THE STANDARD GENERAL INSURANCE COMPANY LIMITED (Registration number 1948/029011/06) AUDITED ANNUAL FINANCIAL STATEMENTS.

Transcription

1 THE STANDARD GENERAL INSURANCE COMPANY LIMITED (Registration number 1948/029011/06) AUDITED ANNUAL FINANCIAL STATEMENTS 30 September 2014 These annual financial statements were prepared under the supervision of the Chief Financial Officer, J Muller Strauss CA(SA) Incorporated in the Republic of South Africa Registered office: African Bank building No. 59, 16 th Road Midrand Johannesburg

2 (Registration number 1948/029011/06) ANNUAL FINANCIAL STATEMENTS CONTENTS Page Directors responsibility and approval of the annual financial statements 2 Certification by the company secretary 3 Independent auditor s report 4-5 Audit committee report 6-7 Directors report 8-9 Report of the independent actuary Statement of financial position 16 Statement of comprehensive income 17 Statement of changes in equity 18 Statement of cash flows 19 Notes to the annual financial statements 20-72

3 ANNUAL FINANCIAL STATEMENTS DIRECTORS RESPONSIBILITY AND APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS The directors are responsible for ensuring that the annual financial statements fairly present the financial position, operating results, statement of changes in equity and cash flow information of the company. The annual financial statements have been compiled by management in terms of International Financial Reporting Standards, and are based on the company's accounting policies and are supported, where appropriate, by reasonable and prudent judgments and estimates. The directors are responsible for the systems of internal control. These are designed to provide reasonable, but not absolute, assurance as to the reliability of the annual financial statements, and to adequately safeguard, verify and maintain accountability of assets, and to prevent and detect material misstatement and loss. The systems are implemented and monitored by suitably trained personnel with appropriate segregation of authority and duties. Nothing has come to the attention of the directors to indicate that any material breakdown in the functioning of these controls, procedures and systems occurred during the year under review. During the month of August 2014 significant developments in the ABIL ( African Bank Investments Limited ) group increased the group-systemic risk exposure of the company. On 10 August 2014 African Bank Limited ( ABL ) was placed under curatorship and later in August 2014 both Ellerine Furnishers Proprietary Limited and Ellerine Holdings Limited commenced with voluntary business rescue proceedings. These developments have cast doubt on the ability of the company to continue as a going concern due to the interdependence amongst the ABIL group companies. The directors are constantly reviewing the situation, as well as available management actions at the Board s disposal. The directors have made an assessment of the company s ability to continue as a going concern and based on the various factors as set out in the section under Critical accounting judgements and key sources of estimation uncertainty Going concern (pages 28 & 29) have a reasonable expectation that the company will be a going concern in the year ahead. Management also obtained written commitments from ABL s Curator that support will be provided to the company should the need arise, especially due to the high deposit exposure to ABL. It is worth highlighting that the board has agreed, as a condition set by the Curator for providing access to the deposit held with ABL, that in the event that excess assets are higher than R55 million on the regulatory asset spread requirement on a statutory basis, R40 million shall be reinvested with ABL as part of a joint effort to resolve the interests of both ABL and the company. Such reinvestment subsequent to year-end is not expected to threaten the solvency of the company. The annual financial statements have been audited by independent auditors, Deloitte & Touche, who were provided unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. The directors believe that all representations made to the independent auditors during their audit were valid and appropriate. The Deloitte & Touche audit report is presented on pages 4 and 5. Approval of the annual financial statements The annual financial statements on pages 16 to 72 were approved by the board of directors on 5 December 2014 and are signed on its behalf by: DB Gibbon Chairman M Botha Director 3

4 ANNUAL FINANCIAL STATEMENTS CERTIFICATION BY THE COMPANY SECRETARY I certify, in accordance with section 88(2)(e) of the Companies Act 71 of 2008 of South Africa ( the Act ), that, the company has lodged with the Registrar of Companies all such returns as are required by a public company in terms of the Act and that all such returns are true, correct and up to date. L Goliath Company Secretary 5 December 2014

5 INDEPENDENT AUDITOR'S REPORT TO THE MEMBER OF THE STANDARD GENERAL INSURANCE COMPANY LIMITED We have audited the financial statements of The Standard General Insurance Company Limited set out on pages 16 to 72, which comprise the statement of financial position as at 30 September 2014, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and the notes thereto, comprising a summary of significant accounting policies and other explanatory information. Directors Responsibility for the Financial Statements The company s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 5

