TIDMMFX
RNS Number : 3991U
Manx Financial Group PLC
29 March 2019
FOR IMMEDIATE RELEASE 29 March 2019
Manx Financial Group PLC (the 'Company')
Report and accounts for the year ended 31 December 2018
Manx Financial Group PLC (LSE: MFX), the financial services
group which includes Conister Bank Limited, Edgewater Associates
Limited and Manx FX Limited presents its audited, final results for
the year ended 31 December 2018.
Jim Mellon, Executive Chairman, commented: "I am pleased to
announce that the outcome for 2018 showed a broadly similar profit
to 2017, despite the figures including the expense of further
investments in infrastructure, the most important being the opening
of a new UK full-service HQ in Newbury and a significant upgrade in
our IT infrastructure. We have continued to strengthen our Balance
Sheet and our new business pipeline remains buoyant for all our
core activities. As a result, we are in an excellent position to
report further success, both at the Interims and at the full
year."
The 2018 Audited Annual Report and Accounts will be available
from the Company's website www.mfg.im shortly.
Contacts:
Manx Financial Group PLC
Denham Eke, Chief Executive
Tel: +44 (0)1624 694694
Beaumont Cornish Limited
Roland Cornish/James Biddle
Tel: +44 (0)20 7628 3396
Britton Financial PR
Tim Blackstone
Tel: +44 (0)7957 140416
Chairman's Statement
Dear Shareholders,
When I wrote to you in the Interim Results for 2018, I was
confident that the full year would continue our growth in
profitability. This has proved to be the case, but the effect of
the two positive initiatives undertaken during the second half of
the year has had a temporary impact on the Income Statement. The
first being the investment in the UK by opening a new full-service
UK Headquarters in Newbury, with a satellite branch in Manchester.
These offices will source new business and manage our UK lending
portfolio through our subsidiary Conister Finance and Leasing
Limited, thus demonstrating our commitment to this increasingly
important segment of our business. Secondly, the increasing
economic uncertainty surrounding both the Isle of Man and the
United Kingdom has reinforced your Board's decision to adopt an
ultra-conservative approach to provisioning under the requirements
of the International Financial Reporting Standard 9 ("IFRS 9") by
recognising an additional buffer to strengthen the Balance Sheet. I
must emphasise that this action does not represent a realized cash
outlay and is there, if ever required, solely to protect our future
profitability. Indeed, the quality of our underwriting is such that
our actual ratio of bad debts written off stands at an enviable
0.6% (2017: 0.5%).
As a consequence, our profit before tax is broadly similar to
2017 at GBP2.7 million (2017: GBP2.7 million). However, our total
assets have increased by 13.8% to GBP196.9 million (2017: GBP173.0
million) and our total shareholder equity has increased by a
corresponding 14.3% to GBP19.7 million (2017: GBP17.3 million).
Whilst the latter figure is gratifying, I am deeply aware that as I
write, our market capitalisation stands at only GBP11.5 million,
being a discount of 42%. This discount is regrettable, especially
when ranked against our peer group.
Of our core businesses, Conister Bank has enjoyed excellent new
business generation, offset by the run-off by mutual agreement of
two discontinued lending streams, both nearly complete, but
representing a decrease of GBP14.8 million during the year (2017:
GBP12.7 million). Thus, the fall in interest income to GBP19.1
million (2017: 19.9 million) belies a total new lending of GBP102.1
million for 2018 (2017: GBP73.7 million). I discuss this further
below, but suffice to say, this bodes well for the future by
diversifying our risk profile. Manx FX Limited produced an
encouraging profit before tax of GBP0.5 million (2017: GBP0.1
million) and Edgewater Associates Limited, although experiencing a
market downturn during the last two months of 2018, produced a
profit before tax of GBP0.3 million (2017: GBP0.8 million).
Corporate governance
It is important for shareholders to understand the emphasis both
I and the Board place upon corporate governance. In May 2018, we
adopted the Quoted Companies Alliance corporate governance code
("QCA") with which we expect to be fully compliant in our reporting
for the year-end statutory accounts. In essence, the code has ten
principles to aid investors in their understanding of our Group and
to help build and develop long term trust and maximise our
relationship with shareholders. As Chairman, it is my
responsibility to make a clear statement on corporate governance
and the value we place upon this. Our full year accounts will
provide a detailed explanation of how we observe the QCA, but
meanwhile, I am keen for investors to understand our strategic
objectives both in the near and longer term.
Our key objectives for 2019
Your Board's fundamental objective remains that of increasing
shareholder value, both in a prudent yet progressive manner. Thus,
our strategic concentration continues to be: -
n Providing the highest quality service throughout our
operations to all customers, ensuring that their treatment is both
fair and appropriate;
n Adopting a pro-active strategy of managing risk, especially
following the implementation of IFRS 9 in full. In doing so, we are
committed to regularly review our loan book to allow for any credit
impairment resulting from observing strict Expected Credit Loss
criteria;
n Concentrating on developing our core businesses by considered
acquisitions, increased prudential lending and augmenting the range
of financial services we offer;
n Implementing an enhanced and scalable IT infrastructure to
better service the operational requirements of a growing Group
without the requirement for a disproportionate increase in
headcount;
n Focusing on the liabilities side of our balance sheet by
introducing a new treasury management function and structure;
and
n Managing our balance sheet to exceed, as far as possible, the
regulatory requirements for capital adequacy.
We implemented the General Data Protection Regulation on 25 May
2018. Doing this required changes in policy, procedures and
technology across the Group to manage how we process and secure
data and protect the rights of individuals. Both our Internal Audit
and Compliance teams have reviewed the process and will continue to
be involved in making sure that the post implementation
requirements continue to be met.
We have also instituted an important new position, that of Head
of Risk and Compliance, to enhance and monitor our control
functions, ensuring that these meet the highest banking standards
and are commensurate with the growth in our operations.
Financial performance review
Conister Bank Limited (the "Bank")
Despite the shadow of economic uncertainty, all our lending
targets for the year were exceeded. We have been able to make
significant inroads into the UK commercial sector, while increasing
our lending in the Isle of Man. As I reported above, net new
lending increased by 38.4% to GBP102.1 million (2017: GBP73.7
million), driven by a 41.9% uplift in lending on the Isle of Man
and a substantial increase in demand for our structured product
range in the UK. Thus, the net loan book growth of 21.0% to
GBP148.3 million (2017: GBP122.5 million) has been achieved with no
deterioration in loan book quality as performing loans remained at
97.2%. In anticipation of this increase in UK demand, we have
opened fully equipped new offices in Newbury and in Manchester. We
are confident that we have invested in the most experienced teams
available to develop this important market segment.
I have previously explained that improving our technology is of
primary importance as we increase in scale. During 2018, we
successfully installed a new deposit system, representing an
investment of GBP1.0 million spread over five years. This has
helped manage the growth of our deposit base by 11.4% to GBP158.5
million (2017: GBP142.3 million). One of our key efficiency
measures, our Loan to Deposit Ratio, improved by 7.5% to 93.6%
(2017: 86.1%) which reflects the improved use of our cash balances.
We also continue to almost exactly match our loan terms to our
deposit maturities. We note, however, that the average term of our
loan book has marginally reduced, reflecting the uncertainty in the
market in response to the current economic outlook.
As I mentioned in my 2017 Chairman's Report, we instituted a
policy to eliminate any reliance upon UK introducers where we
suffer a disproportionately adverse commission-sharing cost. This
initiative has continued throughout 2018. Thus, commission expense
decreased by 27.4% to GBP6.1 million (2017: GBP8.4 million). This
movement resulted in net interest income increasing by 13.1% to
GBP12.8 million (2017: GBP11.3 million) despite interest expense
increasing by 8.9% to GBP3.5 million following the increase in
deposit balances. As a result of these factors, trading income
improved by 15.9% to GBP9.5 million (2017: GBP8.2 million) leading
to a 16.3% increase in operating income GBP9.8 million (2017:
GBP8.4 million).
Although operating expenses decreased in by GBP0.2 million to
GBP6.0 million (2017: GBP6.2 million), this masks the investment we
have made in new personnel, systems and controls, enhancing our
skill set throughout the business. The increase in impairment
provision, to which I have already referred, to GBP0.9 million
(2017: GBP0.6 million) reflects a prudent buffer against a
potentially adverse outcome following any conclusion of the current
economic uncertainty. It is important to note that, despite our
conservative approach to approving advances, this figure still only
represents 2.0% of the enlarged gross loan book, with the total
impairment provision in the Balance Sheet standing at GBP3.4
million (2017: GBP2.7 million). Other costs net to GBP0.2 million
(2017: GBP0.0 million) as the gain last year from the write-off an
intercompany payable has not been repeated. Thus, profit before tax
improved by 26.0% to GBP2.2 million (2017: GBP1.7 million) leading
to a 24.0% increase in post-tax profit contribution by the Bank to
GBP2.0 million (2017: GBP1.6 million).
Total assets, benefitting by a loan book growth of GBP25.6
million, part financed by the conversion of cash and debt
securities of GBP5.7 million, showed a 13.0% increase to GBP190.1
million (2017: GBP168.7 million). As a consequence, shareholder
equity improved by 25.0% to GBP21.1 million (2017: GBP16.9
million).
Included in the Balance Sheet is a VAT debtor amounting to
GBP1.1 million. This figure represents the VAT recovery relating to
a claim under the revised Partial Exemption Special Method. Since
the publication of our last financial statements, the Court of the
European Union determined in favour of Volkswagen Financial
Services Limited in a parallel dispute against HM Revenue &
Customs. This is an extremely encouraging development and sets a
precedent. Thus, discussions with the Isle of Man Government
Customs and Excise Division have commenced regarding a full
recovery of this debtor.
During the year, as part of our drive to maximise new business,
the Group financed the issue of GBP2.4 million of new ordinary
shares by the Bank which, together with the increase in retained
earnings, improved total Tier 1 capital by 23.0% to GBP19.8 million
(2017: GBP16.1 million). This in turn improved total regulatory
capital expressed as a percentage of total risk-weighted assets by
0.6% to 18.1% (2017: 17.5%), well above our notification threshold
of 15.0%.
Edgewater Associates Limited ("EWA")
Although fee income appears to have remained steady at GBP2.6
million (2017: GBP2.6 million), an unexpected change in UK
legislation meant a temporary halt to our ability to service
pension transfers to the Isle of Man during the second half of the
year. Notwithstanding, all other fee-based services showed
encouraging growth. As a result, we were required to make a final
top-up payment of GBP0.1 million to the vendor of our recent
acquisitions. This, coupled with the effect of a full year increase
in administration costs, including investment in improved systems,
to GBP2.3 million (2017: GBP1.8 million) caused the profit
contribution to decline to GBP0.2 million (2017: GBP0.7
million).
Total assets reduced by 2.0% to GBP3.1 million (2017: GBP3.2
million), reflecting a decrease in debtors. However, creditors also
reduced, resulting in an improvement in net assets to GBP2.3
million (2107: GBP2.0 million). Shareholder equity increased by 12%
to GBP2.3 million (2017: GBP2.0 million).
The underlying business continues to experience considerable
excess demand, but is limited by the difficulty of recruiting
suitably qualified advisors. Notwithstanding, EWA remains the Isle
of Man's largest IFA. We remain encouraged by the opportunities
available for this important part of the Group's business and I am
pleased to note that we have already seen a meaningful improvement
in profitability from the beginning of 2019.
Manx FX Limited ("MFX")
This business is still very much in its infancy. Because of the
low-cost structure, relatively small increases in income can
generate unusually positive consequences. For example, the
introduction of a hedging strategy for clients during the year
doubled turnover to GBP0.8 million (2017: GBP0.4 million). While
this level of income is not necessarily expected to be repeated in
2019, MFX continues to attract new clients, and now services an
active Isle of Man customer base of 87 (2017: 58). This rapid
growth means that we continue to develop and invest in an enhanced
operational infrastructure to provide the necessary resilience in
our control functions. As a consequence, our administration
expenses have increased to GBP0.3 million (2017: GBP0.2 million),
leading to a significant profit contribution from MFX of GBP0.5
million (2017: GBP0.1 million).
Turning to the balance sheet, total assets increased to GBP0.6
million (2017: GBP0.2 million) and shareholder equity stands at
GBP0.6 million (2017: GBP0.1 million).
Outlook
The widely reported current economic uncertainties and potential
changes in interest rates will have an impact on credit markets
both in the Isle of Man and the UK. Notwithstanding, I believe that
the Bank's strategy of asset-backed lending to carefully selected
sectors will allow us to continue to grow. We continue to develop
new loan products to those entities with significant balance sheets
which demonstrate both affordability and credit resilience. Thus
far, we have experienced no downturn in demand in both the
commercial and consumer marketplace in both jurisdictions and are
more than able to maintain rigorous credit and risk control in our
underwriting.
In conjunction with this, the Bank continues to seek out
suitable acquisitions for our strategy of consolidation,
particularly in the UK. So far this year, we have acquired 20% of
the issued share capital of Beer Swaps Limited, trading as Ninkasi
Brewkit Rentals, a relatively new company financing brewery
equipment, together with an option to acquire the remaining shares
by April 2021. We have also acquired 30% of the issued share
capital of PayItMonthly Limited which provides web-based finance
solutions to retailers without the need for them to maintain an
onerous compliance resource, allowing their customers the ability
to spread repayments over one year, together with an option to
acquire the remaining shares after August 2021. Although these
initiatives are individually small in scale, they will be
integrated to form our own specialist introducer network using the
synergies available from central funding, systems, risk management
and controls, augmented with dedicated staff capable of developing
this important aspect of our portfolio.
Now that the businesses have fully integrated, EWA has the real
potential to grow financial advisory services, not only on the Isle
of Man but also within the UK, especially as the need to finance a
longer retirement becomes a necessity. We continue to review
suitable acquisitions capable of increasing profitability. EWA not
only has a strong new business pipeline, but approximately half of
its income derives from renewals. Our only limitation to this
growth is the recruitment of suitably qualified advisors. To
counter this, we are concentrating on an internal program of staff
development which is proving to be extremely successful.
MFX also has the potential for further growth and, conversely,
has the capability of benefitting from any uncertainties in the
financial environment as its clients seek the optimum solutions to
manage foreign currency exposures. Only a relatively few Isle of
Man businesses maintain in-house foreign exchange expertise and the
MFX proposition has limited competition.
In short, I believe that the Group as a whole is well placed to
achieve continued expansion. Each of our principal operations are
profitable and each has identified opportunities, yet unrealised.
It is this which will allow us to meet our 2019 strategic
priorities. Whilst our organic growth continues to be excellent,
any significant growth will require further acquisitions, strategic
partnerships and the development of specialist products to meet the
ever-changing market needs. Each solution we offer will be assessed
in terms of risk profile and subsequent reward. Clearly, those
opportunities that utilise technology to the full and fit well
within our current operations are of the greatest interest.
Meanwhile, we remain in an excellent position to report further
success, both at the Interims and the year-end.
I, and the Board, recognise the need to address the question of
shareholder return. As ever, the conflicting demands of utilizing
shareholder equity as the regulatory platform to support growth
versus the compounded cost of a dividend payment are difficult to
reconcile. As an example, currently for every GBP1,000 paid as a
dividend, the Group would forgo GBP6,000 worth of new business with
its attendant yield. Added to which, as the Group utilises
relatively expensive non-dilutive term loans to augment regulatory
capital, we would effectively be undertaking additional borrowing
to make payment. Notwithstanding, we are considering potential
arrangements which will, we believe, be of benefit to shareholders
but without reducing our potential to reach the scale whereby the
Group becomes capable of self-generating regulatory capital. It is
unlikely that we will be able to implement any scheme during 2019,
but depending upon this year's outcome, we may be in a better
position to implement a scheme thereafter.
Finally, and as always, I would like to thank our shareholders
for your continued support, our customers and clients for their
loyalty, and also our excellent staff for their outstanding efforts
in continuing to develop the Group.
