1. Foreign currency exchange rates

Certain transactions of the group occur in foreign currencies. The most material of these currencies is the Great British Pound. These transactions have been translated using the exchange rates below.

Other less material foreign subsidiaries have been translated to rand using the weighted average rates for income statement items and the closing rates for items in the statement of financial position.

5.1 Historic transaction incentive costs

Prior year historic transaction incentive costs include the 2011 Executive Long-Term Incentive Plan of R34 million (refer to note 5.1.1) and the 2014 Exit Transaction Incentive of R57 million (refer to note 5.1.2).

5.1.1 2011 Executive Long-Term Incentive Plan

The Alexander Forbes 2011 Executive Long-Term Incentive Plan was approved by the resolution of the remuneration committee on 4 August 2011 and was amended and revised on 3 June 2014. The plan was constructed and designed as a restricted bonus incentive scheme which is settled in cash. Forty-six senior managers and directors of the group have been designated as eligible employees under the plan. Awards made to eligible employees (including executive directors) in terms of the plan vest in two tranches: (i) 50% on the date the company listed and as such are included in the historic incentive costs shown above; and (ii) 50% 18 months from the listing date, which is conditional upon acceptable performance by participants over the period and upon participants being employed by the group at the date of payment. This portion of the award is accrued as employee benefits. Details of payments made to prescribed officers may be found in the related parties’ note to these financial statements.

5.1.2 2014 Exit Transaction Incentive

The 2014 Exit Transaction Incentive (the 2014 ETI) was adopted by the board of the company to be implemented in the event that the selling shareholders’ investment in the group is successfully realised either by way of a trade sale or listing in 2014.

Participants in the 2014 ETI included the executive directors of the company and certain other senior managers of the group. The 2014 ETI was constructed and designed as a restricted incentive plan which was equity-settled by the company. The shares awarded to eligible participants are subject to certain disposal restrictions as noted below and was settled on the date the company listed. The incentive was awarded in terms of the 2014 ETI based on performing duties and functions in relation to the relevant transaction satisfactorily.

The number of shares to be issued to prescribed officers in terms of this incentive are detailed below:

This was a once-off allocation and there will be no further allocations in the current or future financial years.

5.2 Contractual payment to the Alexander Forbes Management Trust resulting from capital restructure

Since the 2007 Private Equity acquisition and up until the capital restructure which took place on 31 March 2014 the Alexander Forbes Management Trust was a holder of shares in the company but did not hold any A preference shares in the company, which effectively provided inherent leverage to the Alexander Forbes Management Trust. Pursuant to the restructure, the company redeemed all issued A preference shares and, in consideration, issued new shares to the holders of the A preference shares, resulting in significant dilution of the Alexander Forbes Management Trust’s ordinary shareholding in the company and the effective loss of the inherent gearing in the Alexander Forbes Management Trust’s investment in the company. In order to compensate the Trust and, indirectly, the beneficiaries for this loss, the company entered into an agreement dated 20 March 2014 with the Alexander Forbes Management Trust in terms of which the company agreed to pay the Alexander Forbes Management Trust a compensation amount (the compensation amount) upon the happening of certain defined events (including but not limited to the listing of the company on the JSE Limited). The compensation amount was calculated with reference to the offer price achieved in the listing. The compensation amount was R58 million and was thereafter included in the value of the points held in the Management Trust.

10. Earnings per share

10.1 Basic earnings/(loss) per share

Basic earnings/(loss) per share is calculated by dividing the profit/(loss) for the period attributable to equity holders by the weighted average number of ordinary shares in issue during the period.

10.2 Headline earnings/(loss) per ordinary share

Headline earnings/(loss) per share is calculated by excluding applicable non-trading and capital gains and losses from the profit/(loss) attributable to ordinary shareholders and dividing the resultant headline earnings/(loss) by the weighted average number of ordinary shares in issue during the period. Headline earnings/(loss) is defined in Circular 2/2015 issued by the South African Institute of Chartered Accountants.

10.3 Diluted earnings/(loss) per ordinary share

Diluted earnings/(loss) per ordinary share is calculated by adjusting the profit/(loss) attributable to equity holders for any changes in income or expense that would result from the conversion of dilutive potential ordinary shares, and dividing the result by the weighted average number of ordinary shares increased by the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares.

11.3 Reconciliation of assets held under multi-manager investment contracts

As a result of the group being listed, the investments by underlying asset managers in the Alexander Forbes Group Holdings listed shares are recognised as treasury shares and all fair value adjustments recognised on these treasury shares are reversed, while the corresponding fair value of the limited liability continues to be recognised in the income statement. The resultant profit for the year of R59 million (2015: loss of R26 million) has been disclosed separately on the face of the statement of comprehensive income. This treatment also impacts the number of shares in issue, the impact of which is disclosed in note 10.

