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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Manx Financial Group Plc | LSE:MFX | London | Ordinary Share | IM00B28ZPX83 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 19.00 | 18.00 | 20.00 | 19.00 | 18.50 | 18.50 | 13,921 | 10:06:17 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Personal Credit Institutions | 53.34M | 6.14M | 0.0527 | 3.61 | 22.14M |
From Jul 2019 to Jul 2024
TIDMMFX
RNS Number : 4385R
Manx Financial Group PLC
30 June 2020
FOR IMMEDIATE RELEASE 30 June 2020
Manx Financial Group PLC (the 'Company')
Report and accounts for the year ended 31 December 2019
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 2019.
Jim Mellon, Executive Chairman, commented: "I am pleased to announce that the outcome for 2019 showed a significant increase in profitability in comparison to 2018, finishing the year with an 11.54% uplift. We continued to strengthen our balance sheet with a significant increase in liquidity which has prepared us well for dealing with the issues surrounding COVID-19. The share buy-back and subsequent cancellation earlier this year has both eradicated market uncertainty and also increased the basic net asset value per share for the benefit of all shareholders. Whilst it is still too early to predict the full year outcome for 2020, we are as well placed as any to deal with changes in the economic outlook for both the Isle of Man and the UK."
The 2019 Audited Annual Report and Accounts is being posted to Shareholders and 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
Introduction
Normally, it would be pleasing to announce that 2019 produced record results, with pre-tax profit increasing by 11.5% to GBP3.0 million (2018: GBP2.7 million) and profit after tax increasing by 8.4% to GBP2.7 million (2018: GBP2.5 million). However, it would be remiss of me, in the publication of these encouraging figures, to not comment on the impact, both here and across the world, of COVID-19. Government actions to stop the spread of the virus have, in turn, led to a cessation of economic activity in many sectors which, despite unprecedented financial support, will clearly take some time to recover to their previous levels. As a consequence, I have delayed the publication of these accounts to enable me to provide as much clarity as possible on the potential effect of COVID-19 to the Group and its subsidiaries.
As a Group, we are as well prepared as possible for the financial impact of the virus on our operations and, thankfully over the years, we have been cautious in our provisioning and understood the need to maintain maximum liquidity. I will return to this topic later in my report.
Our 2019 results show operating income increasing by 28.1% to GBP16.9 million (2018: GBP13.2 million), which includes a 15.2% growth in our net interest income to GBP17.9 million (2018: GBP15.6 million) and a further reduction of 11.2% in commission expense to GBP5.4 million (2018: GBP6.1 million). These figures represent the effect of a record year for gross new business origination of GBP153.8 million (2018: GBP102.1 million), an increase of 50.6%.
Against this, our operating expenses ex-provisions have grown by 24.4% to GBP11.9 million (2018: GBP9.6 million), the majority of which reflects the continuing investment in our UK expansion. In line with our continuing policy of reviewing Conister Bank's loan book, we have increased provisions by a further GBP1.9 million (2018: GBP0.9 million). Thus, in balance sheet terms, our cumulative provisions of GBP4.8 million (2018: GBP3.4 million) against the net loan book stand at only 2.7% (2018: 2.3%) - further confirming the strength of Conister Bank's credit underwriting. Despite our strategic investment in UK expansion, our operating cost (less provisions) to operating income ratio has improved to 70.8% (2018: 72.9%).
Turning to our balance sheet, our loan book has grown by 21.0% to GBP179.4 million (2018: GBP148.3 million) which, whilst not quite the growth that I was anticipating, is still a notable achievement. I previously mentioned that we have taken steps to increase Conister Bank's liquidity, and our cash and near cash has increased by 52.4% to GBP61.4 million (2018: GBP40.3 million), taking advantage of lower interest rates and, as a consequence, our customer deposits have grown by 32.4% to GBP209.9 million (2018: GBP158.5 million). Our net interest yield on deposits at 10.0% remains much the same as the previous year (2018: 10.5%) despite our gain in liquidity. Thus, our total asset base has increased by 28.4% to GBP252.9 million (2018: GBP196.9 million).
Shareholder equity has increased by 13.2% to GBP22.3 million (2018: GBP19.7 million) and basic earnings per share have grown to 1.98 pence (2018: 1.88 pence).
Our key objectives for 2020
Turning to the current year, our fundamental focus is the protection of shareholder value. Thus, following a recent review, our strategic concentration is to:
n Provide the highest quality service throughout our operations to all customers, ensuring that their treatment is both fair and appropriate;
n Adopt a pro-active strategy of managing risk within a structured compliant regime;
n Concentrate on developing our core business by considered acquisitions, increasing prudential lending and augmenting the range of financial services we offer;
n Implement 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 and other associated operational costs;
n Focus on improving the return on the liabilities side of our balance sheet by developing the newly introduced Treasury management function and structure; and
n Manage our balance sheet to exceed, as far as possible, the regulatory requirements for capital adequacy.
Risk and Governance
Immediately following this Statement, I detail our approach to risk and governance, including an assessment of the business models and strategies of our operating subsidiaries. In particular, I set out our perceived risks and how these are managed, together with a review of our regulatory compliance and also how we meet the requirements of the QCA Code which we adopted last year. Rather than reiterate these methodologies at this point, I would ask that you take the opportunity to review these topics in conjunction with my report.
Operating subsidiaries
Conister Bank Limited (the "Bank")
For some time, we have believed our VAT recovery rate was neither fair nor reasonable. I am pleased to report that the decision by the European Union in favour of Volkswagen Financial Services (UK) Limited versus the UK's HMRC will allow progress to be made in recovering our outstanding debtor: this figure now stands at GBP0.91 million (2018: GBP1.05 million). I would expect good progress to be made this year to conclude this matter.
Our strategy to increase lending in our two geographical areas has continued to prove successful. Advances during the year more than doubled the level achieved just two years ago, with lending GBP51.7 million ahead of last year at GBP153.8 million (2018: GBP102.1 million). Of particular note were our Isle of Man advances, which grew by 15.8% to GBP31.6 million (2018: GBP27.3 million) and our new Newbury office which advanced GBP117.4 million (2018: GBP72.7 million). The Group's recently acquired broker Bluestar Solutions Limited, having integrated well into the Bank's operating structure, generated advances GBP2.7 million ahead of last year at GBP4.8 million (2018: GBP2.1 million). This growth has not been at the cost of asset quality with the performing loan book being a commendable 97.4% (2018: 97.8%). Our net loan book grew by 20.8% to GBP179.4 million (2018: GBP148.3 million). This led to interest income increasing by GBP3.2 million to GBP22.4 million (2018: GBP19.2 million).
Our Isle of Man deposit base remains very loyal and during the year we achieved record monthly retention rates which is a tribute to our customers, our people and our new systems. With deposits increasing by GBP51.4 million to GBP209.9 million (2018: GBP158.5 million) we continue to have ample deposits to fund our growth ambitions. Although in the short term this has negatively impacted our Loan to Deposit ratio, normally a key efficiency measure, 85.6% (2018: 93.9%). This prudent growth in deposits increased our interest expense by GBP0.8 million to GBP4.8 million (2018: GBP4.0 million).
I have discussed over the last few years the need to reduce our dependence on overly expensive introducers and I am pleased to report continued progress on this matter despite the 50.6% increase in advances. During the period our commissions paid reduced by 7.1% to GBP5.7 million (2018: GBP6.1 million).
As a result of the above our net trading income increased by 31.1%, GBP2.8 million, to GBP11.9 million (2018: GBP9.1 million) which led operating income also increasing by 30.7%, GBP2.9 million, to GBP12.4 million (2018: GBP9.5 million).
Overheads increased by GBP1.0 million to GBP7.2 million (2018: GBP6.2 million) reflecting the first full year of our Newbury office and the continued bolstering of our control functions. With our loan book increasing, provisioning increased in the year by GBP1.0 million to GBP1.9 million (2018: GBP0.9 million). Depreciation increased by GBP0.3 million (2018: GBP0.0 million) driven by accounting for leases in relation to a structured product counterparty. Other costs netted to zero year on year. Thus, in total the cost base increased by GBP2.5 million to GBP9.8 million (2018: GBP7.3 million).
For the year, profit before taxation increased by 18.0%, GBP0.4 million, to GBP2.6 million (2018: GBP2.2 million).