Jim Mellon
Executive Chairman
27 March 2019
Consolidated statement of profit or loss and other comprehensive
income
Restated
2018 (Note 5)
For the year ended 31 December Notes GBP000 2017 GBP000
-------------------------------------------------------- ------ -------- -------------
Interest income 19,115 19,893
Interest expense (3,547) (3,256)
Net interest income 10 15,568 16,637
Fee and commission income 11 3,371 3,115
Fee and commission expense 11 (6,109) (8,413)
Net trading income 12,830 11,339
Other operating income 131 91
Loss on trading assets 21 (4) (21)
Realised gains on debt securities 20 135 36
Terminal funding 12 74 90
Operating income 13,166 11,535
Personnel expenses 13 (5,703) (4,783)
Other expenses 14 (3,465) (3,152)
Impairment on loans and advances to customers 15 (857) (585)
Depreciation 24 (184) (134)
Amortisation and impairment of intangibles 25 (396) (286)
Share of profit of equity accounted investees,
net of tax 32 30 38
VAT recovery 23 119 65
Profit before tax payable 16 2,710 2,698
Income tax expense 17 (243) (240)
Profit for the year 2,467 2,458
-------- -------------
Other comprehensive income: -
Items that will be reclassified to profit or
loss
Unrealised gain/(losses) on debt securities 20 44 (93)
Items that will never be reclassified to profit
or loss
Actuarial (losses)/gains on defined benefit
pension scheme taken to equity 30 (50) 30
Total comprehensive income for the period attributable
to owners 2,461 2,395
-------- -------------
Basic earnings per share (pence) 18 1.88 2.17
Diluted earnings per share (pence) 18 1.54 1.70
Company statement of profit or loss and other comprehensive
income
2018
For the year ended 31 December Notes GBP000 2017 GBP000
----------------------------------------- ------ -------- ------------
Interest income 466 -
Operating income 466 -
Personnel expenses (177) (22)
Administration expenses (132) (112)
Depreciation expense (41) (40)
Profit before tax payable 16 116 (174)
Tax payable - -
Profit for the year 116 (174)
Total comprehensive income for the year 116 (174)
----------------------------------------- ------ -------- ------------
Company statement of financial position
Restated Restated
(Note (Note
5) 5)
2018 2017 2016
As at 31 December Notes GBP000 GBP000 GBP000
--------------------------------- ------- --------- --------- ---------
Assets
Cash and cash equivalents 19 9,753 9,745 6,129
Debt securities 20 30,534 34,272 23,991
Trading asset 21 20 24 70
Loans and advances to customers 22 148,278 122,546 115,929
Trade and other receivables 23 2,491 1,908 2,064
Property, plant and equipment 24 1,384 450 719
Intangible assets 25 1,952 1,719 1,316
Goodwill 32 2,344 2,344 2,344
Investment in associate 32 158 38 -
Total assets 196,914 173,046 152,562
Liabilities
Deposits from customers 26 158,500 142,272 125,952
Creditors and accrued charges 27 2,010 3,164 2,975
Block creditors 28 138 751 1,390
Loan notes 29 15,871 8,995 8,545
Pension liability 30 584 560 614
Deferred tax liability 17 88 42 40
Total liabilities 177,191 155,784 139,516
Equity
Called up share capital 31 20,732 20,732 18,933
Profit and loss account (1,009) (3,470) (5,887)
Total equity 19,723 17,262 13,046
Total liabilities and equity 196,914 173,046 152,562
2018 2017
As at 31 December Notes GBP000 GBP000
------------------------------------- -------- --------- ---------
Assets
Cash and cash equivalents 19 1,646 200
Trade and other receivables 23 32 22
Amounts due from Group undertakings 32 - 16
Property, plant and equipment 24 126 166
Investment in Group undertakings 32 16,172 13,772
Subordinated loans 32 7,778 5,778
Total assets 25,754 19,954
Liabilities
Creditors and accrued charges 27 94 139
Amounts due to Group undertakings 32 1,370 2,517
Loan notes 29 15,871 8,995
Total liabilities 17,335 11,651
Equity
Called up share capital 31 20,732 20,732
Profit and loss account (12,313) (12,429)
Total equity 8,419 8,303
Total liabilities and equity 25,754 19,954
Consolidated and company statements of changes in equity
Share Profit Total
Capital and loss equity
Company GBP000 account GBP000
GBP000
---------------------------------- --------- ---------- --------
Balance as at 1 January 2017 18,933 (12,277) 6,656
Loss for the year - (174) (174)
Transactions with owners: -
Share-based payment expense (see
notes 16 and 31) - 22 22
Shares issued 1,799 - 1,799
Balance as at 31 December 2017 20,732 (12,429) 8,303
Profit for the year - 116 116
Transactions with owners: -
Share-based payment expense (see - - -
notes 16 and 31)
Balance as at 31 December 2018 20,732 (12,313) 8,419
Consolidated statement of cash flows
2018 2017
For the year ended 31 December Notes GBP000 GBP000
------------------------------------------------------- -------- --------- ---------
RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING
CASH FLOWS
Profit before tax 2,710 2,698
Adjustments for:
Depreciation 24 184 134
Amortisation and impairment of intangibles 25 396 286
Realised gains on debt securities 20 (135) (36)
Share in net assets of associate 32 (30) (38)
16,
Equity settled share-based payment transactions 31 - 22
3,125 3,066
Changes in:
Trading asset 21 4 46
Trade and other receivables (583) 156
Creditors and accrued charges (1,169) (21)
Net cash flow from trading activities 1,377 3,247
Changes in:
Loans and advances to customers (25,732) (6,617)
Deposits from customers 16,228 16,320
Pension contribution 30 (26) (24)
Cash (outflow)/inflow from operating activities (8,153) 12,926
CASH FLOW STATEMENT
Cash from operating activities
Cash (outflow)/inflow from operating activities (8,153) 12,926
Income taxes paid (182) (28)
Net cash (outflow)/inflow from operating activities (8,335) 12,898
Cash flows from investing activities
Purchase of property, plant and equipment 24 (1,118) (122)
Purchase of intangible assets 25 (629) (452)
Sale of tangible fixed assets - 20
Acquisition of associate 32 (90) -
Sales/(Purchase) of debt securities at FVOCI 20 3,917 (4,806)
Purchase of debt securities at amortised cost 20 - (5,532)
Net cash inflow/(outflow) from investing activities 2,080 (10,892)
Cash flows from financing activities
Receipt of loan notes 29 6,876 450
Increase in share capital - 1,799
(Decrease) in borrowings from block creditors 28 (613) (639)
Net cash inflow from financing activities 6,263 1,610
Net increase in cash and cash equivalents 8 3,616
Cash and cash equivalents at 1 January 9,745 6,129
Cash and cash equivalents at 31 December 9,753 9,745
Included in cash flows are: -
Interest received - cash amounts 18,362 19,109
Interest paid - cash amounts (3,434) (3,152)
Company statement of cash flows
2018 2017
For the year ended 31 December Notes GBP000 GBP000
------------------------------------------------------- -------- --------- ---------
RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING
CASH FLOWS
Profit before tax 116 (174)
Adjustments for:
- Depreciation 24 41 41
- Share-based payment expense 32 - 22
157 (111)
Changes in:
Amounts due from group undertakings 16 280
Trade and other receivables (10) 7
Creditors and accrued charges (45) 57
Amounts due to group undertakings (1,147) 18
Cash (outflow)/inflow from operating activities (1,029) 251
CASH FLOW STATEMENT
Cash from operating activities
Cash (outflow)/inflow from operating activities (1,029) 251
Income taxes paid - -
Net cash (outflow)/inflow from operating activities (1,029) 251
Cash flows from investing activities
Increase in investment in group undertakings 32 (2,400) (1,700)
Issue of subordinated loans 32 (2,000) (600)
Net cash outflow from investing activities (4,400) (2,300)
Cash flows from financing activities
Receipt of loan notes 29 6,875 450
Increase in share capital - 1,799
Net cash inflow from financing activities 6,875 2,249
Net increase in cash and cash equivalents 1,446 200
Cash and cash equivalents at 1 January 200 -
Cash and cash equivalents at 31 December 1,646 200
Notes to the consolidated financial statements
1. Reporting entity
Manx Financial Group PLC is a company incorporated in the Isle
of Man. The consolidated financial statements of Manx Financial
Group PLC (the "Company") for the year ended 31 December 2018
comprise the Company and its subsidiaries (the "Group").
2. Basis of accounting
The consolidated and the separate financial statements of the
Company have been prepared in accordance with International
Financial Reporting Standards ("IFRS") as adopted by the European
Union ("EU") and International Financial Reporting Interpretations
Committee ("IFRIC") interpretations applicable to companies
reporting under IFRS, including International Accounting Standards
("IAS").
This is the first set of the Group's annual financial statements
in which IFRS 9 Financial Instruments and IFRS 15 Revenue from
Contracts with Customers have been applied. Changes to significant
accounting policies are described in Note 5.
3. Functional and presentation currency
These financial statements are presented in pounds sterling,
which is the Group's functional currency. All amounts have been
rounded to the nearest thousand, unless otherwise indicated. All
subsidiaries of the Group have pounds sterling as their functional
currency.
4. Use of judgements and estimates
The preparation of financial statements requires management to
make judgements, estimates and assumptions that affect the
application of accounting policies and the reported amounts of
assets, liabilities, income and expenses. Actual results may differ
from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised and in any future periods
affected.
Assumptions and estimation uncertainties
Information about assumptions and estimation uncertainties at
year-end that have a significant risk of resulting in a material
adjustment to the carrying amounts of assets and liabilities in the
next financial year is included in the following notes:-
n Note 23 - measurement of VAT receivable: key assumptions
underlying carrying amount;
n Note 30 - measurement of defined benefit obligations: key
actuarial assumptions;
n Note 25 and 32 - impairment test of intangible assets and
goodwill: key assumptions underlying recoverable amounts; and
n Note 38(I)(vii) - measurement of ECL allowance for loans and
advances to customers and assessment of specific impairment
allowances where loans are in default or arrears: key assumptions
in determining the weighted-average loss rate.
5. Changes in accounting policies
A number of other new standards are also effective from 1
January 2018 but they do not have a material effect on the Group's
financial statements.
Except for the changes below, the Group has consistently applied
the accounting policies as set out in Note 38 to all periods
presented in these financial statements.
IFRS 9 Financial Instruments
IFRS 9 sets out requirements for recognising and measuring
financial assets, financial liabilities and some contracts to buy
or sell non-financial items. This standard replaces IAS 39
Financial Instruments: Recognition and Measurement. The
requirements of IFRS 9 represent a significant change from IAS 39.
The new standard brings fundamental changes to the accounting for
financial assets and to certain aspects of the accounting for
financial liabilities.
The key changes to the Group's accounting policies resulting
from the Group's adoption of IFRS 9 are summarised below. The full
impact of adopting the standard is set out in Note 6 and 8.
Classification of financial assets and financial liabilities
IFRS 9 contains three principal classification categories for
financial assets: measured at amortised cost, fair value through
other comprehensive income (FVOCI) and fair value through profit or
loss (FVTPL). IFRS 9 classification is generally based on the
business model in which a financial asset is manged and its
contractual cash flows. The standard eliminates the previous IAS 39
categories of held-to-maturity, loans and receivables and
available-for-sale.
IFRS 9 largely retains the existing requirements in IAS 39 for
classification of financial liabilities. However, although under
IAS 39 all fair value changes of liabilities designated under the
fair value option were recognised in profit or loss, under IFRS 9
fair value changes are generally presented as follows:
n the amount of change in fair value that is attributable to
changes in the credit risk of the liability is presented in Other
Comprehensive Income ("OCI"); and
n the remaining amount of change in the fair value is presented
in profit or loss.
For an explanation of how the Group classifies financial assets
and liabilities under IFRS 9, See Note 38(I)(ii).
Impairment of financial assets
IFRS 9 replaces the 'incurred loss' model in IAS 39 with an
'expected credit loss' model.
Under IFRS 9, credit losses are recognised earlier than under
IAS 39. For an explanation of how the Group applies the impairment
requirements of IFRS 9, see Note 38(I)(vii).
Transition
Changes in accounting policies resulting from the adoption of
IFRS 9 have been applied retrospectively,
For more information and details on the changes and implications
resulting from the adoption of IFRS 9, see note 6 and 8(A)(iv).
B. IFRS 15 Revenue from Contracts with Customers
IFRS 15 establishes a comprehensive framework for determining
whether, how much and when revenue is recognised. It replaced IAS
18 Revenue, IAS 11 Construction Contracts and related
interpretations.
The Group initially applied IFRS 15 on 1 January 2018
retrospectively in accordance with IAS 8 without any practical
expedients. The timing or amount of the Group's fee income from
contracts with customers was not impacted by the adoption of IFRS
15.
6. Classification of financial assets and financial
liabilities
For description of how the Group classifies financial assets and
liabilities, see Note 38(I)(ii)
The following table provides reconciliation between line items
in the statement of financial position and categories of financial
instruments.
Mandatorily Designated FVOCI - FVOCI - Amortised Total
at FVTPL as at FVTPL debt instruments equity cost carrying
31 December 2018 instruments amount
Cash and cash equivalents 9,753 9,753
Debt securities - - 30,534 - - 30,534
Trading assets 20 - - - - 20
Loans and advances to
customers - - - - 148,278 148,278
Trade and other receivables - - - - 2,491 2,491
---------------------------- ------------ ------------- ------------------ ------------- ---------- ----------
Total financial assets 20 - 30,534 - 160,522 191,076
Deposits from customers - - - - 158,500 158,500
Creditor and accrued
charges - - - - 2,010 2,010
Block creditors - - - - 138 138
Loan notes - - - - 15,871 15,871
---------------------------- ------------ ------------- ------------------ ------------- ---------- ----------
Total financial
liabilities - - - - 176,519 176,519
---------------------------- ------------ ------------- ------------------ ------------- ---------- ----------
Mandatorily Designated FVOCI - FVOCI - Amortised Total
at FVTPL as at FVTPL debt instruments equity cost carrying
31 December 2017 instruments amount
Cash and cash equivalents - - - - 9,745 9,745
Debt securities - - 28,740 - 5,532 34,272
Trading assets 24 - - - - 24
Loans and advances to
customers - - - - 122,546 122,546
Trade and other receivables - - - - 1,908 1,908
---------------------------- ------------ ------------- ------------------ ------------- ---------- ----------
Total financial assets 24 - 28,740 - 139,731 168,495
Deposits from customers - - - - 142,272 142,272
Creditor and accrued
charges - - - - 3,164 3,164
Block creditors - - - - 751 751
Loan notes - - - - 8,995 8,995
---------------------------- ------------ ------------- ------------------ ------------- ---------- ----------
Total financial
liabilities - - - - 155,182 155,182
---------------------------- ------------ ------------- ------------------ ------------- ---------- ----------
The following table shows the original measurement categories in
accordance with IAS 39 and the new measurement categories under
IFRS 9 for the Group's financial assets and liabilities at 1
January 2017.
Original classification New classification Original carrying New carrying
under IAS under IFRS amount under amount under
1 January 2017 39 9 IAS 39 IFRS 9
Loans and Amortised
Cash and cash equivalents receivables cost 6,129 6,129
Trading assets FVTPL FVTPL (Mandatory) 70 70
Debt securities Available-for-sale FVOCI 23,991 23,991
Debt securities - Amortised Amortised - -
Certificates cost cost
of Deposit
Loans and advances to Amortised Amortised
customers cost cost 116,053 115,929
Loans and Amortised
Trade and other receivables receivables cost 2,064 2,064
------------------------------- ------------------------- ------------------- ------------------ --------------
Total financial assets 148,307 148,183
-------------------------------------------------------------------------------- ------------------ --------------
Original classification New classification Original carrying New carrying
under IAS under IFRS amount under amount under
1 January 2017 39 9 IAS 39 IFRS 9
Amortised Amortised
Deposits from customers cost cost 125,952 125,952
Creditor and accrued Amortised Amortised
charges cost cost 2,975 2,975
Amortised Amortised
Block creditors cost cost 1,390 1,390
Amortised Amortised
Loan notes cost cost 8,545 8,545
------------------------------- ------------------------- ------------------- ------------------ --------------
Total financial liabilities 138,862 138,862
-------------------------------------------------------------------------------- ------------------ --------------
In applying IFRS 9 both in the current period and
retrospectively in previous periods, there were no
reclassifications in the measurement category. As a result, there
has been no financial adjustment in transitioning to IFRS 9 with
respect to adopting the revised measurement categories.