Below is a reconciliation of the assets held under multi-manager investment contracts with the linked liabilities under such contracts:

15.4 Impairment review of goodwill

Goodwill is allocated to cash-generating units (CGUs) in accordance with the group’s accounting policies. This represents the lowest level at which goodwill is monitored for internal management purposes and in all cases is at or below the company’s operating segment. The goodwill balances are subject to an annual impairment review as required by IAS 36.

With the exception of LCP, each CGU goodwill balance is tested for a recoverable amount as determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by the board of directors for the forthcoming year and forecasts for up to three years which are based on assumptions of the business, industry and economic growth. Cash flows beyond this period are extrapolated using terminal growth rates which do not exceed the expected long-term economic growth rate for the geographic segment.

Key assumptions used include:

The specific segment risk factor applied ranges between 1% and 4% in both years.

Sensitivity analysis
A sensitivity analysis had been performed on each of the base case assumptions used for assessing the goodwill, with other variables held constant. Consideration of sensitivities to key assumptions can evolve from one financial year to the next.

The board has considered the surplus value in use or fair value and concluded that, in all cases, there are no reasonably possible changes in key assumptions that may give rise to the carrying amount of goodwill exceeding the value in use or fair value.

15.5 Allocation of goodwill balances to cash-generating units

Factors which are not considered separable from the business of the group, and which contributed to the cost of the acquisition of Alexander Forbes Limited by the company and resulted in the recognition of goodwill, include the following:

• assembled workforce, including specific technical expertise and training expertise;
• distribution channels;
• training and recruitment programmes;
• customer service capability and service support;
• effective marketing programmes and product cross-selling opportunities;
• leading market position; and
• finance-raising capabilities.

16. Intangible assets

Intangible assets comprise values attributed to contractual customer relationships and market-related intangible assets. All intangible assets are non-current in nature.

22. Assets and liabilities of disposal group classified as held for sale and discontinued operations

22.1 Net profit of business units discontinued up to effective date of disposal

The operations of Lane Clark & Peacock Belgium CVBA were disposed of with effect 31 March 2016. This business was classified as a discontinued operation during previous financial years. At 31 March 2016 there are no longer any assets and liabilities related to this operation included in the group statement of financial position. The operating results for the year are included as discontinued operations.

During 2015 the operations of Swaziland Employee Benefits and the associate, Tibiyo Insurance Brokers, both based in Swaziland, and the operations of Trustee Services in the UK were disposed of. At 31 March 2015 the group discontinued the operations of Alexander Forbes Compensation Technologies Proprietary Limited following the board decision to dispose of the business. The sale of this business is imminent, pending the successful resolution of certain conditions precedent to the sale.

The results of Alexander Forbes Compensation Technologies Proprietary Limited are reported as discontinued in the income statement. For a breakdown of the profit or loss on disposal of subsidiaries, refer to note 22.2: Disposal of subsidiaries, associates and operations.

22.2 Disposal of subsidiaries, associates and businesses

As detailed in note 22.1 the disposals of subsidiaries and associates in the year includes deferred consideration received on the sale of Trustee Services in the UK and the disposal of Lane Clark & Peacock Belgium CVBA . Disposals in 2015 include Swaziland Employee Benefit Consultants, Tibiyo Insurance Brokers and Alexander Forbes Trustee Services.

23.3.1 BEE Employee Share Option Plan (ESOP)

The Isilulu Trust (“trust”) was set up as the vehicle through which the ESOP will operate. 39 070 700 ordinary shares were issued to the trust at one cent per share and rank pari passu with other ordinary shares, with the exception of dividends rights for these shares. The trust is consolidated in the group’s results.

All employees not included in the conditional share incentive scheme (refer to note 23.4.2) are beneficiaries of the trust.

There are two types of beneficiaries, Pool A beneficiaries and Pool B beneficiaries. Pool A beneficiaries are black women and are entitled to 70% of the trust income available for distribution. Pool B beneficiaries are all beneficiaries not in pool A and are entitled to 30% of the trust income available for distribution.

The shares are entitled to 30% of the dividends distributed to ordinary shareholders. The trust is restricted from disposing of or encumbering these shares during the term of the trust. Dividends distributed by the trust are treated as employee benefits. The dividend income earned by the trust and subsequently distributed to qualifying employees was R2.7 million during the current financial year.