Total assets, driven by treasury and net loan book growth, increased by 28.7%, GBP55.0 million, to GBP245.7 million (2018: GBP190.7 million). During the year we continued to improve the capitalisation of the Bank by increasing the called-up share capital by a further GBP1.7 million to GBP10.8 million (2018: GBP9.1 million). Shareholder funds increased by 18.1%, GBP3.8 million, to GBP25.0 million (2018: GBP21.2 million).
Edgewater Associates Limited ("EAL")
Our independent financial advisory business remains the largest on the Isle of Man and had a satisfactory year despite strategic headwinds from both a legislative and VAT perspective. Both of these issues were dealt with in the year and the business is now positioned for further growth knowing its competitors have still to navigate these matters. Such uncertainties will create opportunities for EAL which I would expect to be reflected in its performance in the coming year.
A key internal measure, which is driven by customer satisfaction, is renewal income as a percentage of operating income. This year I am pleased to report it has increased by 4.0% to 43.6% (2018: 39.6%) as our dedicated staff continued to deliver unparalleled service in this sector. Renewal income of GBP1.1 million (2018: GBP1.0 million) was supported by an improved performance by our general insurance team. This helped to offset a small dip in new business of GBP0.1 million to GBP1.2 million (2018: GBP1.3 million) as uncertainties to changes in pension legislation led to a temporary halt in new pension business. Operating income remained stable at GBP2.5 million (2018: GBP2.5 million). With costs decreasing by 5.8%, GBP0.1 million, to GBP2.1 million (2018: GBP2.2 million) EAL's underlying profit for the year increased by 26.5%, GBP0.1 million, GBP0.5 million (2018: GBP0.4 million). After a one-off VAT repayment, the profit for the year was GBP0.2 million (2018: GBP0.2 million).
Total assets decreased by 1.4% to GBP3.1 million (2018: GBP3.2 million).
Manx FX Limited ("MFX")
Our fledgling foreign exchange business continues to perform well with performance slightly ahead of last year. The business is prudently increasing its customer base and considering new products and territories to operate within. I still expect volatility in the results of MFX until it achieves its aim of broadening its client base.
Income increased by 4.6% to GBP0.8 million (2018: GBP0.8 million) and costs were in line with last year. Profit for the year increased by 2.4% to GBP0.5 million (2018: GBP0.5 million).
The business has a very liquid balance sheet and declared both an interim dividend, GBP0.4 million, and a final dividend of GBP0.7 million in the year.
An update on the provision of a dividend
In the last Chairman's Statement, I discussed the need for the Group to reward shareholders with a dividend. Unfortunately, the advent of COVID-19 has meant that our regulators are keen to ensure that we preserve as much of our capital within the Group and the Bank as possible. As a result, we are working on a scheme whereby shareholders will be eligible for a script-based payment, with the intention of rewarding long-term holders. I expect to announce the details of this scheme later this year.
Post Period Events
Beer Swaps Limited ("BSL")
The agreement entered into with BSL in 2018 included an option to acquire the remaining shares by April 2021. The Bank acquired further shares in BSL to increase its ordinary shareholding to 75% for a cash consideration of approximately GBP0.5 million. In addition, the Bank simplified the capital structure of BSL by repaying all director loans, being GBP0.1 million, and all issued preference shares, being GBP0.2 million. For the year ended 31 March 2019, BSL reported turnover of GBP0.4 million and a profit before tax of GBP0.1 million with net assets of GBP0.2 million. I am pleased to note that this is yet another successful purchase and integration which bodes well for our future acquisition strategy.
April 2020 EGM
At the Group's EGM on 9 April 2020, two resolutions were considered by shareholders: firstly, to allow the buyback and cancellation of 16,966,158 ordinary shares in return for entering into a GBP1.6 million loan; and then to consider a request to waive Rule 9 of the Takeover Code. Both of these resolutions were passed with significant majorities. As a result, the Group has been able to eliminate the selling overhang of the shareholdings associated with Southern Rock which had been depressing the Group's share price since the announcement of an intention of sale made in November 2018. The share cancellation has had a positive effect on the calculation of net asset value per share which is to the benefit of all shareholders.
Board Changes
Following the EGM, John Banks stepped down from the Board and I would like to take this opportunity to thank him for his invaluable contribution in the time that he was with us and wish him well for the future. In May 2020, we welcomed John Spellman who has joined the boards of both the Group and the Bank. John's commercial experience will be invaluable as we continue to grow the businesses, both in the Isle of Man and UK.
Outlook
The Group's response to COVID-19 was carefully considered and professionally executed with the wellbeing of our staff, their families, and our customers being our principal concern. We deployed our working from home strategy which has allowed the business to continue to function seamlessly for all of our customers for the last ten weeks. As I write, the Isle of Man has had no further cases for thirty seven consecutive days with life returning to much as normal, but with our borders shut. The Bank, in conjunction with the Island's principal clearing banks, has worked very successfully with the Isle of Man Treasury in the provision of disruption loans to those businesses facing financial challenges. These loans are at advantageous terms and are 80% Government backed.
Unfortunately, the situation in the UK, whilst clearly improving, is still somewhat concerning. Conister Finance & Leasing, a subsidiary of the Bank, is working with its clients to obtain the relevant UK Government's business support packages.
Trading for the initial three months of the year was strong in all areas, but as the year progressed, a number of our loan customers have found difficulty in meeting their initial terms. As a result, we are now in continual dialogue with these customers to help them through any unforeseen economic shock. However, the Bank's response has not been confined to forbearance and renegotiation, but has extended to respecting the commitments made to our customers and remaining open for new business. Whilst we have continued with our conservative approach to provisioning, I am pleased to note that recently our clients' circumstances appear to be improving, especially in the Isle of Man where new business acquisition continues apace.
Almost all commentators predict a forthcoming recession in the UK, with the impact of COVID-19 together with Brexit making any realistic assessment almost impossible. Our current view is that it will take some time before the economy becomes stable and, as a result, we anticipate that it will be well into the first half of 2021 before confidence returns.
The earlier slowdown in new advances will, in turn, lead to a reduction in our income interest. The acceptance of forbearance requests will also impact the income statement. As a result, we anticipate that our net loan book will reduce. Factoring this into our planning, we have built up our liquidity to the highest level that we are able, ensuring that we are well placed to take advantage of all lending opportunities. Additionally, any reduction in our net loan book will further improve our regulatory capital ratios.
In short, the financial impact of the virus on the full year's figures is still too uncertain to provide any reliable guidance but our strong cash reserves and diverse income streams will prove valuable assets in the forthcoming months.
I would like to thank my fellow Board members, the Group's executive team and staff for their continued contribution to our ongoing business. I would also like to thank our shareholders and customers for their continued support.
Jim Mellon
Executive Chairman
26 June 2020
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
Hot Features
Premium
2019 2018
For the year ended 31 December Notes GBP000 GBP000
-------------------------------------------------------- ------ -------- --------
Interest income 22,320 19,115
Interest expense (4,391) (3,547)
Net interest income 10 17,929 15,568
Fee and commission income 11 3,796 3,371
Fee and commission expense 11 (5,426) (6,109)
Net trading income 16,299 12,830
Other operating income 308 131
Loss on trading asset 21 (1) (4)
Realised gains on debt securities 20 179 135
Terminal funding 12 80 74
Operating income 16,865 13,166
Personnel expenses 13 (6,762) (5,703)
Other expenses 14 (4,135) (3,465)
Impairment on loans and advances to customers 15 (1,900) (857)
Depreciation 24 (638) (184)
Amortisation and impairment of intangibles 25 (430) (396)
Share of profit of equity accounted investees,
net of tax 32 124 30
VAT recovery 23 (101) 119
Profit before tax payable 16 3,023 2,710
Income tax expense 17 (350) (243)
Profit for the year 2,673 2,467
-------- --------
Other comprehensive income:
Items that will be reclassified to profit
or loss
Unrealised gains on debt securities 20 51 44
Items that will never be reclassified to profit
or loss
Actuarial loss on defined benefit pension scheme
taken to equity 30 (128) (50)
Total comprehensive income for the period attributable
to owners 2,596 2,461
-------- --------
Earnings per share - Profit for the year
Basic earnings per share (pence) 18 2.04 1.88
Diluted earnings per share (pence) 18 1.66 1.54
Earnings per share - Total comprehensive income
for the year
Basic earnings per share (pence) 18 1.98 1.88
Diluted earnings per share (pence) 18 1.62 1.54
The Directors believe that all results derive
from continuing activities.