7. Fair value of financial instruments
For description of the Group's fair value measurement accounting
policy, see Note 38(I)(vi).
The following table analyses financial instruments measured at
fair value at the reporting date, by the level in the fair value
hierarchy into which the fair value measurement is categorised. The
amounts are based on the values recognised in the statement of
financial position.
Level Level Level Total
31 December 2018 1 2 3 GBP000
GBP000 GBP000 GBP000
Debt securities 30,534 - - 30,534
Trading assets 20 - - 20
-------- --------
30,554 - - 30,554
-------------------- -------- -------- -------- --------
Level Level Level Total
31 December 2017 1 2 3 GBP000
GBP000 GBP000 GBP000
Investment securities
Debt securities 28,740 - 5,532 34,272
Trading assets 24 - - 24
-------- --------
28,764 - 5,532 34,296
------------------------- -------- -------- -------- --------
Financial instruments not measured at fair value
The following table sets out the fair values of financial
instruments not measured at fair value and analyses them by the
level in the fair value hierarchy into which each fair value
measurement is categorised: -
Total
Level Level Level Total fair carrying
1 2 3 values amount
31 December 2018 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash and cash equivalents - 9,753 - 9,753 9,753
Loans and advances to customers - - 148,278 148,278 148,278
Investment in associate - - 158 158 158
Trade and other receivables - - 2,491 2,491 2,491
- 9,753 150,927 160,680 160,680
----------- --------- --------- ----------- ----------
Liabilities
Deposits from customers - 158,500 - 158,500 158,500
Creditors and accrued charges - - 2,010 2,010 2,010
Block creditors - - 138 138 138
Loan notes - - 15,871 15,871 15,871
----------- --------- --------- ----------- ----------
- 158,500 18,019 176,519 176,519
----------- -------------------------------- --------- --------- ----------- ----------
Total
Level Level Level Total fair carrying
1 2 3 values amount
31 December 2017 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash and cash equivalents - 9,745 - 9,745 9,745
Debt securities - certificates
of deposit - - 5,532 5,532 5,532
Loans and advances to customers - - 122,546 122,546 122,546
Investment in associate - - 24 24 24
Trade and other receivables - - 1,908 1,908 1,908
- 9,745 130,010 139,755 139,755
----------- --------- --------- ----------- ----------
Liabilities
Deposits from customers - 142,272 - 142,272 142,272
Creditors and accrued charges - - 3,164 3,164 3,164
Block creditors - - 751 751 751
Loan notes - - 8,995 8,995 8,995
----------- --------- --------- ----------- ----------
- 142,272 12,910 155,182 155,182
----------- -------------------------------- --------- --------- ----------- ----------
The fair value of loans and advances is estimated using
valuation models, such as discounted cash flow techniques. Input
into the valuation techniques includes expected lifetime credit
losses, interest rates, prepayment rates. For collateral-dependent
impaired loans, the fair value is measured based on the value of
the underlying collateral. Input into the models may include data
from third party brokers based on over the counter trading
activity, and information obtained from other market participants,
which includes observed primary and secondary transactions.
8. Financial risk review
Risk management
This note presents information about the Group's exposure to
financial risks and the Group's management of capital. For
information on the Group's financial risk management framework, see
Note 36.
A. Credit risk
For definition of credit risk and information on how credit risk
is mitigated by the Group, see Note 36.
i. Credit quality analysis
Loans and advances to customers
Explanation of the terms 'Stage 1', 'Stage 2' and 'Stage 3' is
included in Note 38 (I)(vii).
An analysis of the credit risk on loans and advances to
customers is as follows: -
Stage 1 Stage 2 Stage 3 2018 2017
GBP000 GBP000 GBP000 GBP000 GBP000
Grade A(1) 139,695 - - 139,695 118,373
Grade B 760 5,308 85 6,153 3,090
Grade C - 1,746 4,078 5,824 3,770
Gross value 140,455 7,054 4,163 151,672 125,233
Allowance for impairment (125) (143) (3,126) (3,394) (2,687)
-------- -------- -------- -------- --------
Carrying value 140,330 6,911 1,037 148,278 122,546
-------------------------- -------- -------- -------- -------- --------
(1) Loans are graded A to C depending on the level of risk.
Grade C relates to agreements with the highest of risk, Grade B
with medium risk and Grade A relates to agreements with the lowest
risk.
The following table sets out information about the overdue
status of loans and advances to customers in Stage 1, 2 and 3.
Stage 1 Stage 2 Stage 3 2018 2017
31 December GBP000 GBP000 GBP000 GBP000 GBP000
Current 137,196 - - 137,196 115,267
Overdue < 30 days 2,499 - - 2,499 3,106
Overdue > 30 days 760 7,054 4,163 11,977 6,860
140,455 7,054 4,163 151,672 125,233
------------------- -------- -------- -------- -------- --------
Debt securities, Cash and cash equivalents
The following table sets out the credit quality of liquid
assets:
2018 2017
31 December GBP000 GBP000
Government bonds and treasury bills
Rated A to A+ 30,534 28,740
Corporate bonds
Rated A to A+ - 5,532
Cash and cash equivalents
Rated A to A+ 9,754 9,745
40,288 44,017
------------------------------------- --------- ---------
The analysis has been based on Standard & Poor's
ratings.
ii. Collateral and other credit enhancements
The Group holds collateral in the form of the underlying assets
(typically private and commercial vehicles, plant and machinery) to
loan arrangements as security for HP, finances leases, vehicle
stocking plans, block discounting, wholesale funding arrangements,
integrated wholesale funding arrangements and secured commercial
loan balances, which are sub-categories of loans and advances to
customers. In addition, the commission share schemes have an
element of capital indemnified. During 2018, 37.9% of loans and
advances fell into this category (2017: 41.7%).
Estimates of fair value are based on the value of collateral
assessed at the time of borrowing, and generally are not updated
except when a loan is individually assessed as impaired. At the
time of granting credit within the sub-categories listed above, the
loan balances due are secured over the underlying assets held as
collateral.
iii. Amounts arising from ECL
See accounting policy in Note 38(I)(vii)
IFRS 9 significantly overhauled the requirements and methodology
used to assess credit impairments by transitioning to a
forward-looking approach based on an expected credit loss model.
The new impairment model applies to financial assets measured at
amortised cost, contract assets and debt investments at FVOCI, but
not to investments in equity instruments. Under IFRS 9, credit
losses are recognised earlier than under IAS 39.
After a detailed review, the Group devised and implemented an
impairment methodology in light of the IFRS 9 requirements outlined
above noting the following:
-- A SICR is always deemed to occur when the borrower is 30 days
past due on its contractual payments. If the Group becomes aware
ahead of this time of non-compliance or financial difficulties of
the borrower, such as loss of employment, avoiding contact with the
Group then a SICR has also deemed to occur.
-- A receivable is always deemed to be in default and
credit-impaired when the borrower is 90 days past due on its
contractual payments or earlier if the Group becomes aware of
severe financial difficulties such as bankruptcy, IVA, abscond or
disappearance, fraudulent activity and other similar events.
-- The ECL was derived by reviewing the Group's loss rate and
loss given default over the past 8 years by product and
geographical segment.
-- The Group has assumed that the future economic conditions
will broadly mirror the current environment and therefore the
forecasted loss levels in the next 3 years will match the Group's
experience in recent years.
-- For portfolios where the Group has never had a default in its
history or has robust credit enhancements such as credit insurance
or default indemnities for the entire portfolio, then no IFRS 9
provision is made.
-- If the Group holds objective evidence through specifically
assessing a credit-impaired receivable and believes it will go on
to completely recover the debt due to the collateral held and
cooperation with the borrower, then no IFRS 9 provision is
made.
iv. Reconciliation of the primary statements from IAS 39 to IFRS
9
As a result of the change to the Group's accounting policy in
regards to credit-impairments, it has restated the previous periods
in accordance with IFRS 9. A reconciliation of the primary
statements is as follows:
Consolidated Income Statement
Impact of
adopting
IFRS 9 at
31 December
31 December 2017 GBP000
-------------------------------------- ---- ---------- ----- ------------ -------------
Profit for the year 2,508
Increase to provision for impairment
on loan assets (50)
Restated profit for the year 2,458
Reduction in basic earnings per
share (pence) (0.04)
Reduction in diluted earnings
per share (pence) (0.03)
Consolidated Statement of Other Comprehensive Income
Impact of
adopting
IFRS 9
at 31 December
31 December 2017 GBP000
------------------------------------ ---------- ---- ------ ------------ ----------------
Total comprehensive income for the year
attributable to owners 2,445
Increase to provision for impairment
on loan assets (50)
Restated Total comprehensive income
for the year attributable to owners 2,395
Reduction in basic earnings per share
(pence) (0.04)
Reduction in diluted earnings per share
(pence) (0.03)
Consolidated Statement of Financial Position
Impact of Impact of
adopting adopting
IFRS 9 at IFRS 9 at
31 December 31 December
2017 2016
GBP000 GBP000
---------------------------------- ------------- -------------
Assets
Loans and advances to customers 122,720 116,053
Increase to provision for
impairment on loan assets (174) (124)
Restated loans and advances
to customers 122,546 115,929
Equity
Profit and loss account (3,296) (5,763)
Increase to provision for
impairment on loan assets (174) (124)
Restated profit and loss account (3,470) (5,887)
Consolidated Statement of Cash Flows
Total cash flows from operating, investing and financing
activities remains unchanged due to the increase in impairments on
loan assets being a non-cash item.
Consolidated Statement of Changes in Equity
For an analysis of the retrospective impact of IFRS 9, see the
Consolidated Statement of Changes in Equity which analyses in each
year the effect of adopting IFRS 9 for that year.
v. Concentration of credit risk
Geographical
Lending is restricted to individuals and entities with Isle of
Man, UK or Channel Islands addresses.
Segmental
The Bank is exposed to credit risk with regard to customer loan
accounts, comprising HP and finance lease balances, unsecured
personal loans, secured commercial loans, block discounting,
vehicle stocking plan loans and wholesale funding agreements. In
addition, the Bank lends via significant introducers into the UK.
There was one introducer that accounted for more than 20% of the
Bank's total lending portfolio at the end of 31 December 2018
(2017: one introducer).
B. Liquidity risk
For the definition of liquidity risk and information on how
liquidity risk is manged by the Group see Note 36.
i. Exposure to liquidity risk
The key measure used by the Group for managing liquidity risk is
the ratio of net liquid assets to deposits from customers and
short-term funding. For this purpose, 'net liquid assets' includes
cash and cash equivalents and investment-grade debt securities for
which there is an active and liquid market.
Details of the reported Group ratio of net liquid assets to
deposits from customers at the reporting date and during the
reporting period were as follows:
2018 2017
At 31 December 25% 27%
Average for the period 32% 26%
Maximum for the period 40% 30%
Minimum for the period 25% 23%
------------------------ ------- -------
ii. Maturity analysis for financial liabilities and financial
assets
The table below shows the Group's financial liabilities
classified by their earliest possible contractual maturity, on an
undiscounted basis including interest due at the end of the deposit
term. Based on historical data, the Group's expected actual cash
flow from these items vary from this analysis due to the expected
re-investment of maturing customer deposits.
Residual contractual maturities of financial liabilities as at
the reporting date (undiscounted)
>8 >1 >3 >6 >1 >3
days month months months year years
31 December Sight- - 1 - 3 - 6 - 1 - 3 - 5 >5
2018 8 days month months months year years years years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Deposits
from
customers 1,754 5,012 14,397 34,028 35,032 56,643 11,634 - 158,500
Other
liabilities 2,061 200 230 216 928 8,705 8,063 584 20,987
Total
liabilities 3,815 5,212 14,627 34,244 35,960 65,348 19,697 584 179,487
>8 >3 >6 >1 >3
days >1 month months months year years
31 December Sight- - 1 - 3 - 6 - 1 - 3 - 5 >5
2017 8 days month months months year years years years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Deposits
from
customers 2,579 3,136 12,710 24,241 30,207 60,820 12,567 - 146,260
Other
liabilities 3,094 89 318 1,540 1,754 3,326 3,322 560 14,003
Total
liabilities 5,673 3,225 13,028 25,781 31,961 64,146 15,889 560 160,263
Maturity of assets and liabilities at the reporting date
>8 >1 >3 >6 >1 >3
days month months months year years
31 December Sight- - 1 - 3 - 6 - 1 - 3 - 5 >5
2018 8 days month months months year years years years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Assets
Cash & cash
equivalents 9,753 - - - - - - - 9,753
Debt
securities - 17,995 5,989 - - - 6,550 - 30,534
Loans and
advances
to
customers 5,273 1,047 9,724 15,977 35,246 64,099 16,910 2 148,278
Other assets 20 225 145 - - - - 7,959 8,349
Total assets 15,046 19,267 15,858 15,977 35,246 64,099 23,460 7,961 196,914
Liabilities
Deposits
from
customers 1,754 5,012 14,397 34,028 35,032 56,643 11,634 - 158,500
Other
liabilities 2,098 146 92 - 500 7,690 7,581 584 18,691
Total
liabilities 3,852 5,158 14,489 34,028 35,532 64,333 19,215 583 177,191
>8 >1 >3 >6 >1 >3
days month months- months year years
31 December Sight- - 1 - 3 6 - 1 - 3 - 5 >5
2017 8 days month months months year years years years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Assets
Cash & cash
equivalents 9,745 - - - - - - - 9,745
Debt
securities - 1,998 16,983 8,524 - - 6,767 - 34,272
Loans and
advances
to
customers 3,708 3,649 7,945 10,808 25,849 54,872 15,695 21 122,546
Other assets 103 194 192 - - - - 5,994 6,483
Total assets
13,556 5,841 25,120 19,332 25,849 54,872 22,462 6,015 173,046
------- ------- ------- -------- -------- -------- -------- -------- --------
Liabilities
Deposits
from
customers 2,570 3,105 12,654 24,112 29,716 57,711 12,404 - 142,272
Other
liabilities 3,086 55 234 169 3,333 2,945 3,130 560 13,512
------- ------- ------- -------- -------- -------- -------- -------- --------
Total
liabilities 5,656 3,160 12,888 24,281 33,049 60,656 15,534 560 155,784
iii. Liquidity reserves
The following table sets out the components of the Group's
liquidity reserves.
2018 2018 2017 2017
Carrying Fair Carrying
amount value amount Fair value
GBP000 GBP000 GBP000 GBP000
Balances with other banks 9,753 9,753 9,745 9,745
Unencumbered debt securities issued
by sovereigns 30,534 30,534 34,272 34,272
---------- ------- ---------- ------------
Total liquidity reserves 40,287 40,287 44,017 44,017
------------------------------------- ---------- ------- ---------- ------------
C. Market risk
For the definition of market risk and information on how the
Group manages the market risks of trading and non-trading
portfolios, see Note 36.
The following table sets out the allocation of assets and
liabilities subject to market risk between trading and non-trading
portfolios.
Market risk measure
Carrying Trading Non-trading
amount portfolios portfolios
31 December 2018 GBP000 GBP000 GBP000
Assets subject to market risk
Trading assets 20 20 -
Debt securities 30,534 - 30,534
--------- ------------ ------------
Total 30,554 20 30,534
------------------------------- --------- ------------ ------------
Market risk measure
Carrying Trading Non-trading
amount portfolios portfolios
31 December 2017 GBP000 GBP000 GBP000
Assets subject to market risk
Trading assets 24 24 -
Debt securities 34,272 - 34,272
--------- ------------ ------------
Total 34,296 24 34,272
------------------------------- --------- ------------ ------------
i. Exposure to interest rate risk - Non-trading portfolio
The following tables present the interest rate mismatch position
between assets and liabilities over the respective maturity dates.
The maturity dates are presented on a worst-case basis, with assets
being recorded at their latest maturity and deposits from customers
at their earliest.