6 INDEPENDENT AUDITOR'S REPORT TO THE MEMBER OF THE STANDARD GENERAL INSURANCE COMPANY LIMITED (continued) Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of The Standard General Insurance Company Limited as at 30 September 2014, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa. Emphasis of Matter We draw attention to the matter below. Our opinion is not modified in respect of these matters. Note 3.1 to the financial statements indicates that African Bank Limited was placed under curatorship in August 2014, and Ellerine Furnishers Proprietary Limited and Ellerine Holdings Limited both entered into voluntary business rescue proceedings in August Note 3.1 also indicates that these conditions, along with other factors as set forth in note 3.1, indicate the existence of a material uncertainty which may cast significant doubt on The Standard General Insurance Company s ability to continue as a going concern. Other reports required by the Companies Act As part of our audit of the financial statements, we have read the Directors Report, the Company Secretary s Certificate, the Joint Risk and Audit Committee Report, the Certification of the Statutory Financial Position, and the Statement of Assets, Liabilities, Excess Assets and Capital Requirements for the purpose of identifying whether there are material inconsistencies between these reports and the audited financial statements. These reports are the responsibility of the respective preparers. Based on reading these reports we have not identified material inconsistencies between these reports and the audited financial statements. However, we have not audited these reports and accordingly do not express an opinion on these reports. Deloitte & Touche Registered Auditors Per: P Binnie Partner 5 December

7 ANNUAL FINANCIAL STATEMENTS AUDIT COMMITTEE REPORT The audit committee presents its report for the financial year ended 30 September 2014 as required by section 94(7)(f) of the Companies Act. The joint audit committee has been constituted in accordance with applicable legislation and regulations. Purpose of the audit committee The main purpose of the audit committee is to assist the board in discharging its duties relating to the safeguarding of assets, accounting systems and practices, the integrity of internal financial control processes and the preparation of accurate financial reporting and statements in compliance with all legal requirements and accounting standards. Membership and attendance A newly formed audit committee was constituted on 3 November 2014 and consists of three members who are all independent, non-executive directors. The committee met for the first time on 3 November 2014 to attend to matters relating to the 2014 financial year end. The committee will meet at least four times per financial and calendar year. Prior to the company constituting its own audit committee, the company utilised the audit committee of the ABIL group, which was attended by some of the non-executive and executive directors of the company. The names of the members are as follows: Independent non-executive directors Colin Van der Meulen (chairman) Dave Gibbon Morris Mthombeni Functions of the audit committee The committee has approved the audit committee charter and has discharged the functions in terms of the charter which included: reviewing and approving the company external audit plan including the proposed audit scope, approach to company risk activities and the audit fee; confirming the independence of the auditors, Deloitte & Touche; reviewing external audit reports; assessing the nature and extent of non-audit services; evaluating the role, independence and effectiveness of the internal audit function; approving the internal audit charter and internal audit plan; reviewing the accounting policies adopted by the company and all proposed changes in accounting policies and practices; reviewing the annual financial statements to confirm the financial statements are prepared in accordance with International Financial Reporting Standards and the Companies Act; reviewing the company compliance plan and assessing the procedures for identifying regulatory risks; and reviewing the legal matters that could have a significant impact on the company s financial statements. 7

8 ANNUAL FINANCIAL STATEMENTS AUDIT COMMITTEE REPORT (continued) Attendance by auditors and executive directors The internal and external auditors attended and reported at the meeting of the committee. The executive directors, Marius Botha and Nithia Nalliah attended the meeting by invitation. Independence of external auditors The audit committee has satisfied itself that the auditors are independent of the company. Internal financial controls, accounting practices and company annual financial statements Based on the work of the company s assurance providers, nothing has come to the attention of the committee which indicates that the company s system of internal financial controls and accounting practices, in all material respects, does not provide a basis for reliable annual financial statements. The committee is satisfied that the company annual financial statements are in compliance, in all material respects, with the requirements of the Companies Act and International Financial Reporting Standards, and recommended the financial statements for approval by the board. Colin Van Der Meulen Chairman: Audit committee 5 December

9 ANNUAL FINANCIAL STATEMENTS DIRECTORS REPORT The directors present their report to the shareholder, together with the audited annual financial statements of the company for the financial year ended 30 September Nature of the business The Standard General Insurance Company Limited (Stangen) is a registered long-term insurance company in terms of the Long-term Insurance Act. Its principal activity is the selling of credit life insurance policies to African Bank Limited s (ABL) clients as part of the ABL loan offering. The credit life policy benefits include death, retrenchment, disability, short time and compulsory unpaid leave cover. Stangen s product offering also includes funeral cover, and the piloting of crime injury and personal accident cover to ABL s clients. Stangen s credit life policy premiums are payable by customers monthly and are collected by ABL as part of the customers African Bank loan repayment instalment. Thus Stangen is reliant on ABL collecting these premiums each month and paying these over to Stangen. Hence there is a higher risk of these policies lapsing compared to policies where premiums are payable upfront. Share capital Ordinary shares The authorised share capital remains unchanged at A ordinary shares of R1 each. Holding company The company s holding company is African Bank Investments Limited (ABIL). Financial results The financial results are set out on pages 16 to 72 of these annual financial statements. The company reported a net profit after tax of R1 065 million for the 2014 financial year (2013: R1 277 million). Going concern The directors have satisfied themselves that the company is in a sound financial position and is able to meet its foreseeable cash requirements (refer to the directors responsibility and approval of the annual financial statements and note 3.1 Critical accounting judgements and key sources of estimation uncertainty going concern on pages 28 and 29). On this basis they consider that the company has adequate resources to continue operating for the foreseeable future and therefore deem it appropriate to adopt the going concern basis in preparing the company s financial statements for this reporting period. 9

