| 1. |
Impairment
of goodwill |
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The recoverable amount
of goodwill is tested annually for impairment
in accordance with the stated accounting
policy. The recoverable amount of the cash-generating
units (“CGU”) has been determined
based on value-in-use calculations, being
the net present value of the discounted
cash flows of the CGU less the tangible
net asset value of that CGU. Details of
the main assumptions applied in determining
the net present value of the CGU are provided
in the relevant note on goodwill in these
financial statements. |
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| 2. |
Retirement
benefit obligations |
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The cost of the benefits
and the present value of the defined
benefit pension funds and post-retirement
medical obligations depend on a number of
factors that are determined on an actuarial
basis using a number of assumptions. The
assumptions used in determining the charge
to the income statement arising from these
obligations include the expected long-term
rate of return on the relevant plan assets,
the discount rate and the expected salary
and pension increase rates. Any changes
in these assumptions will impact the charge
to the income statement and may affect planned
funding of the pension plans.
The assumptions relating to the expected
return on plan assets are determined on
a uniform basis, considering long-term historical
returns, asset allocation and future estimates
of long-term investment returns. The group
determines the appropriate discount rate
at the end of each year, which represents
the interest rate that should be used to
determine the present value of the estimated
future cash outflows expected to be
required to settle the pension and post-retirement
medical obligations. In determining the
appropriate discount rate, the group considers
the interest rate on high-quality corporate
bonds and government bonds that are denominated
in the currency in which the benefits
will be paid and that have terms to maturity
approximating the terms of the related pension
liability. The expected salary and pension
increase rates are based on inflation
rates, adjusted for salary scales and country-specific
conditions. The inflation rate used
is a rate within the governments monetary
policy target for inflation and is
calculated as the difference between the
yields on portfolios of fixed interest
government bonds and a portfolio of index
linked bonds of a similar term.
Additional information is provided in the
relevant note in these financial statements. |
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| 3. |
Provisions |
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Provisions are, by definition,
liabilities of uncertain timing or amount.
In order to establish a provision, management
makes assessments of the expected amount
of any future cash outflows and the
estimated timing thereof. Where the effect
of discounting is material, provisions payable
longer than one year are discounted using
pre-tax discount rates that reflect
the current market assessment of the time
value of money and where appropriate, the
risks specific to the liability. Provisions
for impairment of a trade receivable are
established when there is objective evidence
that the group will not be able to collect
all amounts due according to the original
terms of the receivable. |
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| 4. |
Deferred
consideration for acquisitions |
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A number of business
acquisitions have been made on deferred
payment terms. These deferred payments are
generally contingent on the future revenue
and/or profits achieved by the acquired
business. On acquisition date, estimates
are made of the expected future revenue
and profit based on forecasts made
by management. These estimates are re-assessed
at each reporting date and adjustments are
made to the deferred consideration and related
goodwill balances, where necessary. Amounts
of deferred consideration payable after
one year, are discounted using discount
rates that reflect the current market
assessment of the time value of money and,
where appropriate, the risks specific
to the acquired business. |
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| 5. |
Taxation |
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The group is subject
to income tax in numerous jurisdictions
and has many transactions and calculations
for which the ultimate tax determination
may be uncertain during the ordinary course
of business. The group recognises liabilities
for anticipated tax charges. Where the final
outcome of a transaction is different from
the amounts that were initially recorded,
such differences will impact the income
tax and deferred tax provisions in the period
in which such determination is made. |
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| 6. |
Share-based
payments |
| |
Share-based payment costs
arise from the issue of share options to
employees. These share options are classified
as equity-settled share-based payments and
as such, the fair value cost is determined
on date of grant on an actuarial basis using
a number of assumptions. The assumptions
used in determining the fair value cost
include expected volatility, expected dividend
yield, the discount rate and the expected
forfeit or lapse rate. In accordance with
the principles of valuing equity-settled
share-based payments, only a change in the
actual experience of forfeits compared to
the estimated forfeit rate assumption, will
impact on the charge in the income statement.