COMPANY STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
2019 2018
For the year ended 31 December Notes GBP000 GBP000
------------------------------------------------- ------ -------- --------
Dividend income 1,466 -
Interest income 564 466
Operating income 2,030 466
Personnel expenses (146) (177)
Administration expenses (100) (132)
Depreciation expense (101) (41)
Profit before tax payable 16 1,683 116
Tax payable - -
Profit for the year 1,683 116
Total comprehensive income for the year 1,683 116
------------------------------------------------- ------ -------- --------
The Directors believe that all results derive
from continuing activities.
CONSOLIDATED AND COMPANY STATEMENTS OF CHANGES IN EQUITY
2019 2018
As at 31 December Notes GBP000 GBP000
--------------------------------- -------- -------- --------
Assets
Cash and cash equivalents 19 14,620 9,753
Debt securities 20 46,792 30,534
Trading asset 21 19 20
Loans and advances to customers 22 179,370 148,278
Trade and other receivables 23 2,478 2,491
Property, plant and equipment 24 3,299 1,384
Intangible assets 25 2,293 1,952
Goodwill 32 3,734 2,344
Investment in associates 32 282 158
Total assets 252,887 196,914
Liabilities
Deposits from customers 26 209,933 158,500
Creditors and accrued charges 27 2,972 2,010
Contingent consideration 32 863 -
Block creditors 28 - 138
Loan notes 29 15,971 15,871
Pension liability 30 688 584
Deferred tax liability 17 141 88
Total liabilities 230,568 177,191
Equity
Called up share capital 31 20,732 20,732
Profit and loss account 1,587 (1,009)
Total equity 22,319 19,723
Total liabilities and equity 252,887 196,914
The financial statements were approved by the Board of Directors on 29 June 2020 and signed on its behalf by:
Jim Mellon Denham Eke Douglas Grant Executive Chairman Chief Executive Officer Group Finance Director
CONSOLIDATED AND COMPANY STATEMENTS OF CHANGES IN EQUITY
2019 2018
As at 31 December Notes GBP000 GBP000
------------------------------------- -------- --------- ---------
Assets
Cash and cash equivalents 19 119 1,646
Trade and other receivables 23 231 32
Amounts due from Group undertakings 32 1,016 -
Property, plant and equipment 24 450 126
Intangible assets 7 -
Investment in Group undertakings 32 17,822 16,172
Subordinated loans 32 7,778 7,778
Total assets 27,423 25,754
Liabilities
Creditors and accrued charges 27 575 94
Amounts due to Group undertakings 32 775 1,370
Loan notes 29 15,971 15,871
Total liabilities 17,321 17,335
Equity
Called up share capital 31 20,732 20,732
Profit and loss account (10,630) (12,313)
Total equity 10,102 8,419
Total liabilities and equity 27,423 25,754
Share Profit Total
capital and loss equity
Group GBP000 account GBP000
GBP000
-------------------------------- --------- ---------- --------
Balance as at 1 January 2018 20,732 (3,470) 17,262
Profit for the year - 2,467 2,467
Other comprehensive income - (6) (6)
Transactions with owners - - -
Balance as at 31 December 2018 20,732 (1,009) 19,723
Profit for the year - 2,673 2,673
Other comprehensive income - (77) (77)
Transactions with owners - - -
Balance as at 31 December 2019 20,732 1,587 22,319
* The Group has initially applied IFRS 16 at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying IFRS 16 is recognised in retained earnings at the date of initial application. See Note 5 for further details.
Share Profit Total
Capital and loss equity
Company GBP000 account GBP000
GBP000
-------------------------------- --------- ---------- --------
Balance as at 1 January 2018 20,732 (12,429) 8,303
Profit for the year - 116 116
Transactions with owners - - -
Balance as at 31 December 2018 20,732 (12,313) 8,419
Profit for the year - 1,683 1,683
Transactions with owners - - -
Balance as at 31 December 2019 20,732 (10,630) 10,102
2019 2018
For the year ended 31 December Notes GBP000 GBP000
------------------------------------------------------- -------- --------- ---------
RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING
CASH FLOWS
Profit before tax 3,023 2,710
Adjustments for:
Depreciation 24 638 184
Amortisation and impairment of intangibles 25 430 396
Realised gains on debt securities 20 (179) (135)
Share of profit of equity accounted investees 32 (124) (30)
Contingent consideration interest expense 32 88 -
Pension charge included in personnel costs 30 17 15
3,893 3,140
Changes in:
Trading asset 21 1 4
Trade and other receivables 118 (583)
Creditors and accrued charges 144 (1,169)
Net cash flow from trading activities 4,156 1,392
Changes in:
Loans and advances to customers (31,092) (25,732)
Deposits from customers 51,433 16,228
Pension contribution 30 (41) (41)
Cash inflow / (outflow) from operating activities 24,456 (8,153)
CASH FLOW STATEMENT
Cash from operating activities
Cash inflow / (outflow) from operating activities 24,456 (8,153)
Income taxes paid (379) (182)
Net cash inflow / (outflow) from operating activities 24,077 (8,335)
Cash flows from investing activities
Purchase of property, plant and equipment 24 (1,634) (1,118)
Purchase of intangible assets 25 (132) (629)
Sale of tangible fixed assets 24 107 -
Acquisition of subsidiary or associate, net of
cash acquired 32 (1,337) (90)
(Sale) / purchase of debt securities 20 (16,028) 3,917
Net cash (outflow) / inflow from investing activities (19,024) 2,080
Cash flows from financing activities
Receipt of loan notes 29 100 6,876
Payment of lease liabilities (capital) 5 (148) -
Decrease in borrowings from block creditors 28 (138) (613)
Net cash (outflow) / inflow from financing activities (186) 6,263
Net increase in cash and cash equivalents 4,867 8
Cash and cash equivalents at 1 January 9,753 9,745
Cash and cash equivalents at 31 December 14,620 9,753
Included in cash flows are:
Interest received - cash amounts 21,441 18,362
Interest paid - cash amounts (4,251) (3,434)
2019 2018
For the year ended 31 December Notes GBP000 GBP000
-------------------------------------------------------- -------- --------- --------
RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING
CASH FLOWS
Profit before tax 1,683 116
Adjustments for:
Depreciation 24 101 41
Dividend declared (1,466) -
318 157
Changes in:
Amounts due from group undertakings - 16
Trade and other receivables (199) (10)
Creditors and accrued charges 98 (45)
Amounts due to group undertakings (595) (1,147)
Cash outflow from operating activities (378) (1,029)
CASH FLOW STATEMENT
Cash from operating activities
Cash outflow from operating activities (378) (1,029)
Income taxes paid - -
Net cash outflow from operating activities (378) (1,029)
Cash flows from investing activities
Dividend received 450 -
Increase in investment in group undertakings 32 (1,650) (2,400)
Issue of subordinated loans 32 - (2,000)
Purchase of intangible assets (7) -
Net cash outflow from investing activities (1,207) (4,400)
Cash flows from financing activities
Receipt of loan notes 29 100 6,875
Payment of finance lease liability (42) -
Net cash inflow from financing activities 58 6,875
Net (decrease) / increase in cash and cash equivalents (1,527) 1,446
Cash and cash equivalents at 1 January 1,646 200
Cash and cash equivalents at 31 December 119 1,646
Notes to the accounts
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 2019 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 16 Leases has 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(G)(vii) - measurement of Expected Credit Loss ("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;
n Note 32 - Measurement of contingent consideration.
5. Changes in accounting policies
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 16 Leases
The Group has initially adopted IFRS 16 Leases from 1 January 2019. A number of other new standards are effective from 1 January 2019 but they do not have a material effect on the Group's financial statements.
IFRS 16 introduced a single, on-balance sheet accounting model for lessees. As a result, the Group, as a lessee, has recognised right-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments. Lessor accounting remains similar to previous accounting policies.
The Group has applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings as at 1 January 2019. Accordingly, the comparative information presented for 2018 has not been restated. Therefore, it is presented as previously reported under IAS 17 and related interpretations. The details of the changes in accounting policies are disclosed below.
