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Notes on the parent company financial statements

1 Nature of operations

Prudential plc (the Company) is a parent holding company. The Company together with its subsidiaries (collectively, the Group) is an international financial services group with its principal operations in Asia, the US and the UK. In Asia, the Group has operations in Hong Kong, Indonesia, Malaysia, Singapore and other countries. In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company. In the UK, the Group operates through its subsidiaries, primarily The Prudential Assurance Company Limited and M&G Investment Management Limited.

2 Basis of preparation

The financial statements of the Company, which comprise the statement of financial position, statement of changes in equity and related notes, are prepared in accordance with UK Generally Accepted Accounting Practice, including Financial Reporting Standard 101 Reduced Disclosure Framework (‘FRS 101’) and Part 15 of the Companies Act 2006.

In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements in International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (‘IASB’) and endorsed by the EU, but makes amendments where necessary in order to comply with the Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken. The Company has also taken advantage of the exemption under Section 408 of the Companies Act 2006 from presenting its own profit and loss account.

In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:

  • A cash flow statement and related notes;
  • Disclosures in respect of transactions with wholly-owned subsidiaries within the Prudential Group;
  • Disclosure in respect of capital management; and
  • The effects of new but not yet effective IFRSs.

As the consolidated financial statements of the Group include the equivalent disclosure, the Company has also applied the exemptions available under FRS 101 in respect of the following disclosures:

  • IFRS 2 ‘Share Based Payments’ in respect of Group-settled share-based payments; and
  • Disclosure required by IFRS 7 ‘Financial Instrument Disclosures’ and IFRS 13 ‘Fair Value Measurement’.

The accounting policies set out in note 3 below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements.

3 Significant accounting policies

Shares in subsidiary undertakings

Shares in subsidiary undertakings are shown at cost less impairment.

Amounts owed by subsidiary undertakings

Amounts owed by subsidiary undertakings are shown at cost, less provisions.

Derivatives

Derivative financial instruments are held to manage certain macro-economic exposures. Derivative financial instruments are carried at fair value with changes in fair value included in the profit and loss account.

Borrowings

Borrowings are initially recognised at fair value, net of transaction costs, and subsequently accounted for on an amortised cost basis using the effective interest method. Under the effective interest method, the difference between the redemption value of the borrowing and the initial proceeds, net of transaction costs, is amortised through the profit and loss account to the date of maturity or, for subordinated debt, over the expected life of the instrument.

Dividends

Interim dividends are recorded in the period in which they are paid.

Share premium

The difference between the proceeds received on issue of shares and the nominal value of the shares issued is credited to the share premium account.

Foreign currency translation

Assets and liabilities denominated in foreign currencies, including borrowings that have been used to finance or provide a hedge against Group equity investments in overseas subsidiaries, are translated at year end exchange rates. The impact of these currency translations is recorded within the profit and loss account for the year.

Tax

Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable amounts for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can be carried back for one year or carried forward indefinitely to be offset against profits arising from the same company.

Deferred tax assets and liabilities are recognised in accordance with the provisions of IAS 12, ’Income Taxes’. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that future taxable profits will be available against which these losses can be utilised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.

The Group’s UK subsidiaries each file separate tax returns. In accordance with UK tax legislation, where one domestic UK company is a 75 per cent owned subsidiary of another UK company or both are 75 per cent owned subsidiaries of a common parent, the companies are considered to be within the same UK tax group. For companies within the same tax group, trading profits and losses arising in the same accounting period may be offset for the purposes of determining current and deferred taxes.

Pensions

The Company assumes a portion of the pension surplus or deficit of the Group’s main pension scheme, the Prudential Staff Pension Scheme (‘PSPS’). The Company applies the requirements of IAS 19 ‘Employee Benefits’ (as revised in 2011) for the accounting of its interest in the PSPS surplus or deficit. Further details are disclosed in note 7.

A pension surplus or deficit is recorded as the difference between the present value of the scheme liabilities and the fair value of the scheme assets. The Company’s share of pension surplus is recognised to the extent that the Company is able to recover a surplus either through reduced contributions in the future or through refunds from the scheme.

The assets and liabilities of the defined benefit pension schemes of the Prudential Group are subject to a full triennial actuarial valuation using the projected unit method. Estimated future cash flows are then discounted at a high quality corporate bond rate, adjusted to allow for the difference in duration between the bond index and the pension liabilities, where appropriate, to determine their present value. These calculations are performed by independent actuaries.

The aggregate of the actuarially determined service costs of the currently employed personnel and the net income (interest) on the net scheme assets (liabilities) at the start of the period, is recognised in the profit or loss account. Actuarial gains and losses as a result of the changes in assumptions, experience variances or the return on scheme assets excluding amounts included in the net deferred benefit asset (liability) are recorded in other comprehensive income.