10 ANNUAL FINANCIAL STATEMENTS DIRECTORS REPORT (continued) Post-balance sheet events The directors are not aware of any matter or circumstance arising since the end of the financial year, not dealt with in the company annual financial statements, which significantly affects the financial position as at 30 September 2014 or the results of its operations or cash flows for the year then ended. Corporate governance Stangen is a wholly owned subsidiary of ABIL, a company incorporated in the Republic of South Africa and listed on the JSE and therefore subscribes to the values of good corporate governance contained in the King Report on Governance for South Africa and the King Code of Governance Principles (King III). Regulatory approval As at the date of this directors report, there is no outstanding regulatory approval. Dividends to ordinary shareholder The board of directors declared and paid dividends of R1 250 million (2013: R1 210 million) during the current financial year. Directors and changes in directors The following directors are represented on the board of Stangen: Date appointed to board Dave Gibbon Non-executive Chairman 26/11/2004 Nithia Nalliah Executive director 26/01/2007 Mojankunyane Gumbi Non-executive director 13/09/2012 Morris Mthombeni Non-executive director 01/11/2013 Charles Chemel Executive director 08/02/2013 Colin Van Der Meulen Non-executive director 10/02/2014 Marius Botha Executive director 10/02/2014 Johnny Symmonds, a non-executive director, resigned from the board with effect from 1 November Company secretary and registered office The company secretary is L Goliath and her business and postal address is the registered address of the company which is 59 16th Road, Midrand,

11 REPORT OF THE INDEPENDENT ACTUARY TO THE MEMBER OF THE STANDARD GENERAL INSURANCE COMPANY LIMITED Certification of statutory financial position I hereby certify that: o o o o o the actuarial valuation on the statutory basis of The Standard General Insurance Company Limited ( the company ) has been conducted as at 30 September 2014 (the valuation date) in accordance with the applicable Actuarial Society of South Africa Professional Guidance Notes, the results of which are summarised below; this Statutory Actuary s report has been produced in accordance with the applicable Actuarial Society of South Africa Professional Guidance Notes; the assets exceeded the sum of the liabilities and Capital Adequacy Requirements as at valuation date; the company met the requirements of section 31 of the Long-term Insurance Act (the asset spreading requirements) as at valuation date, and in my opinion the company is financially sound at the valuation date, and likely to remain so for the foreseeable future. WJ Haslam, F.I.A., F.A.S.S.A. Statutory Actuary 5 December

12 REPORT OF THE INDEPENDENT ACTUARY TO THE MEMBER OF THE STANDARD GENERAL INSURANCE COMPANY LIMITED 1. STATEMENT OF ASSETS, LIABILITIES, EXCESS ASSETS AND CAPITAL REQUIREMENTS 1.1 Published reporting basis Total value of assets as per statement of financial position Total value of liabilities Value of policy liabilities under insurance contracts Current and other liabilities as per statement of financial position Excess assets Statutory basis Value of assets on the Statutory basis Total value of liabilities Value of policy liabilities under insurance contracts Current and other liabilities as per statement of financial position Excess assets Capital Adequacy Requirements Ratio of excess assets to Capital Adequacy Requirements x 4.5x 2. ANALYSIS OF CHANGE IN EXCESS ASSETS ON THE PUBLISHED REPORTING BASIS 2.1 The excess of the value of assets over the value of liabilities has changed as follows over the reporting period: Change in excess assets over the reporting period ( ) Excess assets as at end of reporting period Excess assets as at beginning of reporting period

13 REPORT OF THE INDEPENDENT ACTUARY TO THE MEMBER OF THE STANDARD GENERAL INSURANCE COMPANY LIMITED 2. ANALYSIS OF CHANGE IN EXCESS ASSETS ON THE PUBLISHED REPORTING BASIS (continued) 2.2 This change in the excess assets may be analysed as follows: Investment return generated by excess assets over liabilities: Investment income Capital appreciation - - Total investment return Operating profit Changes in valuation methods, assumptions and data ( ) ( ) New business surplus Tax ( ) ( ) Total earnings Capital raised - - Dividends paid ( ) ( ) Total analysed change in excess assets ( ) RECONCILIATION TO REPORTED EARNINGS (NET OF TAX) Total earnings as per the above table Reported earnings in annual financial statements Difference RECONCILIATION OF EXCESS ASSETS BETWEEN PUBLISHED REPORTING BASIS AND STATUTORY BASIS Excess assets on published reporting basis Excess assets on statutory basis Difference Statutory margin on IBNR reserve included in statutory basis not included in the published basis Intangible assets inadmissible on statutory basis Total differences between published and statutory bases CHANGES IN PUBLISHED REPORTING VALUATION METHODS, ASSUMPTIONS AND DATA The value of the liabilities before zeroisation as at 30 September 2014 increased by R380.0 million as a result of changes to the valuation assumptions, methods and data. Assumptions were revised to reflect the recent actual experience of the company and the current economic environment. 13