A. Definition of a lease
Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining Whether an Arrangement contains a Lease. The Group now assesses whether a contract is, or contains, a lease based on the new definition of a lease. Under IFRS 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.
On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. It applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts entered into or changed on or after 1 January 2019.
B. As a lessee
The Group leases many assets, including properties and IT equipment.
As a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred substantially all of the risks and rewards of ownership. Under IFRS 16, the Group recognises right-of-use assets and lease liabilities for most leases, that is these leases are presented on the Statement of Financial Position.
However, the Group has elected not to recognise right-of-use assets and lease liabilities for some leases of low-value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. The Group presents right-of-use assets and lease liability separately on the Statement of Financial Position.
i. Significant accounting policies
The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less accumulated depreciation and impairment loss and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.
The lease liability is subsequently increased by the interest cost of the lease liability and decreased by the lease payment made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised, or a termination option is reasonably certain not to be exercised.
The Group has applied judgment to determine the lease term for some lease contracts in which it is a lessee that include renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of lease liabilities and right-of-use assets recognised.
ii. Impacts on transition
Previously, the Group classified property leases as operating leases under IAS 17. The leases typically run for a period of 10 years. The operating lease commitment relating to these leases at 31 December 2018 as disclosed in the Group's consolidated financial statements was GBP1,166,000 (see note 34).
At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 January 2019. The weighted average rate applied is 5.5% per annum.
Right-of-use assets are measured at an amount equal to the lease liability, adjusted by the amount of net prepaid and accrued lease payments of GBP118,234.
The impact on transition is summarised below.
As at 1 January 2019 GBP000 -------------------------------------- --------- Right-of-use assets 737 Net accrued operating lease payments 118 Lease liabilities (855) Retained earnings -
iii. Impacts for the year
Right-of-use assets
The carrying amount of right-of-use assets at the end of the year is as follows:
Right-of-use
Property assets
GBP000 GBP000
Balance at 1 January 2019 737 737
Depreciation expense (165) (165)
Balance at 31 December 2019 572 572
Lease liability
The carrying amount of lease liability at the end of the year is as follows:
Right-of-use
Property assets
GBP000 GBP000
Balance at 1 January 2019 855 855
Interest expense 47 47
Rent payment (195) (195)
Balance at 31 December 2019 707 707
The Group has classified cash payments for the principal portion of lease payments as financing activities.
iv. Exemptions taken
The Group used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:
n Applied the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term; and
n Exclude initial direct costs from measuring the right-of-use asset at the date of initial application.
C. As a lessor
The accounting policies applicable to the Group as a lessor are not different from those under IAS 17.
The Group is not required to make any adjustments on transition to IFRS 16 for leases in which it acts as a lessor.
6. Classification of financial assets and financial liabilities
For description of how the Group classifies financial assets and liabilities, see Note 38(G)(ii).
The following table provides reconciliation between line items in the statement of financial position and categories of financial instruments.
Designated FVOCI FVOCI Total
Mandatorily as at - debt - equity Amortised carrying
at FVTPL FVTPL instruments instruments cost amount
31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Cash and cash equivalents - - - - 14,620 14,620
Debt securities - - 46,792 - - 46,792
Trading assets 19 - - - - 19
Loans and advances
to customers - - - - 179,370 179,370
Trade and other receivables - - - - 2,478 2,478
------------------------------- -------------- ----------- ------------- ------------- ------------ ----------
Total financial assets 19 - 46,792 - 196,468 243,279
Deposits from customers - - - - 209,933 209,933
Creditor and accrued
charges - - - - 2,972 2,972
Block creditors - - - - - -
Loan notes - - - - 15,971 15,971
------------------------------- -------------- ----------- ------------- ------------- ------------ ----------
Total financial liabilities - - - - 228,876 228,876
------------------------------- -------------- ----------- ------------- ------------- ------------ ----------
FVOCI Total
Mandatorily Designated FVOCI - equity Amortised carrying
at FVTPL as at - debt instruments cost amount
FVTPL instruments
31 December 2018 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
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
---------------------------- -------------- ------------- -------------- ------------- ------------ ----------
7. Fair value of financial instruments
For description of the Group's fair value measurement accounting policy, see Note 38(G)(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 2019 1 2 3 GBP000
GBP000 GBP000 GBP000
-------------------- -------- -------- -------- --------
Debt securities 46,792 - - 46,792
Trading assets 19 - - 19
-------- --------
46,811 - - 46,811
-------------------- -------- -------- -------- --------
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
-------------------- -------- -------- -------- --------
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 2019 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash and cash equivalents - 14,620 - 14,620 14,620
Loans and advances to customers - - 179,370 179,370 179,370
Trade and other receivables - - 2,478 2,478 2,478
Investment in associate - - 282 282 282
- 14,620 182,130 196,750 196,750
----------- --------- --------- ----------- ----------
Liabilities
Deposits from customers - 209,933 - 209,933 209,933
Creditors and accrued charges - - 2,972 2,972 2,972
Block creditors - - - - -
Loan notes - - 15,971 15,971 15,971
----------- --------- --------- ----------- ----------
- 209,933 18,943 228,876 228,876
----------- -------------------------------- --------- --------- ----------- ----------
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
Trade and other receivables - - 2,491 2,491 2,491
Investment in associate - - 158 158 158
- 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
----------- -------------------------------- --------- --------- ----------- ----------
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 (G)(vii).
An analysis of the credit risk on loans and advances to customers is as follow s:
Stage 1 Stage 2 Stage 3 2019 2018
GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------- -------- -------- -------- -------- --------
Grade A 168,796 - - 168,796 139,695
Grade B 1,143 1,675 - 2,818 6,153
Grade C - 1,985 10,544 12,529 5,824
Gross value 169,939 3,660 10,544 184,143 151,672
Allowance for impairment (116) (467) (4,190) (4,773) (3,394)
-------- -------- -------- -------- --------
Carrying value 169,823 3,193 6,354 179,370 148,278
-------------------------- -------- -------- -------- -------- --------
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 2019 2018
31 December GBP000 GBP000 GBP000 GBP000 GBP000
------------------- -------- -------- -------- -------- --------
Current 145,373 - - 145,373 137,196
Overdue < 30 days 24,259 - - 24,259 2,499
Overdue > 30 days 307 3,660 10,544 14,511 11,977
169,939 3,660 10,544 184,143 151,672
------------------- -------- -------- -------- -------- --------
For Stage 3 loans and advances that are overdue for more than 30 days, the Bank considers to hold collateral with a value of GBP8,706,600 (2018: GBP6,946,660) representing security cover of 60 % (2018: 58%)
Debt securities, cash and cash equivalents
The following table sets out the credit quality of liquid assets:
2019 2018
GBP000 GBP000
------------------------------------- --------- ---------
Government bonds and treasury bills
Rated A to A+ 44,690 30,534
Floating rate notes
Rated A to A+ 2,102 -
Cash and cash equivalents
Rated A to A+ 14,620 9,753
61,412 40,287
------------------------------------- --------- ---------
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 2019, 25.5% of loans and advances fell into this category (2018: 37.9%).
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(G)(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 - Financial Instruments: Recognition and Measurement.
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 Significant Increase in Credit Risk ("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, individual voluntary arrangements, abscond or disappearance, fraudulent activity or 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.