>1 >3
Sight- >1month >3months year years
31 December 1 - - >6months- - 3 - 5 >5 Non-Int.
2018 month 3months 6months 1 year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash & cash
equivalents 9,753 - - - - - - - 9,753
Debt
securities 17,995 5,989 - - - 6,550 - - 30,534
Loans and
advances
to customers 6,319 9,724 15,977 35,247 64,099 16,910 2 - 148,278
Other assets 245 145 - - - - - 7,959 8,349
Total assets 34,312 15,858 15,977 35,247 64,099 23,460 2 7,959 196,914
Liabilities
and
equity
Deposits from
customers 6,766 14,397 34,028 35,032 56,643 11,634 - - 158,500
Other
liabilities 2,244 92 - 500 7,690 7,581 584 - 18,691
Total equity - - - - - - - 19,723 19,723
Total
liabilities
and equity 9,010 14,489 34,028 35,532 64,333 19,215 584 19,656 196,914
Interest
rate
sensitivity
gap 25,302 1,369 (18,051) (285) (234) 4,245 (582) (11,764) -
Cumulative 25,302 26,671 8,620 8,335 8,101 12,346 11,764 - -
>1 >3
Sight- >6months year years
31 December 1 >1month >3months - - 3 - 5 >5 Non-Int.
2017 month -3months - 6months 1 year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash & cash
equivalents 9,745 - - - - - - - 9,745
Debt
securities 1,998 16,983 8,524 - - 6,766 - - 34,427
Loans and
advances
to
customers 7,356 7,945 10,808 25,849 54,872 15,695 22 - 122,547
Other assets 297 192 - - - - - 5,994 6,483
Total assets
19,396 25,120 19,332 25,849 54,872 22,461 22 5,994 173,046
---------- ----------- ----------- ---------------------------------- ---------- --------- --------- ---------------------------------- --------
Liabilities
and
equity
Deposits
from
customers 5,675 12,654 24,112 29,716 57,711 12,404 - - 142,272
Other
liabilities 3,141 234 169 3,333 2,945 3,130 560 - 13,512
Total equity - - - - - - - 17,262 17,262
---------- ----------- ----------- ---------------------------------- ---------- --------- --------- ---------------------------------- --------
Total
liabilities
and equity 8,816 12,888 24,281 33,049 60,656 15,534 560 17,262 173,046
Interest
rate
sensitivity
gap 10,580 12,232 (4,949) (7,200) (5,784) 6,927 (538) (11,268) -
Cumulative 10,580 22,812 17,863 10,663 4,879 11,806 11,268 - -
The Bank monitors the impact of changes in interest rates on
interest rate mismatch positions using a method consistent with the
FSA required reporting standard. The methodology applies weightings
to the net interest rate sensitivity gap in order to quantify the
impact of an adverse change in interest rates of 2.0% per annum
(2017: 2.0%). The following tables set out the estimated total
impact of such a change based on the mismatch at the reporting
date: -
>1 >3
>3months >6months year years
31 December Sight- >1month - - - 3 - 5 >5 Non-Int.
2018 1 month -3months 6months 1 year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Interest
rate
sensitivity
gap 25,302 1,369 (18,051) (285) (234) 4,245 (582) (11,764) -
Weighting 0.000 0.003 0.007 0.014 0.027 0.054 0.115 0.000 -
GBP000 - 4 (126) (4) (6) 229 (67) - 30
>1 >3
>6months year years
31 December Sight- >1month >3months - - 3 - 5 >5 Non-Int.
2017 1 month -3months -6months 1 year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Interest rate
sensitivity
gap 10,580 12,232 (4,949) (7,200) (5,784) 6,927 (538) (11,268) -
Weighting 0.000 0.003 0.007 0.014 0.027 0.054 0.115 0.000 -
GBP000 - 37 (35) (101) (156) 374 (62) - 57
D. Capital Management
i. Regulatory capital
The lead regulatory of the Group's wholly owned subsidiary,
Conister Bank Limited ('Bank'), is the Isle of Man Financial
Services Authority ('FSA'). The FSA sets and monitors capital
requirements for the Bank.
The Bank's regulatory capital consists of the following
elements.
n Common Equity Tier 1 (CET1) capital, which includes ordinary
share capital, retained earnings and reserves after adjustment for
deductions for goodwill, intangible assets, intercompany
receivable.
n Tier 2 capital, which includes qualifying subordinated
liabilities and any excess of impairment over expected losses.
The lead FSA's approach to the measurement of capital adequacy
is primarily based on monitoring the relationship of the capital
resources requirement to available capital resources. The FSA sets
individual capital guidance (ICG) for the Bank in excess of the
minimum capital resources requirement. A key input to the ICG
setting process is the Bank's internal capital adequacy assessment
process (ICAAP).
The Bank is also regulated by the Financial Conduct Authority in
the United Kingdom for credit and brokerage related activities.
ii. Capital allocation
Management uses regulatory capital ratios to monitor its capital
base. The allocation of capital between specific operations and
activities is, to a large extent, driven by optimisation of the
return achieved on the capital allocated. The amount of capital
allocated to each operation or activity is based primarily on
regulatory capital requirements.
9. Operating segments
Segmental information is presented in respect of the Group's
business segments. The Directors consider that the Group currently
operates in one geographic segment comprising of the Isle of Man,
UK and Channel Islands. The primary format, business segments, is
based on the Group's management and internal reporting structure.
The Directors consider that the Group operates in five (2017: five)
product orientated segments in addition to its investing
activities: Asset and Personal Finance (including provision of HP
contracts, finance leases, personal loans, commercial loans, block
discounting, vehicle stocking plans and wholesale funding
agreements); Manx Incahoot; Conister Card Services; Edgewater
Associates; and Manx FX.
Asset Conister
and Manx Card Edgewater Investing
For the year Personal Incahoot Services Associates Manx Activities Total
ended Finance GBP000 GBP000 GBP000 FX GBP000 GBP000
31 December GBP000 GBP000
2018
Net interest
income 15,568 - - - - - 15,568
Operating income
/(loss) 9,306 12 - 2,562 493 - 13,166
Profit / (loss)
before tax
payable 2,267 (189) (3) 245 490 (100) 2,710
Capital
expenditure 1,589 1 - 150 6 1 1,747
Total assets 190,923 78 - 3,153 608 2,152 196,914
Asset Conister
and Manx Card Edgewater Investing
For the year Personal Incahoot Services Associates Manx Activities Total
ended Finance GBP000 GBP000 GBP000 FX GBP000 GBP000
31 December GBP000 GBP000
2017
Net interest
income 16,637 - - - - - 16,637
Operating income
/(loss) 8,298 44 (104) 2,625 447 - 11,310
Profit / (loss)
before tax
payable 1,910 (293) (104) 742 249 (186) 2,318
Capital
expenditure 254 1 - 319 - - 574
Total assets 168,052 307 18 2,252 181 2,236 173,046
10. Net interest income
2018 2017
GBP000 GBP000
Interest income
Loans and advances to customers 19,037 19,839
-------- --------
Total interest income calculated using the effective interest
method 19,037 19,839
Other interest income 78 54
-------- --------
Total interest income 19,115 19,893
Interest expense
Deposits from customers (2,744) (2,690)
Subordinated liabilities (773) (495)
Block funders (30) (71)
-------- --------
Total interest expense (3,547) (3,256)
Net interest income 15,568 16,637
--------------------------------------------------------------- -------- --------
11. Net fee and commission income
A. Disaggregation of fee and commission income
In the following table, fee and commission income from contracts
with customers in the scope of IFRS 15 is disaggregated by major
type of services. The table includes a reconciliation of the
disaggregated fee and commission income with the Group's reportable
segments.
2018 2017
GBP000 GBP000
Major service lines
Independent financial advice income 2,547 2,625
FX trading income 824 490
---------- ----------
Fee and commission income 3,371 3,115
Fee and commission expense (6,109) (8,413)
---------- ----------
Net fee and commission expense (2,738) (5,298)
------------------------------------- ---------- ----------
12. Terminal funding
In September 2014, the Bank discontinued funding handheld
payment devices (referred to as Terminal Funding) due to the volume
of write offs. Ever since, the book is being run off whilst the
Bank vigorously pursues historical write off. A decision was made
by the Board during 2016 to cease funding and run-off the book upon
the final repayment date of August 2019.
2018 2017
GBP000 GBP000
Interest income 181 377
Fee and commission expense (5) (92)
Provision for impairment on loan assets (102) (195)
74 90
13. Personnel expenses
2018 2017
GBP000 GBP000
Gross salaries (4,233) (3,479)
Executive Directors' remuneration (241) (214)
Non-executive Directors' fees (145) (185)
Executive Directors' pensions (19) (21)
Executive Directors' performance related pay (50) (36)
Pension costs (259) (226)
National insurance and payroll taxes (527) (432)
Training and recruitment costs (229) (190)
(5,703) (4,783)
14. Other expenses
2018 2017
GBP000 GBP000
Professional and legal fees (1,067) (848)
Marketing costs (237) (211)
IT costs (567) (528)
Establishment costs (434) (376)
Communication costs (146) (137)
Travel costs (174) (149)
Bank charges (119) (142)
Insurance (141) (133)
Irrecoverable VAT (303) (180)
Other costs (277) (448)
(3,465) (3,152)
15. Impairment on loans and advances to customers
The charge in respect of specific allowances for impairment
comprises: -
2018 2017
GBP000 GBP000
Specific impairment allowances made (1,246) (1,295)
Reversal of allowances previously made 410 776
Total charge for specific provision for impairment (836) (519)
The charge in respect of collective allowances for impairment
comprises: -
2018 2017
GBP000 GBP000
Collective impairment allowances made (49) (78)
Release of allowances previously made 28 12
Total charge for collective allowances for impairment (21) (66)
Total charge for allowances for impairment (857) (585)
16. Profit before tax payable
The profit before tax payable for the year is stated after
charging: -
Group Company
2018 2017 2018 2017
GBP000 GBP000 GBP000 GBP000
Share options expense - (22) - (22)
Auditor's remuneration: - as Auditor
current year (108) (90) - -
non-audit services (7) (37) - -
Pension cost defined benefit scheme (17) (17) - -
Operating lease rentals for property (251) (220) - -
17. Income tax expense
2018 2017
GBP000 GBP000
-------
Current tax expense
Current year (197) (226)
Changes to estimates for prior years - (12)
(197) (238)
Deferred tax expense
Origination and reversal of temporary differences (46) (2)
Utilisation of previously recognised tax losses - -
Changes to estimates for prior years - -
(46) (2)
Tax expense (243) (240)
2018 2017
GBP000 GBP000
Reconciliation of effective tax rate
Profit before tax 2,710 2,698
Tax using the Bank's domestic tax rate (10.0)% (271) (10.0)% (270)
0.0
Effect of tax rates in foreign jurisdictions % - (1.6)% (44)
Non-deductible expenses (1.2)% (33) (1.0)% (28)
0.3
Tax exempt income % 8 2.4% 67
0.3
Timing difference in current year % 7 1.8% 49
Origination and reversal of temporary differences 1.7
in deferred tax % 46 (0.1)% (2)
0.0
Changes to estimates for prior years % - (0.4)% (12)
Tax expense (9.0)% (243) (8.9)% (240)
The main rate of corporation tax in the Isle of Man is 0.0%
(2017: 0.0%). However the profits of the Group's Isle of Man
banking activities are taxed at 10.0% (2017: 10.0%). The profits of
the Group's subsidiaries that are subject to UK corporation tax are
taxed at a rate of 19.0% (2017: 19.0%).
The value of tax losses carried forward reduced to nil and there
is now a timing difference related to accelerated capital
allowances resulting in a GBP88,000 liability (2017: GBP42,000
liability). This resulted in an expense of GBP50,000 (2017:
GBP2,000) to the consolidated income statement.
18. Earnings per share
A. Basic and diluted earnings per share
The calculation of basic earnings per share has been based on
the profit for the year and the weighted average number of ordinary
shares outstanding.
The calculation of diluted earnings per share has been based on
the profit for the year and the weighted average number of ordinary
shares outstanding after adjustment for the effects of all dilutive
potential ordinary shares.
2018 2017
Total comprehensive income for the year GBP2,461,000 GBP2,395,000
Weighted average number of ordinary shares in
issue 131,096,235 110,880,711
Basic earnings per share (pence) 1.88 2.17
Diluted earnings per share (pence) 1.54 1.70
B. Reconciliation of earnings between basic and diluted
earnings
2018 2017
Total comprehensive income for the year
As per basic earnings per share - total comprehensive GBP2,461,000 GBP2,395,000
income
Interest expense saved if all convertible loan GBP196,150 GBP196,150
notes were exchanged for equity (note 29)
As per dilutive earnings per share GBP2,657,150 GBP2,591,150
C. Reconciliation of weighted average number of ordinary shares
outstanding between basic and diluted
2018 2017
Reconciliation of weighted average number of
ordinary shares in issue between basic and diluted
earnings per share
As per basic earnings per share 131,096,235 110,880,711
Number of shares issued if all convertible loan
notes were exchanged for equity (note 29) 41,666,667 41,666,667
Dilutive element of share options if exercised
(note 31) 10,366 -
As per dilutive earnings per share 172,773,268 152,547,378
19. Cash and cash equivalents
Group Company
2018 2017 2018 2017
GBP000 GBP000 GBP000 GBP000
Cash at bank and in hand 9,753 9,745 1,646 200
9,753 9,745 1,646 200
Cash at bank includes an amount of GBP561,000 (2017: GBP63,000)
representing receipts which are in the course of transmission.
20. Debt securities
Group Company
2018 2017 2018 2017
GBP000 GBP000 GBP000 GBP000
Financial assets at FVOCI:
UK Government Treasury Bills 30,534 28,740 - -
Financial assets at amortised cost:
UK Certificates of Deposit - 5,532 - -
30,534 34,272 - -
UK Government Treasury Bills are stated at fair value and
unrealised changes in the fair value are reflected in other
comprehensive income. There were GBP135,000 (2017: GBP36,000)
realised gains and GBP44,000 unrealised gains (2017: unrealised
losses GBP93,000) during the year.
21. Trading asset
The investment represents shares in a UK quoted company, elected
to be classified as a financial asset at fair value through profit
or loss. The investment is stated at market value and is classified
as a level 1 investment in the IFRS 13 fair value hierarchy. The
cost of the shares was GBP471,000. The unrealised difference
between cost and market value has been taken to the income
statement. Dividend income of GBP355,000 (2017: GBP350,000) and
GBP24,000 (2017: GBP24,000) of sale proceeds have been received
from this investment since it was made. The investment made a net
loss of GBP4,000 (2017: GBP21,000) during the year.
22. Loans and advances to customers
2018 2017
Gross Impairment Carrying Gross Impairment Carrying
Amount Allowance Value Amount Allowance Value
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
HP balances 59,038 (1,416) 57,622 59,909 (1,327) 58,582
Finance lease balances 27,238 (1,551) 25,687 20,088 (1,101) 18,987
Unsecured personal
loans 14,806 (382) 14,424 10,521 (255) 10,266
Vehicle stocking plans 1,486 - 1,486 1,613 - 1,613
Wholesale funding arrangements 22,944 - 22,944 5,830 - 5,830
Block discounting 17,316 - 17,316 13,523 - 13,523
Secured commercial
loans 1,967 (45) 1,922 659 (4) 655
Secured personal loans 6,877 - 6,877 13,090 - 13,090
151,672 (3,394) 148,278 125,233 (2,687) 122,546
Collateral is held in the form of underlying assets for HP,
finance leases, vehicles stocking plans, block discounting, secured
commercial and personal loans and wholesale funding arrangements.
An estimate of the fair value of collateral on past due or impaired
loans and advances is not disclosed as it would be impractical to
do so.
2018 2017
Specific allowance for impairment GBP000 GBP000
Balance at 1 January 2,440 2,099
Specific allowance for impairment made 1,291 1,295
Release of allowances previously made (410) (776)
Write-offs (195) (178)
Balance at 31 December 3,126 2,440
2018 2017
Collective allowance for impairment GBP000 GBP000
Balance at 1 January 247 57
Collective allowance for impairment made 49 202
Release of allowances previously made (28) (12)
Balance at 31 December 268 247
Total allowances for impairment 3,394 2,687
Advances on preferential terms are available to all Directors,
management and staff. As at 31 December 2018 GBP389,005 (2017:
GBP347,328) had been lent on this basis. In the Group's ordinary
course of business, advances may be made to Shareholders but all
such advances are made on normal commercial terms.
