV supplementary
information. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the EEV supplementary
information, and of whether the accounting policies are appropriate to the
Group's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the EEV supplementary
information is properly prepared in accordance with the basis of preparation
note. In forming our opinion we also evaluated the overall adequacy of the
presentation of information in the EEV supplementary information.
Emphasis of matters
Without qualifying our opinion, we draw your attention to the following matters:
* The basis of preparation is set out on page 4 and explains why there is a
possibility that the group's EEV supplementary information may require
adjustment before its inclusion as comparative information in the EEV
supplementary information in the Group's first annual report that contains
supplementary information prepared on an EEV basis for the year ending 31
December 2005.
* As described in the basis of preparation note to the EEV supplementary
information, the Company has prepared the EEV supplementary information for
the year ended 31 December 2004 to establish the financial position and
results of operations of the Company necessary to provide the comparative
supplementary information expected to be included in the Company's first
complete set of EEV supplementary information to be included in the annual
report for the year ending 31 December 2005.
* As explained in the basis of preparation, in accordance with IFRS 1, First
Time Adoption of International Financial Reporting Standards, in arriving at
the underlying preliminary IFRS financial information which forms the
starting point for the EEV supplementary information, no adjustments have
been made for any changes in estimates made at the time of approval of the
ROI GAAP statutory financial statements on which the preliminary IFRS
financial information is based.
* The 1 January 2005 preliminary IFRS Balance Sheet has been prepared on the
basis ("Pro-forma Basis") that IAS32 - "Financial Instruments Disclosure and
Presentation and IAS 39 - "Financial Instrument: Recognition and Measurement
have been applied.
Opinion
In our opinion, the accompanying EEV supplementary information for the year
ended 31 December 2004 has been properly prepared, in all material respects, in
accordance with the basis of preparation set out in the methodology section on
pages 4 to 8, which describes how the EEV principles have been applied.
KPMG
Chartered Accountants
Dublin
21 July 2005
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR GGGZNVGNGKZM
Irish Life&P.Gp (LSE:IPM)
Historical Stock Chart
From Jul 2024 to Aug 2024
Irish Life&P.Gp (LSE:IPM)
Historical Stock Chart
From Aug 2023 to Aug 2024