There have been no significant changes to ECL assumptions from prior year.
iv. 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 no introducer that accounted for more than 20% of the Bank's total lending portfolio at the end of 31 December 2019 (2018: 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 include 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 year were as follows:
2019 2018
---------------------- ------- -------
At 31 December 29% 25%
Average for the year 23% 32%
Maximum for the year 29% 40%
Minimum for the year 19% 25%
---------------------- ------- -------
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 >3
days month months months >1 year years
31 December Sight- - 1 - 3 - 6 - 1 - 3 - 5 >5
2019 8 days month months months year years years years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Deposits
from
customers 2,900 5,127 19,670 40,315 43,792 77,746 22,397 - 211,947
Other
liabilities 5,212 - 4,765 16 7,281 1,274 1,444 2,180 22,172
Total
liabilities 8,112 5,127 24,435 40,331 51,073 79,020 23,841 2,180 234,119
>8 >1 >3 >6 >3
days month months months >1 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
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
2019 8 days month months months year years years years Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash & cash
equivalents 14,620 - - - - - - - 14,620
Debt
securities - 5,795 15,748 17,751 - 7,498 - - 46,792
Loans and
advances
to
customers 12,564 2,017 12,652 14,977 32,615 77,077 27,461 7 179,370
Other assets 19 - - - - - - 12,086 12,105
Total assets 27,203 7,812 28,400 32,728 32,615 84,575 27,461 12,093 252,887
Liabilities
Deposits
from
customers 2,889 5,060 19,411 39,867 43,574 76,953 22,179 - 209,933
Other
liabilities 5,250 - 4,710 - 7,245 900 350 2,180 20,635
Total
liabilities 8,139 5,060 24,121 39,867 50,819 77,853 22,529 2,180 230,568
>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 19,215 584 177,191
iii. Liquidity reserves
The following table sets out the components of the Group's liquidity reserves:
2019 2019 2018 2018
Carrying Fair Carrying Fair
amount value amount value
GBP000 GBP000 GBP000 GBP000
------------------------------ ---------- ------- ---------- -------
Balances with other banks 14,620 14,620 9,753 9,753
Unencumbered debt securities 46,792 46,792 30,534 30,534
Total liquidity reserves 61,412 61,412 40,287 40,287
------------------------------ ---------- ------- ---------- -------
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 2019 GBP000 GBP000 GBP000
------------------------------- --------- ------------ ------------
Assets subject to market risk
Trading assets 19 19 -
Debt securities 46,792 - 46,792
--------- ------------ ------------
Total 46,811 19 46,792
------------------------------- --------- ------------ ------------
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
------------------------------- --------- ------------ ------------
i. Exposure to interest rate risk
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.
2019 month 3months 6months 1 year years years years Bearing Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Assets
Cash & cash
equivalents 14,620 - - - - - - - 14,620
Debt
securities 5,795 15,748 17,751 - 7,498 - - - 46,792
Loans and
advances
to customers 14,581 12,652 14,977 32,615 77,077 27,461 7 - 179,370
Other assets - - - - - - - 12,105 12,105
Total assets 34,996 28,400 32,728 32,615 84,575 27,461 7 12,105 252,887
Liabilities
and
equity
Deposits from
customers 7,949 19,411 39,867 43,574 76,953 22,179 - - 209,933
Other
liabilities 586 4,710 1,188 1,200 1,268 7,882 - 3,801 20,635
Total equity - - - - - - - 22,319 22,319
Total
liabilities
and equity 8,535 24,121 41,055 44,774 78,221 30,061 - 26,120 252,887
Interest
rate
sensitivity
gap 26,461 4,279 (8,327) (12,159) 6,354 (2,600) 7 (14,015) -
Cumulative 26,461 30,740 22,413 10,254 16,608 14,008 14,015 - -
>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 19,723 196,914
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 - -
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 (2018: 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
Sight- >3months >6months year years
31 December 1 >1month - - - 3 - 5 >5 Non-Int.
2019 month -3months 6months 1 year years years years Bearing Total
Interest
rate
sensitivity
gap
GBP000 26,461 4,279 (8,327) (12,159) 6,354 (2,600) 7 (14,015) -
Weighting 0.000 0.003 0.007 0.014 0.027 0.054 0.115 0.000 -
GBP000 - 13 (58) (170) 172 (140) 1 - (182)
>1 >3
Sight- >3months >6months year years
31 December 1 >1month - - - 3 - 5 >5 Non-Int.
2018 month -3months 6months 1 year years years years Bearing Total
Interest
rate
sensitivity
gap
GBP000 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
D. Capital Management
i. Regulatory capital
The lead regulator 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 and intercompany receivable.
n Tier 2 capital, which includes qualifying subordinated liabilities and any excess of impairment over expected losses.
The 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 four (2018: four) 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; Edgewater Associates; and Manx FX.
Asset
and Manx Edgewater Investing
Personal Incahoot Associates Manx Activities Total
For the year ended 31 Finance GBP000 GBP000 FX GBP000 GBP000
December 2019 GBP000 GBP000
Net interest income 17,929 - - - - 17,929
Fee and commission income
/ (loss) 439 (9) 2,529 837 - 3,796
Operating income / (loss) 13,518 (10) 2,529 828 - 16,865
Profit / (loss) before
tax payable 2,944 (295) 219 502 (347) 3,023
Capital expenditure 1,744 - 14 - 8 1,766
Total assets 249,449 14 2,292 321 811 252,887
Asset
and Manx Edgewater Manx Investing
Personal Incahoot Associates FX Activities Total
For the year ended 31 Finance GBP000 GBP000 GBP000 GBP000 GBP000
December 2018 GBP000
Net interest income 15,568 - - - - 15,568
Fee and commission income - 12 2,562 797 - 3,371
Operating income 9,795 12 2,562 797 - 13,166
Profit / (loss) before
tax payable 2,267 (189) 245 490 (103) 2,710
Capital expenditure 1,589 1 150 6 1 1,747
Total assets 190,923 78 3,153 608 2,152 196,914
10. Net interest income
2019 2018
GBP000 GBP000
Interest income
Loans and advances to customers 21,824 19,037
-------- --------
Total interest income calculated using the effective
interest method 21,824 19,037
Other interest income 496 78
-------- --------
Total interest income 22,320 19,115
Interest expense
Deposits from customers (3,383) (2,744)
Loan note interest (873) (773)
Lease liability (47) -
Contingent consideration (88) -
Block funders - (30)
-------- --------
Total interest expense (4,391) (3,547)
Net interest income 17,929 15,568
------------------------------------------------------ -------- --------
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 - Revenue from Contracts with Customers 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.
2019 2018
GBP000 GBP000
Major service lines
Independent financial advice income 2,529 2,547
Foreign exchange trading income 837 824
Brokerage services income 439 -
Fee and commission income 3,796 3,371
Fee and commission expense (5,426) (6,109)
---------- ----------
Net fee and commission expense (1,630) (2,738)
------------------------------------- ---------- ----------
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-offs. 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. Terminal funding continues to generate secondary term rental income following the last repayment date.
2019 2018
GBP000 GBP000
Interest income 78 181
Fee and commission expense - (5)
Provision for impairment on loan assets 2 (102)
80 74
13. Personnel expenses
2019 2018
GBP000 GBP000
Gross salaries (5,142) (4,233)
Executive Directors' remuneration (259) (241)
Non-executive Directors' fees (152) (145)
Executive Directors' pensions (21) (19)
Executive Directors' performance related pay (50) (50)
Pension costs (302) (259)
National insurance and payroll taxes (628) (527)
Training and recruitment costs (208) (229)
(6,762) (5,703)
14. Other expenses
2019 2018
GBP000 GBP000
Professional and legal fees (1,559) (1,067)
Marketing costs (261) (237)
IT costs (633) (567)
Establishment costs (286) (434)
Communication costs (155) (146)
Travel costs (219) (174)
Bank charges (137) (119)
Insurance (199) (141)
Irrecoverable VAT (340) (303)
Other costs (346) (277)
(4,135) (3,465)
15. Impairment on loans and advances to customers
The charge in respect of specific allowances for impairment comprises:
2019 2018
GBP000 GBP000
Specific impairment allowances made (2,091) (1,246)
Reversal of allowances previously made 64 410
Total charge for specific provision for impairment (2,027) (836)
The credit / (charge) in respect of collective allowances for impairment comprises:
2019 2018
GBP000 GBP000
Collective impairment allowances made (138) (49)
Release of allowances previously made 265 28
Total credit / (charge) for collective allowances for
impairment 127 (21)
Total charge for allowances for impairment (1,900) (857)
16. Profit before tax payable
The profit before tax payable for the year is stated after charging:
Group Company
2019 2018 2019 2018
GBP000 GBP000 GBP000 GBP000
Auditor's remuneration: - as Auditor
current year (110) (108) - -
non-audit
services (96) (7) - -
Pension cost defined benefit scheme (17) (15) - -
Operating lease rentals for property (117) (251) - -
17. Income tax expense
2019 2018
GBP000 GBP000
Current tax expense
Current year (297) (197)
Changes to estimates for prior years - -
(297) (197)
Deferred tax expense
Origination and reversal of temporary differences (53) (46)
Utilisation of previously recognised tax losses - -
Changes to estimates for prior years - -
(53) (46)
Tax expense (350) (243)
--------------------------------------------------- ------- -------
2019 2018
GBP000 GBP000
Reconciliation of effective tax rate
Profit before tax 3,023 2,710
Tax using the Bank's domestic tax rate (10.0)% (302) (10.0)% (271)
0.0
Effect of tax rates in foreign jurisdictions (0.8)% (23) % -
Non-deductible expenses (2.6)% (78) (1.2)% (33)
0.3
Tax exempt income 0.0 % - % 8
0.3
Timing difference in current year 0.0 % - % 7
Origination and reversal of temporary differences 1.7
in deferred tax 1.8 % 53 % 46
-------- ------- -------- -------
Tax expense (11.6)% (350) (9.0)% (243)
--------------------------------------------------- -------- ------- -------- -------
The main rate of corporation tax in the Isle of Man is 0.0% (2018: 0.0%). However, the profits of the Group's Isle of Man banking activities are taxed at 10.0% (2018: 10.0%). The profits of the Group's subsidiaries that are subject to UK corporation tax are taxed at a rate of 19.0% (2018: 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 GBP141,000 liability (2018: GBP88,000 liability). This resulted in an expense of GBP53,000 (2018: GBP50,000) to the Consolidated Income Statement.