As detailed below, at the end of the current financial year 15
loan exposures (2017: 3) exceeded 10.0% of the capital base of the
Bank: -
Outstanding Outstanding
Balance Balance Facility
2018 2017 limit
Exposure GBP000 GBP000 GBP000
Block discounting facility 14,211 9,487 23,500
Wholesale funding agreement 21,423 - 24,500
HP and finance lease receivables
Loans and advances to customers include the following HP and
finance lease receivables: -
2018 2017
GBP000 GBP000
Less than one year 42,532 36,227
Between one and five years 60,184 60,576
Gross investment in HP and finance lease receivables 102,716 96,803
The investment in HP and finance lease receivables net of
unearned income comprises: -
2018 2017
GBP000 GBP000
Less than one year 37,508 29,317
Between one and five years 49,289 50,680
Net investment in HP and finance lease receivables 86,797 79,997
23. Trade and other receivables
Group Company
2018 2017 2018 2017
GBP000 GBP000 GBP000 GBP000
Prepayments 382 285 32 22
VAT recoverable 936 817 - -
Other debtors 1,173 806 - -
2,491 1,908 32 22
Included in trade and other receivables is an amount of
GBP936,000 (2017: GBP817,000) relating to a reclaim of VAT. The
Bank, as the Group VAT registered entity, has for some time
considered the VAT recovery rate being obtained by the business was
neither fair nor reasonable, specifically regarding the attribution
of part of the residual input tax relating to the HP business not
being considered as a taxable supply. Queries have been raised with
the Isle of Man Government Customs & Excise Division
("C&E"), and several reviews of the mechanics of the recovery
process were undertaken by the Company's professional advisors.
The decision of the First-Tier Tax Tribunal released 18 August
2011 in respect of Volkswagen Financial Services (UK) Limited
("VWFS") v HM Revenue & Customs (TC01401) ("VWFS Decision")
added significant weight to the case put by the Bank and a request
for a revised Partial Exemption Special Method was submitted in
December 2011. The proposal put forward by the Bank was that the
revised method would allocate 50.0% of costs in respect of HP
transactions to a taxable supply and 50.0% to an exempt supply. In
addition, a Voluntary Disclosure was made as a retrospective claim
for input VAT under-claimed in the last 4 years. A secondary claim
was also made to cover periods Q4 2012 to Q1 2016 for the value of
GBP230,000 and an amount of GBP249,000 has been accrued to cover
periods Q2 2016 to Q4 2018.
In November 2012, it was announced that the HMRC Upper Tribunal
had overturned the First-Tier Tribunal in relation to the VWFS
Decision. VWFS has subsequently been given leave to appeal and this
was scheduled to be heard in October 2013. However, this was
delayed and the case was heard by the Court of Appeal on 17 April
2015 who overturned the Upper Tribunal's decision ruling in favour
of VWFS. HMRC have appealed this decision to the Supreme Court,
which has referred the issue to the European Court of Justice.
The Court of Justice of the European Union ("CJEU") has
published its determination concerning the Volkswagen Financial
Services (UK) Limited ("VWFS") vs HMRC case. The judgement
addressed all specific questions referred and agreed with VWFS on
all material points. Specifically, the judgment clarifies that a
partial exemption method must reflect the taxable sale of the
goods, even where general costs are commercially passed on as part
of the exempt supplies of credit. We have approached Customs and
Excise with a view of commencing conversations to finalise our
historic claims, rolling up the claim to date and agreeing a new
partial exempt method going forward.
The Bank's total exposure in relation to this matter increased
to GBP1,049,000, comprising the debtor balance referred to above
plus an additional GBP113,000 VAT reclaimed under the partial
Exemption Special Method, in the period from Q4 2011 to Q3 2012
(from Q4 2012 the Bank reverted back to the previous method). On
the basis of the discussions and correspondence which have taken
place between the Bank and C&E, in addition to the VWFS case,
the Directors are confident that the VAT claim referred to above
will be secured.
24. Property, plant and equipment
Leasehold IT Furniture Motor
Improvements Equipment & Vehicles(1) Total
Group GBP000 GBP000 Equipment GBP000 GBP000
GBP000
Cost
As at 1 January 2018 443 294 646 10 1,393
Additions 66 41 18 993 1,118
Disposals - - - - -
As at 31 December 2018 509 335 664 1,003 2,511
Accumulated depreciation
As at 1 January 2018 189 152 599 3 943
Charge for year 60 61 13 50 184
Disposals - - - - -
As at 31 December 2018 249 213 612 53 1,127
Carrying value at 31
December 2018 260 122 52 950 1,384
Carrying value at 31
December 2017 254 142 47 7 450
(1) Motor vehicles relate to operating leases with the Group as
lessor.
Leasehold IT Furniture
Improvements Equipment & Total
Company GBP000 GBP000 Equipment GBP000
GBP000
Cost
As at 1 January 2018 234 13 15 262
Additions - - 1 1
Disposals - - - -
As at 31 December 2018 234 13 16 263
Accumulated depreciation
As at 1 January 2018 92 2 2 96
Charge for year 39 1 1 41
Disposals - - - -
As at 31 December 2018 131 3 3 137
Carrying value at 31
December 2018 103 10 13 126
Carrying value at 31
December 2017 142 11 13 166
25. Intangible assets
IT Software
Customer Intellectual and Website
Contracts Property Rights Development Total
Group & Lists GBP000 GBP000 GBP000
GBP000
Cost
As at 1 January 2018 1,284 388 1,550 3,222
Additions - - 496 496
Acquisition of MBL 133 - - 133
Disposals - - - -
As at 31 December 2018 1,417 388 2,046 3,851
Accumulated amortisation
As at 1 January 2018 130 162 1,211 1,503
Charge for year / impairment
(note 32) 65 150 181 396
Disposals - - - -
As at 31 December 2018 195 312 1,392 1,899
Carrying value at 31
December 2018 1,222 76 654 1,952
Carrying value at 31
December 2017 1,154 226 339 1,719
On 23 December 2016, the Company acquired the majority of the
Isle of Man's IFA business held by Knox Financial Services Limited
("KFSL"). The initial acquisition included approximately 4,000
clients together with 6 members of staff. The basis of
consideration was contingent, as it is determined by 4 times
renewal income received in the first 12 months of ownership,
reduced by any clawbacks in the same period. The final value could
not fall below GBP800,000. The Company entered into a loan
agreement with Conister Bank Limited (see note 32 for terms) and
paid the non-refundable minimum of GBP800,000 and a further
GBP200,000 into an escrow account until the final valuation was
determined. When the value was finalised, any surplus or shortfall
was settled.
At acquisition, by reference to the renewal income received by
KFSL in the 12 months prior to disposal, an estimate of GBP236,906
was assumed for income over the preceding 12 months, which would
have generated a consideration sum of GBP947,624. Therefore, EWA
accounted for this transaction by recognising an intangible asset
of GBP947,624 and a receivable of GBP52,376 of the monies held in
escrow. Subsequent to acquisition this estimate was updated to an
estimated purchase price of GBP989,400 as at 31 December 2017.
Consequently, the receivable from escrow was reduced to GBP10,600.
The final consideration for the purchase was determined to be
GBP1,101,000. As acquisition accounting was finalised prior to
final settlement, the GBP111,600 additional cost was recognised as
an expense in the profit and loss during 2018. The fair value of
the assets acquired was considered to be of the same amount as the
sum estimated to be paid and principally relates to customer
contracts. The period over which these contracts are to be
amortised is estimated to be 18.75 years given the average duration
of EWA's existing portfolio for renewal income.
In tandem, both parties entered into an option agreement,
exercisable within three months from the transaction date, for EWA
to acquire the remainder of the vendor's IFA business which
included approximately 150 clients. This option was exercised on 18
January 2017. The price of the acquisition was calculated by four
times the renewal income received over the 12-month period
subsequent to completion. The purchase price was estimated to be
GBP198,300 with GBP75,000 paid upon exercise of the option. During
the year, the final purchase consideration was determined to be
GBP231,759. The Company made a final settlement of GBP156,760
during the year in addition to the GBP75,000 option price paid
during the prior year. This has resulted in a valuation adjustment
of GBP33,403.
On 7 September 2018, the Company acquired a book of insurance
and financial services clients from Westwinds Financial Services
Limited for a final consideration of GBP100,000.
26. Deposits from customers
2018 2017
GBP000 GBP000
Retail customers: term deposits 153,735 137,399
Corporate customers: term deposits 4,765 4,873
158,500 142,272
27. Creditors and accrued charges
Group Company
2018 2017 2018 2017
GBP000 GBP000 GBP000 GBP000
Commission creditors 758 2,042 - -
Other creditors and accruals 897 774 94 139
Taxation creditors 355 348 - -
2,010 3,164 94 139
28. Block creditors
2018 2017
GBP000 GBP000
Drawdown 2 - repayable 25/07/2018, interest payable
at 5.8%, secured on assets of MFL - 95
Drawdown 3 - repayable 08/03/2019, interest payable
at 6.5%, secured on assets of MFL 138 656
138 751
29. Loan notes
Group Company
2018 2017 2018 2017
Notes GBP000 GBP000 GBP000 GBP000
Related parties
J Mellon JM 1,750 1,750 1,750 1,750
Burnbrae Limited BL 1,200 1,200 1,200 1,200
Southern Rock Insurance Company
Limited SR 460 460 460 460
Life Science Developments
Limited LS - 250 - 250
3,410 3,660 3,410 3,660
Unrelated parties UP 12,461 5,335 12,461 5,335
15,871 8,995 15,871 8,995
JM - Two loans, one of GBP500,000 maturing on 31 July 2022 with
interest payable of 5.0% per annum, and one of GBP1,250,000
maturing on 26 February 2020, paying interest of 6.5% per annum.
Both loans are convertible at the rate of 7.5 pence and 9 pence
respectively.
BL - One loan consisting of GBP1,200,000 maturing on 31 July
2022 with interest payable of 5.0% per annum. Jim Mellon is the
beneficial owner of BL and Denham Eke is also a director. The loan
is convertible at a rate of 7.5 pence.
SR - One loan consisting of GBP460,000 maturing on 26 February
2020 with interest payable of 6.5% per annum. The loan is
convertible at a rate of 9 pence. John Banks, a Non-executive
Director, is also a director of SR and Arron Banks is a major
shareholder of SR.
LS - One loan of GBPnil (2017: GBP250,000) which matured on 3
January 2018 with interest payable of 5.0% per annum. Denham Eke is
a director of LS. The loan was repaid on maturity.
UP - Thirty-three loans consisting of an average GBP377,606 with
a weighted average interest payable of 5.4% per annum. The earliest
maturity date is 20 January 2019 and the latest maturity is 10
October 2023.
With respect to the convertible loans, the interest rate applied
was deemed by the Directors to be equivalent to the market rate at
the time with no conversion option.
30. Pension liability
The Conister Trust Pension and Life Assurance Scheme ("Scheme")
operated by the Company is a funded defined benefit arrangement
which provides retirement benefits based on final pensionable
salary. The Scheme is closed to new entrants and the last active
member of the Scheme left pensionable service in 2011.
The Scheme is approved in the Isle of Man by the Assessor of
Income Tax under the Income Tax (Retirement Benefit Schemes) Act
1978 and must comply with the relevant legislation. In addition, it
is registered as an authorised scheme with the FSA in the Isle of
Man under the Retirement Benefits Scheme Act 2000. The Scheme is
subject to regulation by the FSA but there is no minimum funding
regime in the Isle of Man.
The Scheme is governed by two corporate trustees, Conister Bank
Limited and Boal & Co (Pensions) Limited. The trustees are
responsible for the Scheme's investment policy and for the exercise
of discretionary powers in respect of the Scheme's benefits.
The rules of the Scheme state: - "Each Employer shall pay such
sums in each Scheme Year as are estimated to be required to provide
the benefits of the Scheme in respect of the Members in its
employ".
Exposure to risk
The Company is exposed to the risk that additional contributions
will be required in order to fund the Scheme as a result of poor
experience. Some of the key factors that could lead to shortfalls
are: -
n investment performance - the return achieved on the Scheme's
assets may be lower than expected; and
n mortality - members could live longer than foreseen. This
would mean that benefits are paid for longer than expected,
increasing the value of the related liabilities.
In order to assess the sensitivity of the Scheme's pension
liability to these risks, sensitivity analyses have been carried
out. Each sensitivity analysis is based on changing one of the
assumptions used in the calculations, with no change in the other
assumptions. The same method has been applied as was used to
calculate the original pension liability and the results are
presented in comparison to that liability. It should be noted that
in practice it is unlikely that one assumption will change without
a movement in the other assumptions; there may also be some
correlation between some of these assumptions. It should also be
noted that the value placed on the liabilities does not change on a
straight line basis when one of the assumptions is changed. For
example, a 2.0% change in an assumption will not necessarily
produce twice the effect on the liabilities of a 1.0% change.
No changes have been made to the method or to the assumptions
stress-tested for these sensitivity analyses compared to the
previous period. The investment strategy of the Scheme has been set
with regard to the liability profile of the Scheme. However, there
are no explicit asset-liability matching strategies in place.
Restriction of assets
No adjustments have been made to the statement of financial
position items as a result of the requirements of IFRIC 14 issued
by IASB's International Financial Reporting Interpretations
Committee.
Scheme amendments
There have not been any past service costs or settlements in the
financial year ending 31 December 2018 (2017: none).
Funding policy
The funding method employed to calculate the value of previously
accrued benefits is the Projected Unit Method. Following the
cessation of accrual of benefits when the last active member left
service in 2011, regular future service contributions to the Scheme
are no longer required. However, additional contributions will
still be required to cover any shortfalls that might arise
following each funding valuation.
The most recent triennial full actuarial valuation was carried
out at 1 April 2016, which showed that the market value of the
Scheme's assets was GBP1,379,000 representing 80.7% of the benefits
that had accrued to members, after allowing for expected future
increases in earnings. As required by IAS 19 this valuation has
been updated by the actuary as at 31 December 2018.
The amounts recognised in the Consolidated Statement of
Financial Position are as follows: -
2018 2017
Total underfunding in funded plans recognised GBP000 GBP000
as a liability
Fair value of plan assets 1,361 1,469
Present value of funded obligations (1,945) (2,029)
(584) (560)
2018 2017
Movement in the liability for defined benefit GBP000 GBP000
obligations
Opening defined benefit obligations at 1 January 2,029 2,034
Benefits paid by the plan (65) (68)
Interest on obligations 52 54
Actuarial (gain)/loss (71) 9
Liability for defined benefit obligations at 31
December 1,945 2,029
2018 2017
Movement in plan assets GBP000 GBP000
Opening fair value of plan assets at 1 January 1,469 1,420
Expected return on assets 37 37
Contribution by employer 41 41
Actuarial (loss)/gain (121) 39
Benefits paid (65) (68)
Closing fair value of plan assets at 31 December 1,361 1,469
2018 2017
Expense recognised in income statement GBP000 GBP000
Interest on obligation 52 54
Expected return on plan assets (37) (37)
Total included in personnel costs 15 17
Actual return on plan assets (53) 76
2018 2017
Actuarial gain recognised in other comprehensive GBP000 GBP000
income
Actuarial (loss)/gain on plan assets (121) 39
Actuarial gain/(loss) on defined benefit obligations 71 (9)
50 30
2018 2017
Plan assets consist of the following % %
Equity securities 45 48
Corporate bonds 19 18
Government bonds 28 25
Cash 4 5
Other 4 4
-----
100 100
The actuarial assumptions used to 2018 2017 2016
calculate Scheme liabilities under
IAS19 are as follows: -
% % %
Rate of increase in pension in payment:
-
- - -
* Service up to 5 April 1997
* Service from 6 April 1997 to 13 September 2005 3.0 3.0 3.1
* Service from 14 September 2005 2.1 2.1 2.1
Rate of increase in deferred pensions 5.0 5.0 5.0
Discount rate applied to scheme liabilities 2.6 2.6 2.7
Inflation 3.1 3.1 3.2
The assumptions used by the actuary are best estimates chosen
from a range of possible assumptions, which due to the timescale
covered, may not necessarily be borne out in practice.
31. Called up share capital
Ordinary shares of no par value available for issue Number
At 31 December 2018 200,200,000
At 31 December 2017 200,200,000
Issued and fully paid: - Ordinary shares of no Number GBP000
par value
At 31 December 2018 131,096,235 20,732
At 31 December 2017 131,096,235 20,732
There are four convertible loans of GBP3,410,000 (2017:
GBP3,410,000) with no remaining warrants to exercise at 31 December
2018 (2017: GBPnil).