14 REPORT OF THE INDEPENDENT ACTUARY TO THE MEMBER OF THE STANDARD GENERAL INSURANCE COMPANY LIMITED 5. CHANGES IN PUBLISHED REPORTING VALUATION METHODS, ASSUMPTIONS AND DATA (continued) The breakdown of the impacts of the assumption, methodology and data changes is as follows: Changes in methodology and data corrections - ( ) Changes to non-economic assumptions ( ) Changes to economic assumptions (9 823) Total assumption change ( ) 6. PUBLISHED REPORTING VALUATION AND ASSUMPTIONS The valuation was performed using the Financial Soundness Valuation method for insurance contracts in accordance with the requirements of the Long-term Insurance Act. The result of the valuation methods and assumptions is that profits for insurance contracts are released appropriately over the term of each policy. This avoids the premature recognition of profits which could give rise to losses in later years. 7. PUBLISHED REPORTING LIABILITY VALUATION METHODS AND ASSUMPTIONS In the calculation of liabilities for insurance contracts provision has been made for: The best estimate of the future experience, plus the compulsory margins prescribed by SAP 104, plus a discretionary margin equal to the elimination of the overall negative reserve for all insurance contracts. The effects of the discretionary margins are as follows: Elimination of overall negative reserves Total discretionary margin The assumptions (before adding margins) with regard to future surrender, lapse, temporary and permanent disability payment, retrenchment, mortality and morbidity rates were consistent with the company s recent and expected future experience and provision has been made for the expected occurrence of AIDS-related claims. The most recent experience investigation was for the period 1 October 2013 to 30 September 2014 for expenses and 1 July 2013 to 30 June 2014 for disability, retrenchment and persistency. The latest mortality experience investigation was for the period 1 July 2012 to 30 June The lapse investigation was updated to include experience up to 30 June 2014 to allow for the recent repayment behaviour of borrowers in respect of the loans underlying the credit life policies. 14

15 REPORT OF THE INDEPENDENT ACTUARY TO THE MEMBER OF THE STANDARD GENERAL INSURANCE COMPANY LIMITED 7. PUBLISHED REPORTING LIABILITY VALUATION METHODS AND ASSUMPTIONS (continued) Provision for expenses (before adding margins) commences at a level consistent with the company s current experience and allows for a 6.5% per annum escalation thereafter (previous year: 6.5%). Where relevant, liabilities include provisions to meet maturity, mortality and disability guarantees and for losses in respect of potential lapses and surrenders. A discount rate of 7.5% (previous year: 7.0%). No allowance has been made for tax as the fund is in an excess of E situation and consequently not expected to pay tax. The fund does not currently pay tax. Shareholders are entitled to all the profits on the shareholders funds and on the life insurance business. 8. PUBLISHED REPORTING ASSET VALUATION METHODS AND ASSUMPTIONS All assets (including the excess of assets over liabilities) have been valued at fair value. Assets held with African Bank Limited are held at face value less known impairments. 9. STATUTORY CAPITAL ADEQUACY REQUIREMENTS The statutory capital adequacy requirement (CAR) has been calculated in accordance with section 6 of SAP 104. The capital adequacy requirement is calculated to ensure that the excess of assets over liabilities is sufficient to provide for the possibility of significant adverse departures in actual future experience compared to the assumptions adopted in calculating policy liabilities and against significant fluctuations in the value of assets. The following main assumptions have been adopted in calculating the capital adequacy requirement (CAR): The policy liabilities are backed by cash. A reduction in asset values is thus unlikely, which renders the need for a resilience reserve unnecessary. Other risks which are not specified in SAP104 and which rely on the actuary s judgement on risks which are specific to the company concerned were also allowed for in the ordinary capital adequacy requirement (OCAR). The other risks allowed for were: Retrenchment Concentrations. This risk arises from the fact that retrenchments are not necessarily independent of each other. Economic forces within the broad South Africa economy and within individual industries tend to have a large influence on the incidence of retrenchment. There is currently no form of risk transfer, such as relief provisions within the policy documents or reassurance arrangement to protect Stangen from such risks. 15