18. Earnings per share
2019 2018
Profit for the year GBP2,673,000 GBP2,467,000
Weighted average number of ordinary
shares in issue (basic) 131,096,235 131,096,235
Basic earnings per share (pence) 2.04 1.88
Diluted earnings per share (pence) 1.66 1.54
Total comprehensive income for the year GBP2,596,000 GBP2,461,000
----------------------------------------- ------------- -------------
Weighted average number of ordinary
shares in issue (basic) 131,096,235 131,096,235
Basic earnings per share (pence) 1.98 1.88
Diluted earnings per share (pence) 1.62 1.54
The basic earnings per share calculation is based upon the profit for the year after taxation and the weighted average of the number of shares in issue throughout the year.
As at: 2019 2018 Reconciliation of weighted average number of ordinary shares in issue between basic and diluted Weighted average number of ordinary shares (basic) 131,096,235 131,096,235 Number of shares issued if all convertible loan notes were exchanged for equity 41,666,667 41,666,667 Dilutive element of share options if exercised - 10,366 Weighted average number of ordinary shares (diluted) 172,762,902 172,773,268 Reconciliation of profit for the year between basic and diluted Profit for the year (basic) GBP2,673,000 GBP2,467,000 Interest expense saved if all convertible GBP196,150 GBP196,000 loan notes were exchanged for equity Profit for the year (diluted) 2,869,150 GBP2,663,000
The diluted earnings per share calculation assumes that all convertible loan notes and share options have been converted / exercised at the beginning of the year where they are dilutive.
As at: 2019 2018 Reconciliation of total comprehensive income for the year between basic and diluted Total comprehensive income for the year (basic) 2,596,000 2,461,000 Interest expense saved if all convertible loan notes were exchanged for equity 196,150 196,000 Total comprehensive income for the year (diluted) 2,792,150 2,657,000
19. Cash and cash equivalents
Group Company
2019 2018 2019 2018
GBP000 GBP000 GBP000 GBP000
Cash at bank and in hand 14,620 9,753 119 1,646
14,620 9,753 119 1,646
Cash at bank includes an amount of GBP1,060,000 (2018: GBP561,000) representing receipts which are in the course of transmission.
20. Debt securities
Group Company
2019 2018 2019 2018
GBP000 GBP000 GBP000 GBP000
Financial assets at FVOCI:
UK Government Treasury Bills 44,690 30,534 - -
Floating Rate Notes 2,102 - - -
46,792 30,534 - -
UK Government Treasury Bills are stated at fair value and unrealised changes in the fair value are reflected in other comprehensive income. There were GBP179,000 (2018: GBP135,000) realised gains and GBP51,000 (2018: GBP44,000) unrealised gains 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 Consolidated Income Statement. Dividend income of GBP360,500 (2018: GBP355,000) and GBP24,000 (2018: GBP24,000) of sale proceeds have been received from this investment since it was made. The investment made a net loss of GBP1,000 (2018: GBP4,000) during the year.
22. Loans and advances to customers
2019 2018
Gross Impairment Carrying Gross Impairment Carrying
Amount Allowance Value Amount Allowance Value
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
HP balances 65,846 (1,537) 64,309 59,038 (1,416) 57,622
Finance lease balances 40,359 (2,125) 38,234 27,238 (1,551) 25,687
Unsecured personal
loans 21,110 (199) 20,911 14,806 (382) 14,424
Vehicle stocking plans 1,494 (36) 1,458 1,486 - 1,486
Wholesale funding arrangements 23,840 (300) 23,540 22,944 - 22,944
Block discounting 15,693 (200) 15,493 17,316 - 17,316
Secured commercial
loans 11,652 (376) 11,276 1,967 (45) 1,922
Secured personal loans 4,149 - 4,149 6,877 - 6,877
184,143 (4,773) 179,370 151,672 (3,394) 148,278
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.
2019 2018
Specific allowance for impairment GBP000 GBP000
Balance at 1 January 3,126 2,440
Specific allowance for impairment made 2,091 1,291
Release of allowances previously made (64) (410)
Write-offs (521) (195)
Balance at 31 December 4,632 3,126
2019 2018
Collective allowance for impairment GBP000 GBP000
Balance at 1 January 268 247
Collective allowance for impairment made 138 49
Release of allowances previously made (265) (28)
Balance at 31 December 141 268
Total allowances for impairment 4,773 3,394
Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2019 GBP490,641 (2018: GBP389,005) 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.
At the end of the current financial year 5 loan exposures (2018: 9) exceeded 10.0% of the capital base of the Bank:
Outstanding Outstanding
Balance Balance Facility
2019 2018 limit
Exposure GBP000 GBP000 GBP000
Block discounting facility 15,693 14,211 28,235
Wholesale funding agreement 23,840 21,423 28,119
HP and finance lease receivables
Loans and advances to customers include the following HP and finance lease receivables:
2019 2018
GBP000 GBP000
Less than one year 51,865 42,532
Between one and five years 71,124 60,184
Gross investment in HP and finance lease receivables 122,989 102,716
The investment in HP and finance lease receivables net of unearned income comprises:
2019 2018
GBP000 GBP000
Less than one year 44,787 37,508
Between one and five years 61,418 48,768
Net investment in HP and finance lease receivables 106,205 86,276
23. Trade and other receivables
Group Company
2019 2018 2019 2018
GBP000 GBP000 GBP000 GBP000
Prepayments 385 382 44 32
VAT recoverable 835 936 187 -
Other debtors 1,258 1,173 - -
2,478 2,491 231 32
Included in trade and other receivables is an amount of GBP835,000 (2018: GBP936,000) 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 Group's position rests on the outcome of discussions with C&E which in turn will take into account the final assessment by UK Her Majesty's Revenue and Customs ("HMRC") of the impact of the European Union's ruling in favour of Volkswagen Financial Services (UK) Limited ("VWFS") vs HMRC. On the basis of the discussions and correspondence which have taken place between the Bank, its professional advisors and C&E, in addition to the VWFS ruling, the VAT recovery has moved in the year. The Directors are confident that the VAT claim will be secured.
The Bank's total exposure in relation to this matter reduced to GBP906,000 (2018: GBP1,049,000), comprising the debtor balance referred to above plus an additional GBP71,000 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).
24. Property, plant and equipment and right-of-use assets
Leasehold IT Furniture Motor Right-of-use
Improvements Equipment & Vehicles assets Total
Group GBP000 GBP000 Equipment (1) (2) GBP000
GBP000 GBP000 GBP000
Cost
As at 1 January 2019 509 335 664 1,003 - 2,511
Acquisition of subsidiary 160 - 22 107 - 289
Additions 5 58 - 1,571 737 2,371
Disposals - - - (107) - (107)
-------------
As at 31 December
2019 674 393 686 2,574 737 5,064
Accumulated depreciation
As at 1 January 2019 249 213 612 53 - 1,127
Charge for year 66 59 10 338 165 638
Disposals - - - - - -
As at 31 December
2019 315 272 622 391 165 1,765
Carrying value at
31 December 2019 359 121 64 2,183 572 3,299
Carrying value at
31 December 2018 260 122 52 950 - 1,384
(1) Motor vehicles relate to operating leases with the Group as lessor.
(2) See Note 5 for implementation of IFRS 16 - Leases and recognition of right-of-use asset.