The trust is restricted from disposing or encumbering the shares held. AFGH has a call option in terms of which the shares may be repurchased under specific criteria relating to change in control, change in BEE rating and various other provisions. The repurchase price will be calculated in terms of a repurchase formula specifically defined in the agreements.The group does not currently anticipate executing the repurchase for the next 10 years.

23.4.2 Conditional share incentive scheme

Under this scheme executives, senior managers and other key employees of the group (participants) are granted performance-related awards, i.e. conditional rights to receive shares. In addition, these awards are subject to a vesting period determined by the remuneration committee. The performance condition is aligned to the financial year of the group. Further, each participant will not have any shareholder or voting rights prior to the vesting date. Employees are not required to pay for the shares granted under this scheme.

The shares granted under this scheme are subject to the group achieving its target growth in headline earnings per share (HEPS) over the period. The cumulative HEPS over the performance period is equal to the sum of the base year HEPS grown by the Consumer Price Index (CPI) and real Gross Domestic Product (GDP) per annum over the performance period.

Movement in the number of shares outstanding is as follows:

26.4 Revolving credit facility

The credit facility bears interest at JIBAR plus 1.25% per annum compounded quarterly. The interest is payable quarterly while the capital is repayable annually together with any unpaid interest on 31 March 2017. The facility is renewable annually for a 12-month period. Renewal is subject to an annual credit review by the lender and the financing needs of the group.

If Alexander Forbes Limited (AFL) fails to pay any principal amount or interest amount payable by it on its due date, interest shall accrue on the loan and any accrued and unpaid interest from the due date up to the date of actual payment at a rate which is equal to the interest rate (JIBAR plus 1.25%) which would otherwise be applicable plus 2%, for so long as such payment remains outstanding and has not been remedied after any applicable grace period (if any).

The credit facility agreement is for R1 billion and may be drawn or repaid at any time, in whole or in part, which would include the capital plus any accrued and unpaid interest to the repayment date.

The credit facility is subject to certain mandatory repayment events. For instance, the loan would be repaid if AFL or any other member of the group disposes of any of its assets or business (whether pursuant to a single transaction or a series of transactions) which, when aggregated with all other assets disposed of by members of the group since the signature date, directly or indirectly contribute more than 30% of the consolidated EBITDA or assets of the group for the 12-month period up to and as at the date of disposal.

In addition, all amounts outstanding on the credit facility, together with accrued and unpaid interest, shall become immediately due and payable in the event of a sale of all or substantially all of the assets or business of the group or if a change of control occurs. AFL must repay the credit facility if the lender becomes aware that it is unlawful in any applicable jurisdiction for such lender to perform its obligations under a term finance document.

26.5 Financial covenants

Due to the nature of the revolving credit facility there are no financial covenants included in the agreement.

27.3 Post-retirement medical benefit obligation – South Africa

In South Africa certain employees, who joined the group before 1 March 1997, are entitled to a post-retirement medical aid subsidy. At 31 March 2016 this applies to a total of 345 people (2015: 350) and comprises 89 active employees (2015: 94) and 256 pensioners (2015: 258). Employees who joined the group after 1 March 1997 are not eligible for post-retirement medical aid subsidies.

Certain employees employed before 1 March 2009 are eligible for a death-in-service subsidy. If a member eligible for a death-in-service subsidy dies in service, their dependants are eligible to receive a 50% subsidy of medical scheme contributions subject to the fixed rand amount as for the post-retirement subsidy.

The obligation is valued every year by actuaries using the projected unit credit method. The date of the last actuarial valuation was 31 March 2016. The post-retirement medical obligation is partly funded through a cell-captive insurance arrangement; the assets of the insurance cell totalled R62 million at 31 March 2016 (2015: R69 million).

The cell-captive insurance policy is consolidated in the group’s results and the related asset which backs this post-employment liability is reflected in cash and cash equivalents.

The post-retirement medical aid subsidy paid to pensioners is subject to a maximum rand amount. This rand amount increases with inflation (CPI) each year. In order to compensate for the rand amount increase of the subsidy being different to medical aid inflation, the group established a hardship fund in 2004 to provide assistance to specifically identified pensioners in financial need.

During the prior year the subsidy for medical aid was enhanced by R5 million as a once-off benefit and funded from the hardship fund.

29.2Provision for client settlements and other legal claims

The group voluntarily appointed independent legal advisers to conduct a full review of past and current business practices across all of the South African operations in 2006. The results of the review were fully disclosed and published on the group’s website. Following this review the provision for proposed client settlements for historical business practices, including the practice referred to as ‘bulking’, was made. Interest accrues on this provision at the prime lending rate less 4% up to the date of settlement payments.