On 23 June 2014, 1,750,000 share options were issued to
Executive Directors and senior management within the Group at an
exercise price of 14 pence. The options vest over three years with
a charge based on the fair value of 8 pence per option at the date
of grant. The period of grant is for 10 years less 1 day ending 22
June 2024. Of the 1,750,000 share options issued, 1,050,000
(2017:1,050,000) remain outstanding; the balance lapsed during
2017.
Performance and service conditions attached to share options
that have not fully vested are as follows: -
(a) The options granted on 25 June 2010 (1,056,000 options) will
vest if the mid-market share price of GBP0.30 is achieved during
the period of grant (10 years ending 25 June 2020); and
(b) The options granted on 25 June 2010 and 23 June 2014 require
a minimum of three years' continuous employment service in order to
exercise upon the vesting date.
The fair value of services received in return for share options
granted is based on the fair value of share options granted,
measured using a binomial probability model with the following
inputs for each award: -
23 June 25 June
2014 2010
Fair value at date of grant GBP0.08 GBP0.03
Share price GBP0.14 GBP0.11
Exercise price GBP0.14 GBP0.11
Expected volatility 55.0% 47.0%
Option life 3 3
Risk-free interest rate (based on government
bonds) 0.5% 2.2%
Forfeiture rate 33.3% 0.0%
The charge for the year for share options granted was GBPnil
(2017: GBP22,000).
Analysis of changes in financing during the year
2018 2017
Analysis of changes in financing during the year GBP000 GBP000
Balance at 1 January 29,727 27,478
Issue of loan notes 6,876 450
Issue of shares - 1,799
36,603 29,727
The 2018 closing balance is represented by GBP20,732,000 share
capital (2017: GBP20,732,000) and GBP15,871,000 of loan notes
(2017: GBP8,995,000).
32. Investment in Group undertakings
The Company has the following investments in subsidiaries
incorporated in the Isle of Man: -
Nature of 31 December Date of Total Total
Business 2017 Incorporation 2018 2017
Carrying value % Holding GBP000 GBP000
of investments
Conister Bank
Limited Asset and Personal Finance 100 05/12/1935 14,167 11,767
Edgewater Associates
Limited Wealth Management 100 24/12/1996 2,005 2,005
TransSend Holdings Holding Company for
Limited Prepaid Card Division 100 05/11/2007 - -
Bradburn Limited Holding Company 100 15/05/2009 - -
16,172 13,772
Amounts owed to and from Group undertakings are unsecured,
interest-free and repayable on demand.
Subordinated loans
MFG has issued several subordinated loans as part of its equity
funding into the Bank and EWA.
Company 2018 2017
Creation Maturity Interest rate GBP000 GBP000
Conister Bank Limited
11 February 2014 11 February 2024 7.0% 500 500
27 May 2014 27 May 2024 7.0% 500 500
9 July 2014 9 July 2024 7.0% 500 500
17 September 2014 17 September 2026 7.0% 400 400
22 July 2013 22 July 2033 7.0% 1,000 1,000
25 October 2013 22 October 2033 7.0% 1,000 1,000
23 September 2016 23 September 2036 7.0% 1,100 1,100
14 June 2017 14 June 2037 7.0% 450 450
12 June 2018 12 June 2038 7.0% 2,000 -
Edgewater Associates
Limited
14 May 2012 14 May 2017 7.0% - -
28 February 2013 28 February 2018 7.0% 50 50
21 February 2017 21 February 2027 7.0% 150 150
14 May 2017 14 May 2027 7.0% 128 128
7,778 5,778
Group Group
Goodwill 2018 2017
GBP000 GBP000
Edgewater Associates Limited ("EWA") 1,849 1,849
ECF Asset Finance PLC ("ECF") 454 454
Three Spires Insurance Services Limited ("Three
Spires") 41 41
2,344 2,344
Goodwill impairment
The goodwill is considered to have an indefinite life and is
reviewed on an annual basis by comparing its estimated recoverable
amount with its carrying value.
The estimated recoverable amount in relation to the goodwill
generated on the purchase of EWA is based on the forecasted 3 year
cash flow projections, extrapolated to 10 years using a 2.0% annual
increment, and then discounted using a 12.0% discount factor. The
sensitivity of the analysis was tested using additional discount
factors of 15.0% and 20.0% on stable profit levels.
The estimated recoverable amount in relation to the goodwill
generated on the purchase of ECF is based on forecasted 3 year
sales interest income calculated at 5.0% margin, extrapolated to 10
years using a 2.0% annual increment, and then discounted using a
12.0% discount factor. The sensitivity of the analysis was tested
using additional discount factors of 15.0% and 20.0% on varying
sales volumes.
There has been no change in the detailed method of measurement
for EWA and ECF when compared to 2017. The goodwill generated on
the purchase of Three Spires has been reviewed at the current year
end and is considered adequate given its income streams referred to
EWA. Based on the above reviews no impairment to goodwill has been
made in the current year.
Acquisition of Incahoot Limited
On 6 March 2015, the business of Incahoot Limited was acquired
by Manx Incahoot Limited, a subsidiary of the Group.
On 9 December 2016, a valuation was conducted by an independent
firm of professional advisers on the intellectual property rights
acquired for the purpose of including within these financial
statements. The independent firm addressed the three levels of the
IFRS fair value hierarchy and concluded that level 3 was most
appropriate as the intellectual property rights acquired had no
active markets (Level 1), or comparable assets against which to
index prices (Level 2). Therefore, the report valued the
intellectual property rights acquired based on internally generated
data (Level 3) being: costs incurred to date and cash flow
projections. The report averaged two valuation approaches, the
replacement cost approach and the income approach using a discount
factor of 42.5%, to arrive at a final valuation of GBP262,474. This
created an impairment of GBP48,026. On 2 February 2018, the
valuation was again updated which lead to a reduced valuation of
GBP154,427. This created an additional impairment of
GBP108,047.
The Directors performed an internal impairment assessment and
consider the recoverable amount of the intellectual property rights
to be GBP76,000 at 31 December 2018. The recoverable amount at 31
December 2017 was considered to be GBP154,427 based on an external
valuation.
Investment in associates
Group Group
2018 2017
GBP000 GBP000
The Business Lending Exchange ("BLX") 56 38
Beer Swaps Limited ("BSL") 10 -
Pay It Monthly Ltd ("PIML") 92 -
158 38
On December 2017, 40.0% of the share capital of BLX was acquired
for nil consideration. The Group's share of the associate's total
comprehensive income during the year was GBP18,000.
On April 2018, 20% of the share capital of BSL was acquired for
nil consideration. The Group's share of the associates total
comprehensive income post acquisition and up to year-end was
GBP10,000.
On August 2018, 30% of the share capital of PIML was acquired
for GBP90,000 consideration. The Group's resulting share of the
associates total comprehensive income post acquisition and up to
year-end was GBP2,000.
33. Related party transactions
Cash deposits
During the year, the Bank held cash on deposit on behalf of Jim
Mellon (Executive Chairman of MFG) and companies related to Jim
Mellon and Denham Eke (Chief Executive Officer of MFG). Total
deposits amounted to GBP173,157 (2017: GBP40,000), at normal
commercial interest rates in accordance with the standard rates
offered by the Bank.
Staff and commercial loans
Details of staff loans are given in note 22.
Normal commercial loans have been made to various companies
connected to Jim Mellon and Denham Eke. As at 31 December 2018,
GBP113,000 of capital and interest was outstanding (2017:
GBP299,000).
Intercompany recharges
Various intercompany recharges are made during the course of the
year as a result of the Bank settling debts in other Group
companies. EWA provides services to the Group in arranging its
insurance and defined contribution pension arrangements.
Loan advance to EWA
On 14 December 2016, a loan advance was made to EWA by the Bank
in order to provide the finance required to acquire MBL (see note
25). The advance was for GBP700,000 at an interest rate of 8%
repayable over 6 years. A negative pledge was given by EWA to not
encumber any property or assets or enter into an arrangement to
borrow any further monies. The balance as at 31 December 2018 was
GBP508,000 (2017: GBP700,000).
Loan advance to BLX
On 11 October 2017, a GBP4,000,000 loan facility was made
available to BLX by the Bank in order to provide the finance
required to expand its operations. The facility is for 12 months,
followed by a 3 year amortisation period. Interest is charged at
commercial rates. At 31 December 2018, GBP2,520,000 (2017:
GBP550,000) had been advanced to BLX.
Loan advance to BSL
On 27 April 2018, a GBP1,000,000 loan facility was made
available to BSL by the Bank in order to provide the finance
required to expand its operations. On 10 October 2018, this
facility was increased to GBP1,500,000. The facility is for 12
months. Interest is charged at commercial rates. At 31 December
2018, GBP1,099,000 (2017: GBPnil) had been advanced to BSL.
Loan advance to PIML
On 24 May 2018, a GBP500,000 loan facility was made available to
PIML by the Bank in order to provide the finance required to expand
its operations. The facility is for 12 months. Interest is charged
at commercial rates. At 31 December 2018, GBP322,000 (2017: GBPnil)
had been advanced to PIML. Post-year-end on 6 February 2019, the
facility was increased to GBP1,000,000.
Investments
The Bank holds less than 1% equity in the share capital of an
investment of which Jim Mellon is a shareholder (note 21). Denham
Eke acts as co-chairman.
Subordinated loans
The Company has advanced GBP7,450,000 (2017: GBP5,450,000) of
subordinated loans to the Bank and GBP328,000 (2017: GBP328,000) to
EWA at 31 December 2018.
Loan notes
See note 29 for a list of related party loan notes as at 31
December 2018 and 2017.
Key management remuneration including Executive Directors
2018 2017
GBP000 GBP000
Short-term employee benefits 297 300
-------- --------
34. Operating leases
Non-cancellable lease rentals are payable in respect of property
and motor vehicles as follows: -
2018 2017
Leasehold Leasehold
Property Other Property Other
GBP000 GBP000 GBP000 GBP000
Less than one year 214 - 178 -
Between one and five years 790 - 738 -
Over five years 162 - 276 -
1,166 - 1,192 -
35. Subsequent events
There were no significant subsequent events identified after 31
December 2018.
36. Financial risk management
A. Introduction and overview
The Group has exposure to the following risks from financial
instruments:
n credit risk;
n liquidity risk;
n market risks; and
n operational risks.
i. Risk management framework
The Company's Board have overall responsibility for the
establishment and oversight of the Group's risk management
framework. The Board of Directors have established the Group Audit,
Risk and Compliance Committee ('ARCC'), which is responsible for
approving and monitoring Group risk management policies. ARCC is
assisted in its oversight role by Internal Audit. Internal Audit
undertakes both regular and ad hoc reviews of risk management
controls and procedures, the results of which are reported to the
ARCC.
The Group's risk management policies are established to identify
and analyse the risks faced by the Group, to set appropriate risk
limits and controls, and to monitor risks and adherence to limits.
The risk management policies and systems are reviewed regularly to
reflect changes in market conditions and the Group's activities.
The Group, though its training and management standards and
procedures, aims to develop a disciplined and constructive control
environment in which all employees understand their roles and
obligations.
B. Credit risk
'Credit risk' is the risk of financial loss to the Group if a
customer or counterparty to a financial instrument fails to meet
its contractual obligations, and arises principally from the
Group's loans and advances to customers and investment debt
securities. Credit risk includes counterparty, concentration,
underwriting and credit mitigation risks.
Management of credit risk
The Bank's Board of Directors created the Credit Committee which
is responsible for managing credit risk, including the
following:
n Formulating credit policies in consultation with business
units, covering collateral requirements, credit assessments, risk
grading and reporting, documentary and legal procedures, and
compliance with regulatory and statutory requirements.
n Establishing the authorisation structure for the approval and
renewal of credit facilities. Authorisation limits are allocated to
in line with credit policy.
n Reviewing and assessing credit risk: The Credit Committee
assesses all credit exposures in excess of designated limits,
before facilities are committed to customers. Renewals and reviews
of facilities are subject to the same review process.
n Limiting concentrations of exposures to counterparties,
geographies and industries, by issuer, credit rating band, market
liquidity and country (for debt securities).
n Developing and maintaining risk grading's to categorise
exposures according to the degree of risk of default. The current
risk grading consists of 3 grades reflecting varying degrees of
risk of default.
n Developing and maintaining the Group's process for measuring
ECL: This includes processes for:
o initial approval, regular validation and back-testing of the
models used;
o determining and monitoring significant increase in credit
risk; and
o incorporation of forward-looking information.
n Reviewing compliance with agreed exposure limits. Regular
reports on the credit quality of portfolios are provided to the
Credit Committee which may require corrective action to be
taken.
C. Liquidity risk
'Liquidity risk' is the risk that the Group will encounter
difficulty in meeting obligations associated with its financial
liabilities that are settled by delivering cash or another
financial asset. Liquidity risk arises from mismatches in the
timing and amounts of cash flows, which is inherent to the Group's
operations and investments.
Management of liquidity risk
The Group's approach to managing liquidity is to ensure, as far
as possible, that it will always have enough liquidity to meet its
liabilities when they are due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Group's reputation. The key elements of the Group's
liquidity strategy are as follows:
n Funding base: offering six-months to five-year fixed term
deposit structure with no early redemption option. This means the
Bank is not subject to optionality risk where customers redeem
fixed rate products where there may be a better rate available
within the market;
n Funding profile: the Bank has a matched funding profile and
does not engage in maturity transformation which means that on a
cumulative mismatch position the Bank is forecast to be able to
meet all liabilities as they fall due;
n Monitoring maturity mismatches, behavioural characteristics of
the Group's financial assets and financial liabilities, and the
extent to which the Group's assets are encumbered and so not
available as potential collateral for obtaining funding.
n Liquidity buffer: the Bank maintains a liquidity buffer of
10.0% of its deposit liabilities, with strict short-term mismatch
limits of 0.0% for sight to three months and -5.0% for sight to six
months. This ensures that the Bank is able to withstand any
short-term liquidity shock; and
n Interbank market: the Bank has no exposure to the interbank
lending market. The Bank has no reliance on liquidity via the
wholesale markets. In turn, if market conditions meant access to
the wholesale funding was constrained as per the 2008 credit
crisis, this would have no foreseeable effect on the Bank.
n The Bank's liquidity position is monitored daily against
internal and external limits agreed with the FSA and according to
the Bank's Liquidity Policy. The Bank also has a Liquidity
Contingency Policy and Liquidity Contingency Committee in the event
of a liquidity crisis or potential liquidity disruption event
occur.
The Treasury department receives information from other business
units regarding the liquidity profile of their financial assets and
financial liabilities and details of other projected cash flows
arising from projected future business. Treasury then maintains a
portfolio of short-term liquid assets, largely made up of
short-term liquid investment securities, loans and advances to
banks and other inter-bank facilities, to ensure that sufficient
liquidity is maintained within the Group as a whole.
Regular liquidity stress testing is conducted under a variety of
scenarios covering both normal and more severe market conditions.
The scenarios are developed considering both Group-specific events
and market-related events (e.g. prolonged market illiquidity).
D. Market risk
'Market risk' is the risk that changes in market prices - e.g.
interest rates, equity prices, foreign exchange rates and credit
spreads (not relating to changes in the obligor's/issuer's credit
standing) will affect the Group's income or value of its holdings
of financial instruments. The objective of the Group's market risk
management is to manage and control market risk exposures within
acceptable parameters to ensure the Group's solvency while
optimising the return on risk.
Management of market risks
Overall authority for market risk is vested in Assets and
Liabilities Committee ("ALCO") who sets up limits for each type of
risk. Group finance is responsible for the development of risk
management policies (subject to review and approval by ALCO) and
for the day-to-day review of their implementation.
Foreign exchange risk
The Bank is not subject to foreign exchange risks and its
business is conducted in pounds sterling.
Equity risk
The Group has investment in associates of GBP158,000 (2017:
GBP38,000) which are carried at cost adjusted for the Group's share
of net asset value. The investment is audited annually and the Bank
has access to these accounts. The Bank's exposure to market risk is
not considered significant given the low carrying amount of the
investment.