Leasehold IT Furniture Right-of
Improvements Equipment & use-asset Total
Company GBP000 GBP000 Equipment GBP000 GBP000
GBP000
Cost
As at 1 January 2019 234 13 16 - 263
Additions - - 1 424 425
Disposals - - - - -
As at 31 December 2019 234 13 17 424 688
Accumulated depreciation
As at 1 January 2019 131 3 3 - 137
Charge for year 38 1 2 60 101
Disposals - - - - -
As at 31 December 2019 169 4 5 60 238
Carrying value at 31
December 2019 65 9 12 364 450
Carrying value at 31
December 2018 103 10 13 - 126
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 2019 1,417 388 2,046 3,851
Acquisition of subsidiary
(note 32) 496 143 - 639
Additions 7 8 117 132
Disposals - - - -
As at 31 December 2019 1,920 539 2,163 4,622
Accumulated amortisation
As at 1 January 2019 195 312 1,392 1,899
Charge for year / impairment 107 131 192 430
Disposals - - - -
As at 31 December 2019 302 443 1,584 2,329
Carrying value at 31
December 2019 1,618 96 579 2,293
Carrying value at 31
December 2018 1,222 76 654 1,952
26. Deposits from customers
2019 2018
GBP000 GBP000
Retail customers: term deposits 203,241 153,735
Corporate customers: term deposits 6,692 4,765
209,933 158,500
27. Creditors and accrued charges
Group Company
2019 2018 2019 2018
GBP000 GBP000 GBP000 GBP000
Commission creditors 1,044 758 - -
Other creditors and accruals 893 897 66 94
Lease liability (see note 5) 707 - 509 -
Taxation creditors 328 355 - -
2,972 2,010 575 94
28. Block creditors
2019 2018
GBP000 GBP000
Drawdown 3 - repayable 08/03/2019, interest payable
at 6.5%, secured on assets of MFL - 138
- 138
29. Loan notes
Group Company
2019 2018 2019 2018
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
3,410 3,410 3,410 3,410
Unrelated parties UP 12,561 12,461 12,561 12,461
15,971 15,871 15,971 15,871
JM - Two loans, one of GBP1,250,000 maturing on 26 February 2020, paying interest of 6.5% per annum, and one of GBP500,000 maturing on 31 July 2022 with interest payable of 5.0% per annum. Both loans are convertible at the rate of 7.5 pence and 9 pence respectively. See note 35 for the terms of the renewal of the GBP1,250,000 loan.
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 previous Non-executive Director, is also a director of SR.
UP - Thirty-three loans consisting of an average GBP380,636 with a average interest payable of 5.5% (2018: 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 Bank 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 - IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, 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 2019 (2018: 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: Employee Benefits, this valuation has been updated by the actuary as at 31 December 2019.
The amounts recognised in the Consolidated Statement of Financial Position are as follows:
2019 2018
Total underfunding in funded plans recognised GBP000 GBP000
as a liability
Fair value of plan assets 1,471 1,361
Present value of funded obligations (2,159) (1,945)
(688) (584)
2019 2018
Movement in the liability for defined benefit GBP000 GBP000
obligations
Opening defined benefit obligations at 1 January 1,945 2,029
Benefits paid by the plan (69) (65)
Interest on obligations 55 52
Actuarial loss / (gain) 228 (71)
Liability for defined benefit obligations at 31
December 2,159 1,945
2019 2018
Movement in plan assets GBP000 GBP000
Opening fair value of plan assets at 1 January 1,361 1,469
Expected return on assets 38 37
Contribution by employer 41 41
Actuarial gain / (loss) 100 (121)
Benefits paid (69) (65)
Closing fair value of plan assets at 31 December 1,471 1,361
2019 2018
Expense recognised in income statement GBP000 GBP000
Interest on obligation 55 52
Expected return on plan assets (38) (37)
Total included in personnel costs 17 15
Actual return on plan assets 142 (53)
2019 2018
Actuarial loss recognised in other comprehensive GBP000 GBP000
income
Actuarial gain / (loss) on plan assets 100 (121)
Actuarial (loss) / gain on defined benefit obligations (228) 71
(128) (50)
2019 2018
Plan assets consist of the following % %
Equity securities 50 45
Corporate bonds 18 19
Government bonds 30 28
Cash 2 4
Other - 4
-----
100 100
2019 2018 2017
The actuarial assumptions used to 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 3.0
* 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 2.9 2.6 2.6
Inflation 3.1 3.1 3.1
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 2019 200,200,000 At 31 December 2018 200,200,000 Issued and fully paid: - Ordinary shares of no Number GBP000 par value At 31 December 2019 131,096,235 20,732 At 31 December 2018 131,096,235 20,732
There are four convertible loans of GBP3,410,000 (2018: GBP3,410,000).
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 (2018:1,050,000) 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 (2018: GBPnil).
Analysis of changes in financing during the year
2019 2018
Analysis of changes in financing during the year GBP000 GBP000
Balance at 1 January 36,603 29,727
Issue of loan notes 100 6,876
36,703 36,603
The 2019 closing balance is represented by GBP20,732,000 share capital (2018: GBP20,732,000) and GBP15,971,000 of loan notes (2018: GBP15,871,000).
32. Investment in Group undertakings
Subsidiaries
The Company has the following investments in subsidiaries incorporated in the Isle of Man:
Nature of 31 December Date of Total Total
Business 2019 Incorporation 2019 2018
Carrying value % Holding GBP000 GBP000
of investments
Conister Bank
Limited Asset and Personal Finance 100 05/12/1935 15,817 14,167
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 - -
17,822 16,172
Blue Star Business Solutions Limited
On 16 April 2019, the Group (through Bradburn Limited) acquired 100% of the shares and voting interest in Blue Star Business Solutions Limited ("BBSL"), obtaining control of BBSL. This acquisition is part of the Group's strategy to increase its distribution in the UK broker market. BBSL was formed in 2004 and is based in Hampshire. The business is a niche brokerage which focuses on delivering excellent customer service to small and medium sized businesses in the UK that require funding for IT equipment amongst other assets. The Group invested in BBSL to allow it to grow profitably by gaining market share and through its banking subsidiary, Conister Bank Limited, writing the majority of its funding requests.
For the 9 months ended 31 December 2019, BBSL contributed revenue of GBP719,115 and a consolidated profit of GBP346,241 including its lending contribution to the Group. If the acquisition had occurred on 1 January 2019, management estimates that the consolidated revenue would have been GBP922,345 and consolidated profit for the year would have been GBP361,348. Individual results for the 9 months ended 31 December 2019 recorded a loss of GBP24,378.
A. Consideration transferred
The following table summarises the acquisition-date fair value of each major class of consideration transferred:
GBP000
Cash 1,500
Contingent consideration 775
2,275
i. Contingent consideration transferred
The Group has agreed to pay the selling shareholders:
n 50% of net profits in BBSL for 3 years post completion; and
n 50% of the incremental net profit that the Group benefits from as a result of taking up BBSL loan proposals post completion up until the third anniversary.
This is to be paid on each anniversary with a final payment in year 4 for the unrealised lending profit. The total consideration is to have a cap of GBP4,000,000 in total. The contingent consideration is calculated by forecasting 3 years of net profits discounted using an interest rate of 16.0% per annum. Unwinding the discount up to 31 December 2019 has created an GBP88,000 of interest expense in the Consolidated Income Statement, bringing the balance to GBP863,000. The range of contingent consideration payable is GBPnil - GBP2,500,000.
B. Acquisition-related costs
In the current year, the Group incurred acquisition-related costs of GBP20,000 relating to external legal fees and due diligence costs. These costs have been included in 'administrative expenses' in the Condensed Consolidated Statement of Profit or Loss and Other Comprehensive Income.
C. Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired, and liabilities assumed at the date of acquisition:
GBP000
Property, plant and equipment 289
Intangible assets 639
Trade and other receivables 114
Cash and cash equivalents 163
Trade and other payables (203)
Loans and borrowings (117)
Total identifiable net assets acquired 885
The trade receivables comprise gross contractual amounts due of GBP114,000.
D. Goodwill
The goodwill arising from the acquisition has been recognised as follows:
GBP000
Total consideration transferred 2,275
Fair value of identifiable net assets (885)
Goodwill 1,390
Amounts owed to Group undertakings
Amounts owed to 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 EAL.