To date the group has made substantial progress in relation to the client settlement process, with the vast majority of all retirement funds that received offers having accepted the settlement offer.

29.3 Provision for errors and omissions claims

The group’s errors and omissions risk is insured in the London market (the market policy), with a limit of R2 billion (2015: R1.95 billion) for each and every claim or loss in the annual aggregate in excess of the aggregate deductible of R90 million. The market policy covers all subsidiary and associate companies, except for Lane Clark & Peacock. Lane Clark & Peacock effect their own cover.

Upon exhaustion of the aggregate deductible of R90 million a residual deductible of R1.2 million for each claim or loss shall apply, and the ZAR equivalent of £30 000 for each claim deductible in respect of investment and investment-related business activities regulated by the Financial Services Authority in the UK.

The aggregate deductible of R90 million is insured with a third-party cell-captive insurer, Mannequin Insurance PCC Limited (the Mannequin policy). The limit of the Mannequin policy is equal to the limit of the aggregate deductible of the market policy, i.e. R90 million. The Mannequin policy imposes a deductible of R1.5 million per claim for Africa operations or £100 000 for operations outside Africa.

From 1 April 2014 the Mannequin policy also covers associates and non-wholly-owned (NWOS) operations. Except Namibia operations (which have access to a R2 billion limit), associates and NWOS have a limit of R125 million per claim and in the aggregate. In the event of the exhaustion of the aggregate excess of R90 million, the market policy will drop down to cover associates and NWOS to the full limit of R125 million respectively less any amount paid for claims in respect of associates and NWOS. The Mannequin policy imposes a deductible of R375 000 per claim in respect of associates and NWOS. These deductibles are unchanged from the prior year.

The group has an equity investment in a cell in Mannequin Insurance PCC Limited, which entitles the group to the underwriting profits earned by this insurance cell. The group is required to maintain the insurance cell and ensure it is adequately capitalised. Additional capital is required to be paid in the event that underwriting losses are incurred by the insurance cell.

The assets, liabilities, income statement and cash flow effects attributable to the group’s investment in the Mannequin insurance cell are included in the consolidated financial statements of the group. The effect is to eliminate the premium payments to the cell-captive insurer on consolidation and to recognise the assets, liabilities, cash flows and net operating results of the insurance cell in the consolidated financial statements of the group. The insurance premiums charged to the various group operations continue to be allocated to the relevant businesses in determining the trading results of operations reflected in the segmental profit analysis.

Critical assumptions and judgements

Twice a year a committee of senior group managers conducts a detailed review of all outstanding claims. The merit of each claim is assessed and each claim is scored based on the probability (on a scale of 1 (unlikely) to 10 (extremely likely)) of being realised and the estimated cost to the group. A provision is raised for the product of the probability and the estimated cost. Judgement is exercised when assessing probability and potential cost based on past experience and any industry developments. Legal advice is sought where necessary and all calculations are submitted to the group insurance underwriters for their comment and review. Where the probability of a claim is assessed at 5 or more an accrual is made for any excess payable.

There is a specific matter being reviewed by a foreign regulator in respect of a legacy subsidiary business that has been sold. Whilst this review is ongoing it is too early to determine (i) if there is any liability that may arise and (ii) in the event a liability does arise, if it will impact the group.

29.4 Other provisions

Other provisions include the following:

• Provision for clawback of commissions received by the group. This provision is based on historical client lapse experience. However, it may not be representative of future client lapse experience which will affect the quantum of commission required to be repaid to insurers.
• Provision for contractual obligations in relation to premises leases entered into in the United Kingdom, which require the relevant buildings to be refurbished at the end of the lease term. The nature of the actual expenditure and quantum thereof will only be determined at the end of the lease term.
• Provision for onerous premises leases. This provision is based on management’s best estimate but conditions may change regarding the likelihood, timing and commercial terms of sublease arrangements in respect of unoccupied office space.

33.2 Policyholder liability under long-term insurance contracts

The policyholder liability arises from group life business written by a long-term insurance subsidiary of the group. The net liability position comprises:

Critical assumptions and judgements

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 SAP 104 of the Actuarial Society of South Africa.

Assumptions need to be made in respect of inputs to the model. The following process is followed to determine the valuation assumptions:

• Management exercises judgement in deciding on best estimates for assumptions.
• 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.

Best estimate assumptions as to mortality and morbidity, expenses, investment income and tax are used which may vary at each reporting date. Reliance is placed on historical information and statistical models. 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.