16 REPORT OF THE INDEPENDENT ACTUARY TO THE MEMBER OF THE STANDARD GENERAL INSURANCE COMPANY LIMITED 9. STATUTORY CAPITAL ADEQUACY REQUIREMENTS (continued) Operational Risks. SAP104 is not specific about the amount that should be determined for operational risks and leaves it to the actuary s judgement. The practice is usually for the capital to be of the order of 3% of the company s annual premiums. This has been used in the past, but was increased by the addition of R50 million as a result of the amounts that continue to be claimed by ABL arising from overpayments of premiums in the past. These have amounted to approximately R50 million in the past year. IBNR Volatility. Volatility in the IBNR reserve is a risk that arises from the assumptions used to determine this reserve. This includes an amount in respect of the development factors that are adopted, and an amount in respect of the incidence rate that is adopted for each of the origin months. The ordinary capital adequacy requirement (OCAR) exceeded termination capital adequacy requirement (TCAR) and the minimum capital adequacy requirement (MCAR), and thus the capital adequacy requirements have been based on the OCAR. 16

17 STATEMENT OF FINANCIAL POSITION as at 30 September 2014 ASSETS Notes Intangible assets Equipment Other assets Reinsurance assets Cash and cash equivalents Cash and cash equivalents ABL call deposit Total assets EQUITY AND LIABILITIES Share capital Share premium Retained earnings Total equity (capital and reserves) Deferred tax liability Taxation Policyholders liabilities under insurance contracts Incurred and reported (IAR) provision Other liabilities Accounts payable Total liabilities Total equity and liabilities

18 STATEMENT OF COMPREHENSIVE INCOME Notes Insurance premium and reinsurance income Reinsurance outwards ( ) ( ) Net insurance income Investment income and capital appreciation Interest and other investment income Net income Net insurance claims 18 ( ) ( ) Gross insurance benefits 18 ( ) ( ) Reinsurance recoveries Operating and administration expenses 19 ( ) ( ) Impairment of financial instruments 9 (56 888) - Profit before taxation Taxation 20 ( ) ( ) Profit for the year Other comprehensive income - - Total comprehensive income for the year

19 STATEMENT OF CHANGES IN EQUITY Ordinary share capital Share Retained A shares premium earnings Total Balance at 30 September Total comprehensive income for the year Dividends paid - - ( ) ( ) Balance at 30 September Total comprehensive income for the year Dividends paid - - ( ) ( ) Balance at 30 September

20 STATEMENT OF CASH FLOWS Notes Cash flows from operations Cash receipts from policyholders and investments Cash paid to policyholders, suppliers and employees 23 ( ) ( ) Taxation paid 24 ( ) ( ) Net cash inflow from operating activities Cash flows from investing activities Acquisition of equipment (147) (65) Acquisition of intangible assets (298) (699) Loss on disposal of investments - (628) Net cash outflow from investing activities (445) (1 392) Cash flows from financing activities Dividends paid ( ) ( ) Net cash outflow from financing activities ( ) ( ) Increase / (decrease) in cash and cash equivalents (47 313) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year

21 1. GENERAL INFORMATION The Standard General Insurance Company Limited (Stangen) is a registered long-term insurance company in terms of the Long-term Insurance Act. Its principal activity is the selling of credit life insurance policies to African Bank Limited s (ABL) clients as part of the ABL loan offering. The credit life policy benefits include death, retrenchment, disability, short time and compulsory unpaid leave cover. Stangen product offering includes funeral cover, and the piloting of crime injury and personal accident cover to ABL s clients. 2. ADOPTION OF NEW STANDARDS AND INTERPRETATIONS 2.1 New and revised IFRSs affecting amounts reported in the current year The new and revised standards, amendments to standards and interpretation which have been applied in the current year have had no material effect on the amounts reported in these financial statements. 2.2 New and revised IFRSs with no material effect on the annual financial statements The following new and revised standards, amendments to standards and interpretations have been applied in the current year. The application of these new revised standards and interpretations has not had any material effect on the amounts reported for the current and prior years. IFRS/IFRIC IFRS 7 Title and Details Title: Financial Instruments: Disclosures Details: Amendments related to the enhancement of disclosure about offsetting of financial assets and financial liabilities. IFRS 13 Title: Details: The amendments do not change the current offsetting model in IAS 32, which requires an entity to offset a financial asset and financial liability in the statement of financial position only when the entity currently has a legally enforceable right to set off and intends either to settle the asset and liability on a net basis or to realise the asset and settle the liability simultaneously. The amendments clarify the set off requirements as well as the requirements towards the disclosure of the financial instruments that are offset. Fair Value Measurement IFRS 13 was issued in order to eliminate inconsistencies in the guidance on how to measure fair value and disclosure requirements that currently exist under the different IFRSs that require or permit fair value measurement. It provides a fair value hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. 21