2019 2018
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 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 7,778
EAL's subordinated loan that matured on 28 February 2018 continues in existence and has not been called for payment by MFG.
Group Group
2019 2018
Goodwill GBP000 GBP000
EAL 1,849 1,849
BBSL 1,390 -
ECF Asset Finance PLC ("ECF") 454 454
Three Spires Insurance Services Limited ("Three
Spires") 41 41
3,734 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 EAL 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 11.0% 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 BBSL is based on forecasted 3 year interest income calculated at an average yield of 8%, with a terminal value calculated using a 3.0% growth rate of net income and then discounted using a 16.0% discount factor. The sensitivity of the analysis was tested using additional discount factors of up to 20.0% on varying interest income growth rates.
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 11.0% 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 EAL and ECF when compared to 2018. 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 EAL. 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 GBPnil (2018: GBP76,000) at 31 December 2019. This created an impairment charge of GBP76,000 for intellectual property rights and GBP32,047 for the website during the current year.
Investment in associates
Group Group
2019 2018
GBP000 GBP000
The Business Lending Exchange ("BLX") 166 56
Beer Swaps Limited ("BSL") 20 10
Payitmonthly Ltd ("PIML") 96 92
282 158
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 GBP110,000 (2018: GBP18,000).
On April 2018, 20% of the share capital of BSL was acquired for nil consideration. The Group's share of the associate's total comprehensive income during the year was GBP10,000 (2018: 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 during the year was GBP4,000 (2018: 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 GBP446,366 (2018: GBP173,157), 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.
Commercial loans have been made to various companies connected to Jim Mellon and Denham Eke on normal commercial terms. As at 31 December 2019, GBP62,746 of capital and interest was outstanding (2018: GBP113,328).
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. EAL provides services to the Group in arranging its insurance and defined contribution pension arrangements.
Loan advance to EAL
On 14 December 2016, a loan advance was made to EAL by the Bank in order to provide the finance required to acquire MBL. The advance was for GBP700,000 at an interest rate of 8% per annum repayable over 6 years. A negative pledge was given by EAL to not encumber any property or assets or enter into an arrangement to borrow any further monies. The balance as at 31 December 2019 was GBP395,172 (2018: GBP508,000).
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 2019, GBP4,000,000 (2018: GBP2,520,000) 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 leasing portfolio. On 10 October 2018, this facility was increased to GBP1,500,000. The facility is for 12 months. Interest is charged at commercial rates. During the year, the facility was increased to GBP2,250,000. At 31 December 2019, GBP2,250,000 (2018: GBP1,099,000) 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. During the year, the facility was increased to GBP1,500,000. At 31 December 2019, GBP1,424,000 (2018: GBP322,000) had been advanced to PIML.
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 (2018: GBP7,450,000) of subordinated loans to the Bank and GBP328,000 (2018: GBP328,000) to EAL at 31 December 2019. See note 32 for more details.
Loan notes
See note 29 for a list of related party loan notes as at 31 December 2019 and 2018.
Key management remuneration including Executive Directors
2019 2018
GBP000 GBP000
Short-term employee benefits 309 297
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34. Operating leases
Non-cancellable lease rentals are payable in respect of property and motor vehicles as follows:
2019 2018
Leasehold Leasehold
Property Property
GBP000 GBP000
Less than one year 101 214
Between one and five years - 790
Over five years - 162
101 1,166
35. Subsequent events
Acquisition of subsidiary
On 28 February 2020, the Group announced that it has entered into an agreement to acquire (through its subsidiary, the Bank) additional ordinary shares in BSL (see note 32) for a cash consideration of GBP506,824. The Bank's shareholding in BSL will increase to 75% (31 December 2019: 20%) on completion of the purchase. Further the Bank will simplify the capital structure of BSL by repaying all issued preference shares, being GBP200,000, as part of the transaction plus repayment of Director loans of GBP100,000.
Loan notes (see note 29)
The GBP1,250,000 loan note due to mature on 26 February 2020 and paying interest of 6.5% per annum has been renewed at an interest rate of 5.4% and for a term of 5 years.
The GBP460,000 loan note due to mature on 26 February 2020 and paying interest of 6.5% per annum was renewed for a further 2 months with no change to other terms.
COVID-19
In late February 2020, the UK recorded its first case of the coronavirus "COVID-19", which shortly spread to the IOM in the following month. In an attempt to contain the outbreak, both the UK and Manx Governments, in line with action taken by other Governments throughout the world, introduced a number of significant restrictions on businesses, human movement and social interactions, including shutting down a wide range of economic sectors in which the Group has a significant interest.
Both the UK and Manx Governments launched various financial support measures to provide vital liquidity and relief to both individuals and businesses struggling to trade through this global economic crisis.
The Group is closely monitoring the coronavirus pandemic and its potential impacts on its business. The extent to which COVID-19 impacts the Group's business will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge on the severity of COVID-19 and the success of efforts to contain or treat COVID-19.
In line with the Financial Reporting Council's joint statement on 26 March 2020, the Group does not consider COVID-19 to be an adjusting event and as such any impacts are not reflected within this Annual Report.
The Group assessed the changes in the environment on its capital and liquidity positions and is comfortable that it can keep a solid financial standing. Management will continue to monitor the developments and update its strategy and course of actions as necessary in the circumstances.
Other
There were no other significant subsequent events identified after 31 December 2019.
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.
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 the 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 the 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 GBP282,000 (2018: GBP158,000) 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 fair value Fair value
through profit and loss ("FVTPL")
Financial assets at fair value through Fair value
other comprehensive income ("FVOCI")
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.
Set out below is an index of the significant accounting policies, the details of which are available on the pages that follow:
Ref. Note description No.
----
Basis of consolidation of subsidiaries and separate
A. financial statements of the Company 71
B. Interest in equity accounted investees 71
C. Interest 71
D. Fee and commission income 72
E. Leases 72
F. Income tax 72
G. Financial assets and financial liabilities
i. Recognition and initial measurement 72
ii. Classification 73
iii. Derecognition 73
iv. Modifications of financial assets and financial
liabilities 74
v. Offsetting 74
vi. Fair value measurement 74
vii. Impairment 75
H. Cash and cash equivalents 77
I. Loans and advances 77
J. Property, plant and equipment 77
K. Intangibles assets and goodwill 77
L. Impairment of non-financial assets 78
Deposits, debt securities issued and subordinated
M. liabilities 78
N. Employee benefits 79
i. Long-term employee benefits 79
ii. Share-based compensation 79
O. Share capital and reserves 79
P. Earnings per share ("EPS") 79
Q. Segmental reporting 79
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. 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.
D. Fee and commission income
The Group generates fee and commission income through provision of independent financial advice, insurance brokerage agency, introducer of foreign exchange services and commissions from brokering business finance for small and medium sized enterprises.
Independent financial advice and insurance brokerage agency
Income represents commission arising on services and premiums relating to policies and other investment products committed during the year, as well as renewal commissions having arisen on services and premiums relating to policies and other investment products committed during the year and previous years and effective at the balance sheet date. Income is recognised on the date that policies are submitted to product providers with an appropriate discount being applied for policies not completed. As a way to estimate what is due at the year end, a "not proceeded with" rate of 10.0% for pipeline life insurance products and 0.0% for non-life insurance pipeline is assumed. Renewal commissions are estimated by taking the historical amount written pro-rata to 3 months.
Other
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 fee relates.
E. 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.
F. 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.
G. 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 solely payments of principal and interest ("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 of financial assets and financial liabilities
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 losses 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; and
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 Expected Credit Loss ("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 2019 year-end, 37.9% had such credit enhancements (2018: 41.7%); and
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 estimates 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; and
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; and
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.
H. 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.
I. 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 receivables (see 38 (G)).
J. 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
K. 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
L. 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 grouped 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.
M. 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.
N. 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 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.
O. 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.
P. Earnings per share ("EPS")
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 MFG 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.
Q. 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 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 2020 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)
-------------------------------------------------------------
Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate 1 January 2020
Benchmark Reform (issued on 26 September 2019)
Amendments to IAS 1 and IAS 8: Definition of Material (issued 1 January 2020
on 31 October 2018)
Amendments to References to the Conceptual Framework in 1 January 2020
IFRS Standards (issued on 29 March 2018)
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.
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June 30, 2020 02:00 ET (06:00 GMT)
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