The Group's investment in listed equities is not considered
significant.
Interest rate risk
The principal potential interest rate risk that the Bank is
exposed to is the risk that the fixed interest rate and term
profile of its deposit base differs materially from the fixed
interest rate and term profile of its asset base, or basis and term
structure risk.
Additional interest rate risk may arise for banks where (a)
customers are able to react to market sensitivity and redeem fixed
rate products and (b) where a bank has taken out interest rate
derivate hedges especially against longer term interest rate risk,
where the hedge moves against the bank.
Interest rate risk for the Bank is not deemed to be currently
material due to the Bank's matched funding profile. Any interest
rate risk assumed by the Bank will arise from a reduction in
interest rates, in a rising environment due to the nature of the
Bank's products and its matched funded profile. The Bank should be
able to increase its lending rate to match any corresponding rise
in its cost of funds, notwithstanding its inability to vary rates
on its existing loan book. The Bank attempts to efficiently match
its deposit taking to its funding requirements.
E. Operational risk
'Operational risk' is the risk of direct or indirect loss
arising from a wide variety of causes associated with the Group's
processes, personnel, technology and infrastructure, and from
external factors other than credit, market and liquidity risks -
e.g. those arising from legal and regulatory requirements and
generally accepted standards of corporate behaviour. Operational
risks arise from all of the Group's operations.
Management of operational risk
The Group's objective is to manage operational risk so as to
balance the avoidance of financial losses and damage to the Group's
reputation with overall cost effectiveness and innovation. In all
cases, Group policy requires compliance with all applicable legal
and regulatory requirements.
The Group has developed standards for the management of
operational risk in the following areas:
n business continuity planning;
n requirements for appropriate segregation of duties, including
the independent authorisation of transactions;
n requirements for the reconciliation and monitoring of
transactions;
n compliance with regulatory and other legal requirements;
n documentation of controls and procedures;
n periodic assessment of operational risks faced, and the
adequacy of controls and procedures to address the risks
identified;
n requirements for the reporting of operational losses and
proposed remedial action;
n development of contingency plans;
n training and professional development;
n ethical and business standards;
n information technology and cyber risks; and
n risk mitigation, including insurance where this is
cost-effective.
Compliance with Group standards is supported by a programme of
periodic reviews undertaken by Internal Audit. The results of
Internal Audit reviews are discussed with ARCC
37. Basis of measurement
The financial statements are prepared on a historical cost
basis, except for the following material items.
Items Measurement basis
Financial instruments at FVPL Fair value
Financial assets at FVOCI Fair value
Net defined benefit asset/liability Fair value of plan assets less
the present value of the defined
benefit obligation
38. Significant accounting policies
Except for the changes explained in Note 5, the Group has
consistently applied the following accounting policies to all
periods presented in these financial statements.
A. Basis of consolidation of subsidiaries and separate financial
statements of the Company
i. Business combinations
The Group accounts for business combinations using the
acquisition method when control is transferred to the Group. The
consideration transferred in the acquisition is generally measured
at fair value, as are the identifiable net assets acquired. Any
goodwill that arises is tested annually for impairment. Any gain on
a bargain purchase is recognised in profit or loss immediately.
Transaction costs are expensed as incurred, except if they are
related to issue of debt or equity securities.
ii. Subsidiaries
Subsidiaries are entities controlled by the Group. The Group
'controls' an entity if it is exposed to or has rights to, variable
returns from its involvement with the entity and has the ability to
affect those returns through its power over the entity. The Group
reassesses whether it has control if there are changes to one or
more of the elements of control. This includes circumstances in
which protective rights held (e.g. those resulting from a lending
relationship) become substantive and lead to the Group having power
over an investee. The financial statements of subsidiaries are
included in the consolidated financial statements from the date on
which control commences until the date on which control ceases.
iii. Loss of control
When the Group loses control over a subsidiary, it derecognises
the assets and liabilities of the subsidiary, and any related
Non-Controlling Interest ("NCI") and other components of equity.
Any resulting gain or loss is recognised in profit or loss. Any
interest retained in the former subsidiary is measured at fair
value when control is lost.
iv. Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised income
and expenses arising from intra-group transactions, are eliminated
in preparing the consolidated financial statements. Unrealised
losses are eliminated in the same way as unrealised gains, but only
to the extent that there is no evidence of impairment.
v. Separate financial statements of the Company
In the separate financial statements of the Company, interests
in subsidiaries, associates and joint ventures are accounted for at
cost.
B. Interests in equity accounted investees
The Group's interests in equity accounted investees may comprise
interests in associates and joint ventures.
Associates are those entities in which the Group has significant
influence, but not control or joint control, over the financial and
operating policies. A joint venture is an arrangement in which the
Group has joint control, whereby the Group has rights to the net
assets of the arrangement, rather than rights to its assets and
obligations for its liabilities.
Interests in associates and joint ventures are accounted for
using the equity method. They are initially recognised at cost,
which includes transaction costs. Subsequent to initial
recognition, the consolidated financial statements include the
Group's share of the profit or loss and OCI of equity accounted
investees, until the date on which significant influence or joint
control ceases.
C. Foreign currency
Foreign currency assets and liabilities (applicable to the
Conister Card Services division only) are translated at the rates
of exchange ruling at the reporting date. Transactions during the
year are recorded at rates of exchange in effect when the
transaction occurs. The exchange movements are dealt with in the
income statement.
D. Interest
Interest income and expense are recognised in profit or loss
using the effective interest rate method.
Effective interest rate
The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts of the financial
instrument to the net carrying amount of the financial asset or
financial liability. The discount period is the expected life or,
where appropriate, a shorter period. The calculation includes all
amounts receivable or payable by the Group that are an integral
part of the overall return, including origination fees, loan
incentives, broker fees payable, estimated early repayment charges,
balloon payments and all other premiums and discounts. It also
includes direct incremental transaction costs related to the
acquisition or issue of the financial instrument. The calculation
does not consider future credit losses.
Once a financial asset or a group of similar financial assets
has been written down as a result of impairment, subsequent
interest income continues to be recognised using the original
effective interest rate applied to the reduced carrying value of
the financial instrument.
E. Fees and commission income
Fees and commission income other than that directly related to
the loans is recognised over the period for which service has been
provided or on completion of an act to which the fees relate.
Income in respect of fiduciary deposit taking is recognised on
an accruals basis.
F. Programme costs
Programme costs are direct expenditure incurred in relation to
prepaid card programmes. The costs are recognised over the period
in which income is derived from operating the programmes.
G. Leases
Leases in which the Group is a lessor
Finance leases and HP contracts
When assets are subject to a finance lease or HP contract, the
present fair value of the lease payments is recognised as a
receivable. The difference between the gross receivable and the
present value of the receivable is recognised as unearned finance
income. HP and lease income is recognised over the term of the
contract or lease reflecting a constant periodic rate of return on
the net investment in the contract or lease. Initial direct costs,
which may include commissions and legal fees directly attributable
to negotiating and arranging the contract or lease, are included in
the measurement of the net investment of the contract or lease at
inception.
Operating leases
Assets held for operating leases are presented on the Statement
of Financial Position according to the nature of the asset. Lease
income is recognised over the lease term on a straight-line
basis.
Leases in which the Group is a lessee
Operating leases
Leases in which a significant portion of the risks and rewards
of ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases (net of any incentives
received from the lessor) are charged to the income statement on a
straight-line basis over the period of the lease.
H. Income tax
Current and deferred taxation
Current taxation relates to the estimated corporation tax
payable in the current financial year. Deferred taxation is
provided in full, using the liability method, on timing differences
arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. Deferred
taxation is determined using tax rates (and laws) that have been
enacted or substantially enacted by the reporting date and are
expected to apply when the related deferred tax is realised.
Deferred taxation assets are recognised to the extent that it is
probable that future taxable profit will be available against which
the temporary differences can be utilised.
I. Financial assets and financial liabilities
i. Recognition and initial measurement
The Group initially recognises loans and advances, deposits,
debt securities issued and subordinated liabilities on the date on
which they are originated. All other financial instruments
including regular-way purchases and sales of financial assets) are
recognised on the trade date, which is the date on which the Group
becomes party to the contractual provisions of the instrument.
A financial asset or financial liability is measured initially
at fair value plus, for an item not at FVTPL, transaction costs
that are directly attributable to its acquisition or issue.
ii. Classification
Financial assets
On initial recognition, a financial asset is classified as
measured at: amortised cost, FVOCI or FVTPL.
A financial asset is measured at amortised cost if it meets both
of the following conditions and is not designated as at FVTPL:
n the asset is held within a business model whose objective is
to hold assets to collect contractual cash flows; and
n the contractual terms of the financial asset give rise on
specified dates to cash flows that are SPPI.
A debt instrument is measured at FVOCI only if it meets both of
the following conditions and is not designated as FVTPL:
n the asset is held within a business model whose objective is
achieved by both collecting contractual cash flows and selling
financial assets; and
n the contractual terms of the financial asset give rise on
specified dates to cash flows that are SPPI.
On initial recognition of an equity investment that is not held
for trading, the Group may irrevocably elect to present subsequent
changes in fair value in OCI. This election is made on an
investment-by-investment basis.
All other financial assets are classified as measured at
FVTPL.
In addition, on initial recognition, the Group may irrevocably
designate a financial asset that otherwise meets the requirements
to be measured at amortised cost or at FVOCI as at FVTPL if doing
so eliminates or significantly reduces an accounting mismatch that
would otherwise arise.
Business model assessment
The group makes an assessment of the objective of a business
model in which an asset is held at a portfolio level because this
best reflects the way the business is managed and information
provided to management.
Assessment of whether contractual cash flows are solely payments
of principal and interest
For the purposes of this assessment, 'principal' is defined as
the fair value of the financial asset on initial recognition.
'Interest' is defined as consideration for the time value of money
and for the credit risk associated with the principal amount
outstanding during a particular period of time and for other basic
lending risks and costs (e.g. liquidity risk and administrative
costs), as well as profit margin.
In assessing whether the contractual cash flows are SPPI, the
Group considers the contractual terms of the instrument. This
includes assessing whether the financial asset contains a
contractual term that could change the timing or amount of
contractual cash flows such that it would not meet this
condition.
Reclassifications
Financial assets are not reclassified subsequent to their
initial recognition, except in the period after the Group changes
its business model for managing financial assets.
Financial liabilities
The Group classifies its financial liabilities, other than
financial guarantees and loan commitments, as measured at amortised
cost.
iii. Derecognition
Financial assets
The Group derecognises a financial asset when the contractual
rights to the cash flows from the financial asset expire, or when
it transfers the rights to receive the contractual cash flows in a
transaction in which substantially all of the risks and rewards of
ownership of the financial asset are transferred or in which the
Group neither transfers nor retains substantially all of the risks
and rewards of ownership and it does not retain control of the
financial asset.
On derecognition of a financial asset, the difference between
the carrying amount of the asset (or the carrying amount allocated
to the portion of the asset derecognised) and the sum of (i) the
consideration received (including any new asset obtained less any
new liability assumed) and (ii) any cumulative gain or loss that
had been recognised in OCI is recognised in profit or loss.
Financial liabilities
The Group derecognises a financial liability when its
contractual obligations are discharged or cancelled, or expire.
iv. Modifications
Financial assets
If the terms of a financial asset are modified, then the Group
evaluates whether the cash flows of the modified asset are
substantially different.
If the cash flows are substantially different, the contractual
rights to cash flows from the original financial asset are deemed
to have expired. In this case, the original financial asset is
derecognised and a new financial asset is recognised at fair value
plus any eligible transaction costs.
If the cash flows are modified when the borrower is in financial
difficulties, then the objective of the modification is usually to
maximise recovery of the original contractual terms rather than to
originate a new asset with substantially different terms. If the
Group plans to modify a financial asset in a way that would result
in forgiveness of cash flows, then it first considers whether a
portion of the asset should be written off before the modification
takes place. This approach impacts the result of the quantitative
evaluation and means that the derecognition criteria are not
usually met in such cases.
If the modification of a financial asset measured at amortised
cost or FVOCI does not result in derecognition of the financial
asset, then the Group first recalculates the gross carrying amount
of the financial asset using the original effective interest rate
of the asset and recognises the resulting adjustment as a
modification gain or loss in profit or loss. Any costs or fees
incurred and fees received as part of the modification adjust the
gross carrying amount of the modified financial asset and are
amortised over the remaining term of the modified financial asset.
If such modification is carried out because of financial
difficulties of the borrower, then the gain or loss is presented
together with impairment losses. In other cases, it is presented as
interest income calculated using the effective interest rate
method.
Financial liabilities
The Group derecognises a financial liability when its terms are
modified and the cash flows of the modified liability are
substantially different. In this case, a new financial liability
based on the modified terms is recognised at fair value. The
difference between the carrying amount of the financial liability
derecognised and consideration paid is recognised in profit or
loss. Consideration paid includes non-financial assets transferred,
if any, and the assumption of liabilities, including the new
modified financial liability.
If the modification of a financial liability is not accounted
for as derecognition, then the amortised cost of the liability is
recalculated by discounting the modified cash flows at the original
effective interest rate and the resulting gain or loss I s
recognised in profit or loss. Any costs and fee incurred are
recognised as an adjustment of the carrying amount of the liability
and amortised over the remaining term of the modified financial
liability by re-computing the effective interest rate on the
instrument.
v. Offsetting
Financial assets and financial liabilities are offset and the
net amount presented in the statement of financial position when,
and only when, the Group currently has a legally enforceable right
to set off the amounts and it intends either to settle them on a
net basis or to realise the asset and settle the liability
simultaneously.
Income and expenses are presented on a net basis only when
permitted under IFRS, or for gains and losses arising from a group
of similar transactions such as in the Group's trading
activity.
vi. Fair value measurement
'Fair value' is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date in the
principal or, in its absence, the most advantageous market to which
the Group has access at the date. The fair value of a liability
reflects its non-performance risk.
The Group recognises transfers between levels of the fair value
hierarchy as of the end of the reporting period during which the
change has occurred.
The Group measures fair values using the following fair value
hierarchy, which reflects the significance of the inputs used in
making the measurements: -
n Level 1: inputs that are quoted market prices (unadjusted) in
active markets for identical instruments;
n Level 2: inputs other than quoted prices included within Level
1 that are observable either directly (i.e. as prices) or
indirectly (i.e. derived from prices). This category includes
instruments valued using: quoted market prices in active markets
for similar instruments; quoted prices for identical or similar
instruments in markets that are considered less than active; or
other valuation techniques in which all significant inputs are
directly or indirectly observable from market data; and
n Level 3: inputs that are unobservable. This category includes
all instruments for which the valuation technique includes inputs
not based on observable data and the unobservable inputs have a
significant effect on the instrument's valuation. This category
includes instruments that are valued based on quoted prices for
similar instruments for which significant unobservable adjustments
or assumptions are required to reflect differences between the
instruments.
The fair values of financial assets and financial liabilities
that are traded in active markets are based on quoted market prices
or dealer price quotations. For all other financial instruments,
the Group determines fair values using other valuation
techniques.
For financial instruments that trade infrequently and have
little price transparency, fair value is less objective, and
requires varying degrees of judgement depending on liquidity,
concentration, uncertainty of market factors, pricing assumptions
and other risks affecting the specific instrument.
vii. Impairment
A financial instrument that is not credit-impaired on initial
recognition is classified in 'Stage 1' and has its credit risk
continuously monitored by the Group.
If a significant increase in credit risk ("SICR") since initial
recognition is identified, the financial instrument is moved to
'Stage 2' but is not yet deemed to be credit-impaired.
n An SICR is always deemed to occur when the borrower is 30 days
past due on its contractual payments. If the Group becomes aware
ahead of this time of non-compliance or financial difficulties of
the borrower, such as loss of employment, avoiding contact with the
Group then an SICR has also deemed to occur.
n A receivable is always deemed to be in default and
credit-impaired when the borrower is 90 days past due on its
contractual payments or earlier if the Group becomes aware of
severe financial difficulties such as bankruptcy, IVA, abscond or
disappearance, fraudulent activity and other similar events.
If the financial instrument is credit-impaired, the financial
instrument is then moved to 'Stage 3'. Financial instruments in
Stage 3 have their ECL measured based on expected credit losses on
an undiscounted lifetime basis.