22 2. (84 723)ADOPTION OF NEW STANDARDS AND INTERPRETATIONS (continued) 2.2 New and revised IFRSs with no material effect on the annual financial statements (continued) IFRS/IFRIC IAS 19 Title and Details Title: Employee Benefits Details: The main changes include the removal of the corridor approach, which allowed entities the option to defer the recognition of actuarial gains and losses on defined benefit plans. Annual improvements Title: Details: The revised standard requires that all re-measurements arising from defined benefit plans be presented in other comprehensive income. It also enhanced disclosure requirements for defined benefits plans. Annual Improvements Project Annual improvements ,cycles. Amendments affected IFRS 1, IAS 1, IAS 16, IAS 32, and IAS New and revised IFRSs in issue but not yet effective The company has not applied the following new and revised IFRSs that have been issued but with a future effective date. IFRS effective for periods beginning on or after 1 January 2014 or 1 July 2014 IFRS/IFRIC Title and Details Expected impact IFRS 10 Title: Details: Consolidated Financial Statements IFRS 10 exception to the principle that all subsidiaries must be consolidated. Entities meeting the definition of "Investment entities" must be accounted for at fair value under IFRS 9 "Financial Instruments" and IAS 39 "Financial Instruments: Recognition and measurement. The statement is not applicable to the company. IFRS 12 Title: Details Disclosure of interest in other entities Amendments applicable to investment entities. The statement is not applicable to the company. IAS 19 Title: Details: Employee benefits Amendments regarding clarification of the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to period of service. The company is in the process of assessing the impact that the amendment will have on the financial statements. 22

23 2. ADOPTION OF NEW STANDARDS AND INTERPRETATIONS (continued) 2.3 New and revised IFRSs in issue but not yet effective (continued) IFRS effective for periods beginning on or after 1 January 2014 or 1 July 2014 (continued) IFRS/IFRIC Title and Details Expected impact IAS 27 Title: Details: Consolidated and separate financial statements Requirement to account for interests in "Investment entities" at fair value under IFRS 9 "Financial Instruments" and IAS 39 "Financial Instruments: Recognition and measurement", in the separate financial statements of a parent. The statement is not applicable to the company. IAS 32 Title: Details: Financial Instruments: Classification and Measurement The amendments do not change the current offsetting model in IAS 32, which requires an entity to offset a financial asset and financial liability in the statement of financial position only when the entity currently has a legally enforceable right to set off and intends either to settle the asset and liability on a net basis or to realise the asset and settle the liability simultaneously. The amendments are made to clarify the application principles on the offsetting requirements for the financial assets and financial liabilities. The company will comply with the standard and will make sure that the set off requirements are applied correctly when the standard becomes effective. IAS 36 Title: Details: Impairment of assets Amendments arising from Recoverable Amount Disclosures for Non-Financial Assets. The amendments clarify the disclosure requirements in respect of fair value less costs of disposal. The company will comply with the standard and will make sure that the appropriate disclosure is provided. Two additional disclosure requirements were added: Additional information about the fair value measurement of impaired assets when the recoverable amount is based on fair value less costs of disposal. Information about the discount rates that have been used when the recoverable amount is based on fair value less costs of disposal using a present value technique. The amendment harmonises disclosure requirements between value in use and fair value less costs of disposal. 23

24 2. ADOPTION OF NEW STANDARDS AND INTERPRETATIONS (continued) 2.3 New and revised IFRSs in issue but not yet effective (continued) IFRS effective for periods beginning on or after 1 January 2014 or 1 July 2014 (continued) IFRS/IFRIC Title and Details Expected impact IAS 39 Title: Financial instruments: recognition and The amendment is not measurement expected to impact the Details: Amendments for novations of derivatives. The amendments provide an exception to the requirement to discontinue hedge accounting in certain circumstances in which there is a change in counterparty to a hedging instrument in order to achieve clearing for that instrument. company. IFRIC 21 Title: Details: Levies This interpretation provides guidance on when to recognise a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 and those where the timing and amount of the levies certain. The statement is not applicable to the company. The Interpretation identifies the obligating event for the recognition of a liability as the activity that triggers the payment of the levy in accordance with the relevant legislation. Guidance provided indicates that the liability is recognised progressively if the obligating event occurs over a period of time and if an obligation is triggered on reaching a minimum threshold, the liability is recognised when that minimum threshold is reached. IFRS effective for periods beginning on or after 1 January 2015 IFRS 7 Title: Details: Financial Instruments: Disclosures Amendments require specific disclosure about the initial application of IFRS 9. The amendments defer the effective date of IFRS 9 from periods beginning on or after 1 January 2013 to periods beginning on or after 1 January Also effective when IFRS 9 is first applied. The company will comply with the standard and will reconsider the classification of its financial assets into financial assets at amortised cost or fair value when the standard becomes effective. 24

