1 INTRODUCTION

  

FirstRand Limited (“the Group”) is an integrated financial services company consisting of banking, insurance, asset management and health operations.

The Group adopts the following accounting policies in preparing its consolidated financial statements. These policies have been consistently applied to all the years presented, unless otherwise stated.

2 BASIS OF PRESENTATION

The Group’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (”IFRS"). The principal accounting policies are consistent in all material aspects with those adopted in the previous year, except for the adoption of:

  • IFRIC 12 Service Concession Arrangements which is effective for annual periods beginning on or after
    1 January 2008. The Interpretation provides guidance on the treatment of assets arising from service concession arrangements. Refer to paragraph 33 of the accounting policies for further details.
  • IFRIC 13 Customer Loyalty Programmes which is effective for annual periods beginning on or after 1 July 2008. The Interpretation applies to the accounting for customer loyalty award credits that the entity grants to its customers that customers can redeem in future. The Interpretation impacts the revenue recognition related to the sales transaction and further details are provided in paragraph 32 of the accounting policies.
  • IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction is effective for annual periods beginning on or after 1 January 2008. This Interpretation provides guidance on the measurement of defined benefit assets. As a result of the fact that the Group has not recognised a defined benefit asset the Interpretation does not have any impact on the Group’s results.

The Group adjusts comparative figures to conform to changes in presentation in the current year. For details refer to accounting policy paragraph 34.

The Group prepares its consolidated financial statements in accordance with the going concern principle using the historical cost basis, except for certain assets and liabilities. These assets and liabilities include:

  • financial assets and liabilities held for trading;
  • financial assets classified as available-for-sale;
  • derivative financial instruments;
  • financial instruments at fair value through profit and loss;
  • investment properties valued at fair value;
  • employee benefit liabilities, valued using projected unit credit method; and
  • policyholder liabilities under insurance contracts that are valued in terms of the Financial Soundness Valuation (“FSV”) basis as outlined below.

The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are outlined in note 50 of the annual report.

All monetary information and figures presented in these financial statements are stated in millions of Rand (R million), unless otherwise indicated.

3 CONSOLIDATION

The consolidated financial statements include the assets, liabilities and results of the operations of the holding company and its subsidiaries. Subsidiaries are companies in which the Group, directly or indirectly, has the power to exercise control over the operations for its own benefit. The Group considers the existence and effect of potential voting rights that are presently exercisable or convertible in determining control. Subsidiaries are consolidated from the date on which the Group acquires effective control. Consolidation is discontinued from the effective date of disposal.

Minority shareholders are not treated as equity participants. Therefore, all acquisitions of minority interests or disposals by the Group of its minority interests in subsidiary companies, where control is maintained, are treated as transactions with external parties. Any differences between the purchase price and the book value of a minority interest acquired, is recorded as goodwill or in cases where the book value exceeds the purchase price, in the income statement for the period. All profits and losses as a result of a disposal of an interest in subsidiaries to minorities, where control is maintained subsequent to disposal, are recorded in the income statement for the period.

The Group consolidates a special purpose entity (“SPE”) when the substance of the relationship between the Group and the SPE indicates that the Group controls the SPE. The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

3.1 Consolidation of collective investment schemes

The Group consolidates collective investment schemes in which it is considered to have control through its size of investment, voting control or related management contracts. The consolidation principles as described in interests in subsidiaries above are applied.

4 ASSOCIATES AND JOINT VENTURES

Associates are entities in which the Group holds an equity interest of between 20% and 50% or over which it has the ability to exercise significant influence, but does not control. Joint ventures are entities in which the Group has joint control over the economic activity of the joint venture, through a contractual agreement. Investments acquired and held exclusively with the view to dispose of in the near future (within 12 months) are not accounted for using the equity accounting method, but carried at fair value less cost to sell in terms of the requirements of IFRS 5.

The Group includes the results of associates and joint ventures in its consolidated financial statements using the equity accounting method, from the effective date of acquisition to the effective date of disposal. The investment is initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss.

Earnings attributable to ordinary shareholders include the Group’s share of earnings of associates and joint ventures. Reserves include the Group’s share of post acquisition move­ments in reserves of associates and joint ventures. The cumulative post acquisition movements are adjusted against the cost of the investment in the associate or joint venture.

Goodwill on the acquisition of associates and joint ventures is included in the carrying amount of the investment in associates or joint ventures. Investments in associates and joint ventures are assessed annually for impairment in accordance with IAS 36.

The Group discontinues equity accounting when the carrying amount of the investment in an associate or joint venture reaches zero, unless it has incurred obligations or guaranteed obligations in favour of the associated undertaking.

After discontinuing equity accounting the Group applies the requirements of lAS 39 to determine whether it is necessary to recognise any additional impairment loss with respect to the net investment in the associate or joint venture as well as other exposures to the investee.

The Group increases the carrying amount of investments with its share of the associate or joint venture’s income when equity accounting is resumed. The Group resumes equity accounting only after its share of the profits equals the share of losses not recognised.

Unrealised gains on transactions between the Group and its associates or joint ventures are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the associates and joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.