The Group measures loss allowances at an amount equal to
lifetime ECL, except for debt investment securities that are
determined to have low credit risk at the reporting date for which
they are measured as a 12-month ECL. Loss allowances for lease
receivables are always measured at an amount equal to lifetime
ECL.
12-month ECL are the portion of ECL that result from default
events on a financial instrument that are possible within the 12
months after the reporting date. Financial instruments for which a
12-month ECL is recognised are referred to as 'Stage 1 financial
instruments'.
Life-time ECL are the ECL that result from all possible default
events over the expected life of a financial instrument. Financial
instruments for which a lifetime ECL is recognised but which are
not credit-impaired are referred to as 'Stage 2 financial
instruments'.
Measurement of ECL
After a detailed review, the Group devised and implemented an
impairment methodology in light of the IFRS 9 requirements outlined
above noting the following:
n The ECL was derived by reviewing the Group's loss rate and
loss given default over the past 8 years by product and
geographical segment.
n The Group has assumed that the future economic conditions will
broadly mirror the current environment and therefore the forecasted
loss levels in the next 3 years will match the Group's experience
in recent years.
n For portfolios where the Group has never had a default in its
history or has robust credit enhancements such as credit insurance
or default indemnities for the entire portfolio, then no IFRS 9
provision is made. At year-end, 37.9% had such credit enhancements
(2017: 41.7%).
n If the Group holds objective evidence through specifically
assessing a credit-impaired receivable and believes it will go on
to completely recover the debt due to the collateral held and
cooperation with the borrower, then no IFRS 9 provision is made
ECL are probability-weighted estimate of credit losses. They are
measured as follows:
n financial assets that are not credit-impaired at the reporting
date: as the present value of all cash shortfalls (i.e. the
difference between the cash flows due to the entity in accordance
with the contract and the cash flows that the Group expects to
receive);
n financial assets that are credit-impaired at the reporting
date: as the difference between the gross carrying amount and the
present value of estimated future cash flows; and
n undrawn loan commitments: as the present value of the
difference between the contractual cash flows that are due to the
Group if the commitment is drawn down and the cash flows that the
Group expects to receive.
Credit-impaired financial assets
At each reporting date, the Group assesses whether financial
assets carried at amortised cost and debt financial assets carried
at FVOCI, and finance lease receivables are credit-impaired
(referred to as 'Stage 3 financial assets'). A financial asset is
'credit-impaired' when one or more events that have a detrimental
impact on the estimated future cash flows of the financial asset
have occurred.
Evidence that a financial asset is credit-impaired includes the
following observable date:
n significant financial difficulty of the borrower or
issuer;
n a breach of contract such as a default or past due event;
n the restructuring of a loan or advance by the Group on terms
that the Group would not consider otherwise;
n it is becoming probable that the borrower will enter
bankruptcy or other financial reorganisation; or
n the disappearance of an active market for a security because
of financial difficulties.
A loan that has been renegotiated due to a deterioration in the
borrower's condition is usually considered to be credit-impaired
unless there is evidence that the risk of not receiving contractual
cash flows has reduced significantly and there are no other
indicators of impairment. In addition, a retail loan that is
overdue for 90 days or more is considered credit-impaired even when
the regulatory definition of default is different.
In making an assessment of whether an investment in sovereign
debt is credit impaired, the Group considers the following
factors:
n the market's assessment of creditworthiness as reflected in
the bond yields;
n the rating agencies' assessments of creditworthiness;
n the country's ability to access the capital markets for new
debt issuance;
n the probability of debt being restructured, resulting in
holders suffering losses through voluntary or mandatory debt
forgiveness;
n The international support mechanisms in place to provide the
necessary support as 'lender of last resort' to that country, as
well as the intention, reflected in public statements, of
governments and agencies to use those mechanisms. This includes an
assessment of the depth of those mechanisms and, irrespective of
the political intent, whether there is the capacity to fulfil the
required criteria.
Presentation of allowance for ECL in the statement of financial
position
Loss allowances for ECL are presented in the statement of
financial position as follows:
n financial assets measured at amortised cost: as a deduction
from the gross carrying amount of the assets
n loan commitments: generally, as a provision;
n debt instruments measured at FVOCI: no loss allowance is
recognised in the statement of financial position because the
carrying amount of these assets is their fair value. However, the
loss allowance is disclosed and is recognised in the fair value
reserve.
Write-off
Loans and debt securities are written off (either partially or
in full) when there is no reasonable expectation of recovering a
financial asset in its entirety or a portion thereof. This is
generally the case when the Group determines that the borrower does
not have assets or sources of income that could generate sufficient
cash flows to repay the amounts subject to the write-off. This
assessment is carried out at the individual asset level.
Recoveries of amounts previously written off are included in
'impairment losses on financial instruments' in the statement of
profit or loss and OCI.
Financial assets that are written off could still be subject to
enforcement activities in order to comply with the Group's
procedures for recovery of amounts due.
J. Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash
equivalents comprise cash and deposit balances with an original
maturity date of three months or less.
K. Loans and advances
Loans and advances' captions in the statement of financial
position include:
n loans and advances measured at amortised cost (see 38 (I)):
They are initially measured at fair value plus incremental direct
transaction costs, and subsequently at their amortised cost using
the effective interest method; and
n finance lease receivable (see 38 (G)).
L. Property, plant and equipment
Items of property, plant and equipment are stated at historical
cost less accumulated depreciation (see below). Historical cost
includes expenditure that is directly attributable to the
acquisition of the items.
The assets' residual values and useful economic lives are
reviewed, and adjusted if appropriate, at each reporting date. An
asset's carrying amount is written down immediately to its
recoverable amount if the asset's carrying amount is greater than
its estimated recoverable amount.
When parts of an item of property, plant and equipment have
different useful lives, those components are accounted for as
separate items of property, plant and equipment.
Depreciation and amortisation
Assets are depreciated or amortised on a straight-line basis, so
as to write off the book value over their estimated useful lives.
The useful lives of property, plant and equipment and intangibles
are as follows: -
Property, plant and equipment
Leasehold improvements to expiration of the lease
IT equipment 4-5 years
Motor vehicles 2.5 years
Furniture and equipment 4 -10 years
M. Intangible assets and goodwill
i. Goodwill
Goodwill that arises on the acquisition of subsidiaries is
measured at cost less accumulated impairment losses.
ii. Software
Software acquired by the Group is measured at cost less
accumulated amortisation and any accumulated impairment losses.
Expenditure on internally developed software is recognised as an
asset when the Group is able to demonstrate: that the product is
technically feasible, its intention and ability to complete the
development and use the software in a manner that will generate
future economic benefits, and that it can reliably measure the
costs to complete the development. The capitalised costs of
internally developed software include all costs directly
attributable to developing the software and capitalised borrowing
costs, and are amortised over its useful life. Internally developed
software is stated at capitalised cost less accumulated
amortisation and any accumulated impairment losses.
Software is amortised on a straight-line basis in profit or loss
over its estimated useful life, from the date on which it is
available for use. Amortisation methods, useful lives and residual
values are reviewed at each reporting date and adjusted if
appropriate.
iii. Other
Intangible assets that are acquired by an entity and having
finite useful lives are measured at cost less accumulated
amortisation and any accumulated impairment losses.
Intangible assets acquired as part of a business combination,
with an indefinite useful live are measured at fair value.
Intangible assets with indefinite useful lives are not amortised
but instead are subject to impairment testing at least
annually.
The useful lives of intangibles are as follows: -
Customer contracts and lists to expiration of the agreement
Business intellectual property rights 4 years - indefinite
Website development costs indefinite
Software 5 years
N. Impairment of non-financial assets
At each reporting date, the Group reviews the carrying amounts
of its non-financial assets (other than deferred tax assets) to
determine whether there is any indication of impairment. If any
such indication exists, the asset's recoverable amount is
estimated. Goodwill is tested annually for impairment.
For impairment testing, assets are group together into the
smallest group of assets that generates cash inflows from
continuing use that is largely independent of the cash inflows of
other assets or Cash Generating Units ("CGUs"). Goodwill arising
from a business combination is allocated to CGUs or groups of CGUs
that are expected to benefit from the synergies of the
combination.
The 'recoverable amount' of an asset or CGU is the greater of
its value in use and its fair value less cost to sell. 'Value in
use' is based on the estimated future cash flows, discounted to
their present value using a pre=tax discount rate that reflects
current market assessments of the time value of money and the risks
specific to the asset or CGU.
An impairment loss is recognised if the carrying amount of an
asset or CGU exceeds its recoverable amount.
The Group's corporate assets do not generate separate cash
inflows and are used by more than one CGU. Corporate assets are
allocated to CGUs on a reasonable and consistent basis and tested
for impairment as part of the testing of the CGUs to which the
corporate assets are located.
Impairment losses are recognised in profit or loss. They are
allocated first to reduce the carrying amount of any goodwill
allocated to the CGU, and then to reduce the carrying amounts of
the other assets in the CGU on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. For
other assets, an impairment loss is reversed only to the extent
that the asset's carrying amount does not exceed the carrying
amount that would have been determined, net of depreciation or
amortisation, if no impairment loss had been recognised.
O. Deposits, debt securities issued and subordinated
liabilities
Deposits, debt securities issued and subordinated liabilities
are the Group's sources of debt funding.
The Group classifies capital instruments as financial
liabilities or equity instruments in accordance with the substance
of the contractual terms of the instruments.
Deposits, debt securities issued and subordinated liabilities
are initially measured at fair value minus incremental direct
transaction costs, and subsequently measured at their amortised
cost using the effective interest method.
Fiduciary deposits received on behalf of clients by way of a
fiduciary agreement are placed with external parties and are not
recognised in the statement of financial position.
The Group could receive funds for its prepaid card activities.
These funds would be held in a fiduciary capacity for the sole
purpose of making payments as and when card-holders utilise the
credit on their cards and therefore would not be recognised in the
statement of financial position.
P. Employee benefits
i. Long term employee benefits
Pension obligations
The Group has pension obligations arising from both defined
benefit and defined contribution pension plans.
A defined contribution pension plan is one under which the Group
pays fixed contributions into a separate fund and has no legal or
constructive obligations to pay further contributions. Defined
benefit pension plans define an amount of pension benefit that an
employee will receive on retirement, usually dependent on one or
more factors such as age, years of service and remuneration.
Under the defined benefit pension plan, in accordance with IAS
19 Employee benefits, the full service cost for the period,
adjusted for any changes to the plan, is charged to the income
statement. A charge equal to the expected increase in the present
value of the plan liabilities, as a result of the plan liabilities
being one year closer to settlement, and a credit reflecting the
long-term expected return on assets based on the market value of
the scheme assets at the beginning of the period, is included in
the income statement.
The statement of financial position records as an asset or
liability as appropriate, the difference between the market value
of the plan assets and the present value of the accrued plan
liabilities. The difference between the expected return on assets
and that achieved in the period, is recognised in the income
statement in the year in which they arise. The defined benefit
pension plan obligation is calculated by independent actuaries
using the projected unit credit method and a discount rate based on
the yield on high quality rated corporate bonds.
The Group's defined contribution pension obligations arise from
contributions paid to a Group personal pension plan, an ex gratia
pension plan, employee personal pension plans and employee
co-operative insurance plans. For these pension plans, the amounts
charged to the income statement represent the contributions payable
during the year.
ii. Share-based compensation
The Group maintains a share option programme which allows
certain Group employees to acquire shares of the Group. The change
in the fair value of options granted is recognised as an employee
expense with a corresponding change in equity. The fair value of
the options is measured at grant date and spread over the period
during which the employees become unconditionally entitled to the
options.
At each reporting date, the Group revises its estimate of the
number of options that are expected to vest and recognises the
impact of the revision to original estimates, if any, in the income
statement, with a corresponding adjustment to equity.
The share option programme was originally set up for Group
employees to subscribe for shares in Conister Trust Limited (now
Conister Bank Limited). Since the Scheme of Arrangement, the
shareholders of the Bank became shareholders of the Company. The
share option programme is now operated by the Company. The fair
value is estimated using a proprietary binomial probability model.
The proceeds received, net of any directly attributable transaction
costs, are credited to share capital (nominal value) and share
premium when the options are exercised.
Q. Share capital and reserves
Share issue costs
Incremental costs that are directly attributable to the issue of
an equity instrument are deducted from the initial measurement of
the equity instruments.
R. Earnings per share
The Group presents basic and diluted EPS data for its ordinary
shares. Basic EPS is calculated by dividing the profit or loss that
is attributable to ordinary shareholders of the Bank by the
weighted-average number of ordinary shares outstanding during the
period. Diluted EPS is determined by adjusting profit or loss that
is attributable to ordinary shareholders and the weighted-average
number of ordinary shares outstanding for the effects of all
dilutive potential ordinary shares, which comprise share options
granted employees.
S. Segmental reporting
A segment is a distinguishable component of the Group that is
engaged either in providing products or services (business
segment), or in providing products or services within a particular
economic environment (geographical segment), which is subject to
risks and rewards that are different from those of other segments.
The Group's primary format for segmental reporting is based on
business segments. An operating segment is a component of the Group
that engages in business activities from which it may earn revenues
and incur expenses, including revenues and expenses relating to
transactions with any of the Group's other components, whose
operating results are regularly reviewed by the Group's chief
operating decision maker (CODM) to make decisions about resources
to be allocated to the segment and assess its performance, and for
which discrete financial information is available.
Segment results are reported to the Group's CEO (being the CODM)
include items that are directly attributable to a segment as well
as those that can be allocated on a reasonable basis.
39. Standards issued but not yet effective
A number of new standards are effective for annual periods
beginning after 1 January 2018 and earlier application is
permitted; however, the Group has not early adopted the new or
amended standards in preparing these consolidated financial
statements.
Standards Effective date
(accounting
periods
commencing on
or after)
IFRIC 23 Uncertainty over Income Tax Treatments (issued 1 January 2019
on 7 June 2017)
Amendments to IFRS 9: Prepayment Features with Negative 1 January 2019
Compensation (issued on 12 October 2017)
IFRS 16 Leases (issued on 13 January 2016) 1 January 2019
Of those standards that are not yet effective, IFRS 16 is
expected to have a material impact on the Group's financial
statements in the period of initial application.
IFRS 16 Leases
The Group is required to adopt IFRS 16 Leases from 1 January
2019. The Group has assessed the estimated impact that initial
application of IFRS 16 will have on its consolidated financial
statements, as described below. The actual impacts of adopting the
standard on 1 January 2019 may change because:
n the Group has not finalised the testing and assessment of
controls over its new IT systems; and
n the new accounting policies are subject to change until the
Group presents its first financial statements that include the date
of initial application.
IFRS 16 introduces a single, on-balance sheet lease accounting
model for lessees. A lessee recognises a right-of use asset
representing its right to use the underlying asset and a lease
liability representing its obligation to make lease payments. These
are recognition exemptions for short-term leases and leases of
low-value items. Lessor accounting remains similar to the current
standard - i.e. lessors continue to classify leases as finance or
operating leases.
IFRS 16 replaces existing leases guidance, including IAS 17
Leases, IFRIC 4 Determining whether an Arrangement contains a
Lease, SIC-15 Operating Leases - Incentives and SIC-27 Evaluating
the Substance of Transactions Involving the Legal Form of a
Lease.
Leases in which the Group is a lessor
No significant impact is expected for leases in which the Group
is a lessor.
Leases in which the Group is a lessee
The group will recognise new assets and liabilities for its
office premises and car parking sub-leases. As at 31 December 2018,
the Group's future minimum lease payments under non-cancellable
operating leases amounted to GBP1,166,000 (2017: 1,192,000) on an
undiscounted basis. (see note 34)
Transition
The Group plans to apply IFRS 16 initially on 1 January 2019,
using the modified retrospective approach. Therefore, the
cumulative effect of adopting IFRS 16 will be recognised as an
adjustment to the opening balance of retained earnings at 1 January
2019, with no restatement of comparative information.
The Group plans to apply the practical expedient to grandfather
the definition of a lease on transition. This means that it will
apply IFRS 16 to all contracts entered into before 1 January 2019
and identified as leases in accordance with IAS 17 and IFRIC 4.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR SEWFAAFUSEED
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March 29, 2019 03:00 ET (07:00 GMT)
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