25 2. ADOPTION OF NEW STANDARDS AND INTERPRETATIONS (continued) 2.3 New and revised IFRSs in issue but not yet effective (continued) IFRS effective for periods beginning on or after 1 January 2015 (continued) IFRS/IFRIC Title and Details Expected impact The amendments to IFRS 7 require additional disclosures on transition from IAS 39 to IFRS 9. The new transitional disclosures include, but are not limited to: Changes in the classifications of financial assets and financial liabilities, showing separately: a) the changes in the carrying amounts on the basis of their measurement categories in accordance with IAS 39 (i.e. not resulting from a change in measurement attribute on transition to IFRS 9); and b) the changes in the carrying amounts arising from a change in measurement attribute, such as from amortised cost to fair value, on transition to IFRS 9. The following four financial assets and financial liabilities that have been reclassified so that they are measured at amortised cost as a result of the transition to IFRS 9: a) The fair value of the financial assets or financial liabilities at the end of the reporting period. b) The fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified. c) The effective interest rate determined on the date of reclassification. d) The interest income or expense recognised. 25

26 2. ADOPTION OF NEW STANDARDS AND INTERPRETATIONS (continued) 2.3 New and revised IFRSs in issue but not yet effective (continued) IFRS effective for periods beginning on or after 1 January 2015 (continued) IFRS/IFRIC Title and Details Expected impact The amendments also require additional hedge accounting disclosures resulting from introduction of the hedge accounting chapter in IFRS 9. Implementation guidance has been added to IFRS 7, which illustrates how the quantitative disclosures might be made. IFRS effective for periods beginning on or after 1 January 2016 IFRS 10 Title: Details: Consolidated Financial Statements Amendments regarding the sale or contribution of assets between an investor and it s associate or joint venture. The statement is not applicable to the company. IFRS 11 Title: Details: Joint arrangements Amendments regarding the accounting for acquisitions of an interest in joint operation. The statement is not applicable to the company. IFRS 14 Title: Details: Regulatory Deferral Accounts The standard permits an entity which is a firsttime adopter of IFRS to continue to account, with some limited changes for "regulatory deferral account balances" in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Regulatory deferral account balances arise when an entity provides good or services to customers at a price or rate that is subject to rate regulation. The statement is not applicable to the company. IAS 16 Title: Details: Property, plant and equipment Amendments regarding the clarification of acceptable methods of depreciation and amortisation. Amendments bringing bearer plants into the scope of IAS 16. The company will comply with the standard when the standard becomes effective. 26

27 2. ADOPTION OF NEW STANDARDS AND INTERPRETATIONS (continued) 2.3 New and revised IFRSs in issue but not yet effective (continued) IFRS effective for periods beginning on or after 1 January 2016 (continued) IFRS/IFRIC Title and Details Expected impact IAS 27 Title: Details: Separate financial statements Amendments reinstating the equity method as an accounting option for investments in subsidiaries, joint ventures and associates in an equity's separate financial statements. The statement is not applicable to the company. IAS 28 Title: Details: Investments in associates and joint ventures Amendments regarding the sale or contribution of assets between an investor and it s associate or joint venture. The statement is not applicable to the company. IAS 38 Title: Details: Intangible assets Amendments regarding the clarification of acceptable methods of depreciation and amortisation. The company will comply with the standard when the standard becomes effective. IAS 41 Title: Details: Agriculture Amendments bringing bearer plants into the scope of IAS 16. The statement is not applicable to the company. IFRS effective for periods beginning on or after 1 January 2017 IFRS 15 Title: Details: Revenue from contracts with customers The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. The company will comply with the standard when the standard becomes effective. IFRS effective for periods beginning on or after 1 January 2018 IFRS 9 Title: Details: Financial Instruments: Classification and Measurement This standard is part of the IASB s three-part project intended to ultimately replace current IAS 39: Recognition and Measurement of Financial Instruments standard. The company will comply with the standard when the standard becomes effective. This phase deals with classification and measurement of financial assets. 27

28 2. ADOPTION OF NEW STANDARDS AND INTERPRETATIONS (continued) 2.3 New and revised IFRSs in issue but not yet effective (continued) IFRS effective for periods beginning on or after 1 January 2018 (continued) IFRS/IFRIC Title and Details Expected impact Finalized version of the standard is issued in July The final version incorporates requirements for classification and measurement, impairment, general hedge accounting and derecognition. The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject to local endorsement requirements). For a limited period, previous versions of IFRS 9 may be adopted early if not already done so provided the relevant date of initial application is before 1 February Critical accounting judgements and key sources of estimation uncertainty In the application of the company s accounting policies, which are described below, management is required to make judgements, estimates and assumptions about income, expenses and the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on the historical experience and other factors that are considered to be relevant. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates, judgements and assumptions. These 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 if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. A change in accounting estimate is defined as an adjustment to the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. Estimates and judgements and assumptions made, predominantly relate to policyholders liabilities arising from insurance contracts (note 12), IAR provision (note 13) and useful lives, residual values and depreciation methods for equipment (note 6). Other judgements made relate to classifying financial assets and liabilities into their relevant categories and in the determination of their fair value for measurement and disclosure purposes. 28