Investment in associates held in policyholder portfolios backing investment linked policyholder liabilities are designated on initial recognition at fair value through profit or loss in terms of the scope exemption in IAS 28.

4.1 Collective investment schemes

Collective investment schemes in which the Group has less than 50% economic interest, but significant influence through the management company, are accounted for as associates.

5 INTEREST INCOME AND EXPENSE

The Group recognises interest income and expense in the income statement for instruments measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the average expected life of the financial instruments or portfolios of financial instruments. Net interest income on advances and deposits designated at fair value through profit or loss, which are not trading in nature, is recognised in interest income and expense.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

From an operational perspective, the Group suspends the accrual of contractual interest on non recoverable advances. However, in terms of lAS 39, interest income on impaired advances is thereafter recognised based on the original effective interest rate used to determine the discounted recoverable amount of the advance. This difference between the discounted and undiscounted recoverable amount is released to interest income over the expected collection period of the advance.

Instruments with characteristics of debt, such as redeemable preference shares, are included in loans and advances or long term liabilities. Dividends received or paid on these instruments are included and accrued in interest income and expense using the effective interest method.

6 FAIR VALUE INCOME

The Group includes profits, losses and fair value adjustments on trading financial instruments (including derivative instruments which do not qualify for hedge accounting in terms of lAS 39) as well as financial instruments designated at fair value through profit or loss, other than advances and deposits not of a trading nature, as fair value income in non interest income.

7 FEE AND COMMISSION INCOME

The Group generally recognises fee and commission income on an accrual basis when the service is rendered.

Certain fees and transaction costs that form an integral part of the effective interest rate of available-for-sale and amortised cost financial instruments are capitalised and recognised as part of the effective interest rate of the financial instrument over the expected life of the financial instruments. These fees and transaction costs are recognised as part of the net interest income and not as non interest revenue.

Commission income on acceptances, bills and promissory notes endorsed is credited to income over the lives of the relevant instruments on a time apportionment basis.

8 DIVIDEND INCOME

The Group recognises dividends when the Group’s right to receive payment is established. This is on the “last day to trade” for listed shares and on the “date of declaration” for unlisted shares. Dividend income includes scrip dividends, irrespective of whether there is an option to receive cash instead of shares.

9 FOREIGN CURRENCY TRANSLATION


9.1 Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Rand (“R”), which is the functional and presentation currency of the holding company of the Group.

9.2 Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.

Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.

Translation differences on non monetary items, such as equities at fair value through profit or loss, are reported as part of the fair value gain or loss.

Foreign currency translation differences on monetary items classified as available-for-sale, such as foreign currency bonds designated as available-for-sale, are not reported as part of the fair value gain or loss in equity, but are recognised as a translation gain or loss in the income statement when incurred.

Translation differences on non monetary items, classified as available-for-sale, such as equities are included in the fair value reserve in equity when incurred.

9.3 Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency of the Group are translated into the presentation currency as follows:

  • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
  • income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates), in which case income and expenses are translated at the actual rates at the dates of the transactions; and
  • all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold or partially disposed of, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

10 BORROWING COSTS

The Group capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset up to date on which construction or installation of the assets is substantially completed. Other borrowing costs are expensed when incurred.

11 DIRECT AND INDIRECT TAXES

Direct taxes include South African and foreign jurisdiction corporate tax payable, secondary tax on companies, as well as capital gains tax.

Indirect taxes include various other taxes paid to central and local governments, including value added tax and regional services levies.

Indirect taxes are disclosed as part of operating expenditure in the income statement.

The charge for current tax is based on the results for the year as adjusted for items which are non taxable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date, in each particular jurisdiction within which the Group operates.

Tax in respect of the South African life insurance operation is determined using the four fund method applicable to life insurance companies.

12 RECOGNITION OF ASSETS


12.1 Assets

The Group recognises assets when it obtains control of a resource as a result of past events, and from which future economic benefits are expected to flow to the entity.

12.2 Contingent assets

The Group discloses a contingent asset where, as a result of past events, it is highly likely that economic benefits will flow to it, but this will only be confirmed by the occurrence or non occurrence of one or more uncertain future events which are not wholly within the Group’s control.

13 LIABILITIES, PROVISIONS AND CONTINGENT LIABILITIES


13.1 Liabilities and provisions

The Group recognises liabilities, including provisions, when:

  • it has a present legal or constructive obligation as a result of past events;
  • it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
  • a reliable estimate of the amount of the obligation can be made.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of the obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre tax rate that reflects the current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as interest expense.

13.2 Contingent liabilities

The Group discloses a contingent liability when:

  • it has a possible obligation arising from past events, the existence of which will be confirmed only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the entity; or
  • it has a present obligation that arises from past events but is not recognised because:
    – it is not probable that an outflow of resources will be required to settle an obligation; or
    – the amount of the obligation cannot be measured with sufficient reliability.

14 CASH AND CASH EQUIVALENTS

In the cash flow statement, cash and cash equivalents comprise:

  • coins and bank notes;
  • money at call and short notice;
  • balances with central banks;
  • balances guaranteed by central banks; and
  • balances with other banks.

All balances included in cash and cash equivalents have a maturity date of less than three months from the date of acquisition.