All other assumptions are determined at
grant date and are not amended.
The expected volatility assumption is determined
based on a rolling historical volatility
over the expected life of the options. Where
volatility data on the Alexander Forbes
share price is not available, the average
volatility of comparable financial
institutions is used. The expected dividend
yield is determined based on historical
dividend yields and management’s estimates.
The discount rate is based on zero-coupon
government bonds denominated in the currency
in which the shares will be issued, namely
South Africa, and have terms to maturity
consistent with the assumed life of the
share options. The expected forfeit rate
has been based on historical experience
and management estimates.
Additional information is provided in the
relevant note in these financial statements. |
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| 7. |
Valuation
of financial liabilities under multi-manager
investment and unit trust contracts |
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The valuation of these
financial liabilities is linked to
the fair value of the supporting assets
and deviations from investment return assumptions
and therefore have no impact on the group’s
results. |
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| 8. |
Valuation
of policyholder assets and liabilities in
respect of long-term insurance contracts |
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The actuarial value of
policyholder assets and liabilities arising
from long-term insurance contracts is determined
using the Financial Soundness Valuation
method as described in the actuarial guidance
note PGN 104 of the Actuarial Society of
South Africa. The method requires a number
of assumptions as inputs to the valuation
model. The following process is followed
to determine the valuation assumptions: |
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| •
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The best estimate
for a particular assumption is determined. |
| • |
Prescribed margins
are then applied, as required by the
Long-term Insurance Act in South Africa
and Board Notice 72 issued in terms
of the Act. |
| • |
Discretionary margins
may be applied, as required by the
valuation methodology or if the statutory
actuary considers such margins necessary
to cover the risks inherent in the
contracts. |
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Best estimate assumptions
as to mortality and morbidity, expenses,
investment income and tax are used that
may vary at each balance sheet date. A margin
for adverse deviations is included in the
assumptions. Improvements in estimates have
a positive impact on the value of the liabilities
and related assets, while deteriorations
in estimates have a negative impact.
The process for determining the assumptions
used are as follows: |
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Mortality and
morbidity |
| |
For group life insurance
contracts, the rate of recovery from disability
is derived from industry experience studies,
adjusted where appropriate for the group’s
own experience. For individual life insurance
contracts introduced in the current year,
demographic assumptions were set with reference
to reinsurer rates and industry experience. |
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Expenses |
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Expense assumptions are
based on an expense analysis, using a functional
cost approach. This analysis allocates expense
between policy and overhead expenses and
within policy expenses, between new business,
maintenance and claims. |
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Investment income |
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Estimates are made as
to future investment income and are tested
against market conditions as at the valuation
date taking into account the terms of the
liabilities. Inflation assumptions
are tested against market conditions and
with regard to consistency, with the interest
rate assumption. |
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Tax |
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Allowance is made for
future taxation and taxation relief. |
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| 9. |
Ultimate
liability arising from claims under short-term
insurance contracts |
| |
The estimation of the
ultimate liability arising from claims under
short-term insurance contracts has several
sources of uncertainty. The risk environment
can change suddenly and unexpectedly owing
to a wide range of events or influences.
The group is constantly refining its
short-term risk monitoring and management
tools to enable the group to assess risks
appropriately, despite the greatly increased
pace of change. There will never be absolute
certainty in respect of identifying risks
at an early stage, measuring them sufficiently
or correctly estimating their real hazard
potential. |
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| 10. |
Errors and
omissions in the ordinary course of business |
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The group is exposed
to various actual and potential claims,
lawsuits and other proceedings relating
to alleged errors and omissions or non-compliance
with laws and regulations in the conduct
of its ordinary course of business. As with
any business with similar operations to
the group, the risk exists that significant
adverse developments in past claims could
result in material changes to provisions
made in respect of prior years. |