29 3. Critical accounting judgements and key sources of estimation uncertainty (continued) The following are the critical judgements and key estimation uncertainties that management have made in the process of applying the company s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. 3.1 Going concern As stated in the directors responsibility section, the annual financial statements have been prepared on the going concern basis which contemplates the continuity of normal business activity and the realisation of assets and settlement of liabilities in the normal course of business. The placing of ABL under curatorship on 10 August 2014 has cast doubt on whether the company can continue as a going concern considering the close business relationship of the company with ABL as illustrated by: The fact that a significant amount of the company s deposits are invested with ABL, which were frozen when curatorship took effect. Furthermore, the South African Reserve Bank announced that wholesale deposits will be subject to a 10% haircut as at the date of curatorship; ABL owed the company a significant amount in premiums, arising from acting as premium collection agent on the credit life business; The company is reliant on the ABL infrastructure for its operations including IT infrastructure support; ABL acts as the financial services provider for the company; and The placing of ABL under curatorship has resulted in significantly lower new business volumes on credit life. In addition to the above, Ellerine Furnishers Proprietary Limited and Ellerine Holdings Limited both entered into voluntary business rescue proceedings in August This placed the holding company ABIL under financial strain as the viability of two of its material subsidiaries were in question. This limited the support that parent company ABIL could provide to the company if the need arises. The directors have considered the following factors in deciding whether the company is a going concern: The expectation is that the company will be sold to the Good Bank holding company. Although this is not a certainty, current discussions indicate that this will take place due to the interdependency between the company and the new Good Bank. The company has deep knowledge of unsecured lending and it will be beneficial to the Good Bank holding company to start its operation with the company and its credit life business portfolio; A portion of the ABL deposit was released by the Curator enabling the company to meet its short term funding requirements. An agreement has also been reached with ABL to release premiums more frequently than monthly. This indicates a strong commitment from the Curator to continue providing support to the company if needed; The solvency and asset spread position of the company is above the regulatory minimum requirement and on the basis of various stress tests applied this is expected to be the position going forward; Changes are proposed to the underwriting model in order to mitigate the risk of claims being outside of expectation; 29

30 3. Critical accounting judgements and key sources of estimation uncertainty (continued) 3.1 Going concern (continued) Management has conducted various stress tests including: a significant increase in lapse rates; going into run-off and relying on in force business only (if the company is not sold to the Good Bank holding company); significantly lower business volumes; default on the ABL deposit (due to default by ABL); default on the payment of premiums by ABL; and the reinsurance asset being written off (due to a default by the reinsurer). Under all these scenarios it is expected that the company will still be solvent; Stress tests were also performed, having regard to the actuarial report and Own Risk and Solvency Assessment ( ORSA ) conducted during the course of the year as part of preparation for the new Solvency Assessment and Management ( SAM ) regime for insurers. It is management s view that the key financial risks for the company relate to the first six months of the new financial year (the expected curatorship period), and thereafter may dissipate as the company is expected to earn sufficient additional monthly earnings to improve its current excess asset position; and It is expected that there will be regulatory changes on credit life directly affecting the company which may include price capping and market conduct reforms, and worst case the removal of mandatory insurance cover on unsecured loans. These changes are not expected to take effect until the 2016 financial year, and would likely only apply to new business. Nonetheless, the company s projections indicate that there is no threat to the company s solvency as the company will be able to mitigate the risk through management actions such as increasing waiting periods and reducing benefits commensurate with the price caps. Based on the above, the directors consider the preparation of the annual financial statements as a going concern as appropriate as the company is expected to realise its assets and settle its commitments in the normal course of business for a period of not less than one year from the date of approval of these annual financial statements. 3.2 The ultimate liability arising from benefit payments under insurance contracts The determination of the liabilities under long-term insurance contracts is dependent on the estimates made by the company. Policyholders liabilities under long-term insurance contracts are comprised of the claims reported, assessed but not settled at the reporting date, the claims related to the events which might have taken place on or before the reporting date but were not communicated to the insurer on the reporting date as well as of the estimates of the net present value of future claims and benefits under existing contracts, offset by probable future premiums to be received or paid (net of expected service costs). The liability for long-term insurance contracts is either based on current assumptions or on assumptions established at the inception of the contract, reflecting the best estimate at the time increased with a margin for risk and adverse deviation. At inception of the contract, the company determines assumptions in relation to future death, disabilities, voluntary terminations, investment returns and administration expenses. 30