Share-based payments

The Group offers share award and option plans for certain key employees and a Save As You Earn (‘SAYE’) plan for all UK and certain overseas employees. The share-based payment plans operated by the Group are mainly equity-settled plans with a few cash-settled plans.

Under IFRS 2 ‘Share-based payment’, where the Company, as the parent company, has the obligation to settle the options or awards of its equity instruments to employees of its subsidiary undertakings, and such share-based payments are accounted for as equity-settled in the Group financial statements, the Company records an increase in the investment in subsidiary undertakings for the value of the share options and awards granted with a corresponding credit entry recognised directly in equity. The value of the share options and awards granted is based upon the fair value of the options and awards at the grant date, the vesting period and the vesting conditions.

4 Reconciliation from the FRS 101 parent company results to the IFRS Group results

The parent company financial statements are prepared in accordance with FRS 101 and the Group financial statements are prepared in accordance with IFRS as issued by the IASB and endorsed by the EU. At 31 December 2016, there were no differences between FRS 101 and IFRS as issued by the IASB and endorsed by the EU in terms of their application to the parent company.

The tables below provide a reconciliation between the FRS 101 parent company results and the IFRS Group results.

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  2016 £m 2015 £m
Profit after tax    
Profit for the financial year of the Company (including dividends from subsidiaries) in accordance with FRS 101 and IFRS 840 920
Share in the IFRS result of the Group, net of distributions to the Company* 1,081 1,659
Profit after tax of the Group attributable to shareholders in accordance with IFRS 1,921 2,579

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  2016 £m 2015 £m

* The ‘share in the IFRS result and net equity of the Group’ lines represent the parent company’s equity in the earnings and net assets of its subsidiaries and associates.

Net equity    
Shareholders’ equity of the Company in accordance with FRS 101 and IFRS 7,505 7,909
Share in the IFRS net equity of the Group* 7,161 5,046
Shareholders’ equity of the Group in accordance with IFRS 14,666 12,955

The profit for the financial year of the Company in accordance with IFRS includes dividends received in the year from subsidiary undertakings of £1,318 million and £985 million for the years ended 31 December 2016 and 2015, respectively.

As stated in note 3, under FRS 101, the Company accounts for its investments in subsidiary undertakings at cost less impairment. For the purpose of this reconciliation, no adjustment is made to the Company in respect of any valuation adjustments to shares in subsidiary undertakings that would be eliminated on consolidation.

5 Shares in subsidiary undertakings

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  2016 £m
At 1 January 12,514
Liquidation of subsidiary undertaking (1,600)
Other movements (55)
At 31 December 10,859

The liquidation related to a central finance subsidiary in order to simplify the Group’s corporate structure.

Other movements comprise £6 million in respect of share-based payments, reflecting the value of payments settled by the Company for employees of its subsidiary undertakings, less £61 million relating to cash received from subsidiaries in respect of share awards.

Subsidiary undertakings of the Company at 31 December 2016 are listed in note D6 of the Group financial statements.

6 Derivative financial instruments

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  2016 £m   2015 £m
  Fair value assets Fair value liabilities   Fair value assets Fair value liabilities
Cross-currency swap 4   1
Inflation-linked swap 447   322
Total 4 447   1 322

Derivative financial instruments are held to manage certain macro-economic exposures. The change in fair value of the derivative financial instruments of the Company was a loss before tax of £122 million (2015: £7 million).

7 Pension scheme financial position

The majority of UK Prudential staff are members of the Group’s pension schemes. The largest scheme is the Prudential Staff Pension Scheme (the Scheme) which is primarily a closed defined benefit scheme.

At 31 December 2005, the allocation of surpluses and deficits attaching to the Scheme between the Company and the unallocated surplus of The Prudential Assurance Company Limited (PAC) with-profits fund was apportioned in the ratio 30/70 following detailed consideration of the sourcing of previous contributions. This ratio was applied to the base deficit position at 1 January 2006 and for the purpose of determining the allocation of the movements in that position up to 31 December 2016. The IAS 19 service charge and ongoing employer contributions are allocated by reference to the cost allocation for current activity.

The last completed triennial actuarial valuation of the Scheme was as at 5 April 2014. Further details on the results of this valuation and the total employer contributions to the Scheme for the year are provided in note C9 of the Group financial statements, together with the key assumptions adopted, including mortality assumptions.

A description of the regulatory framework in which the Scheme operates, the governance of the Scheme, and the risks to which the Scheme exposes the Company is provided in note C9. The most recent full valuation has been updated to 31 December 2016, applying the principles prescribed by IAS 19. The actuarial assumptions used in determining the IAS 19 benefit obligations and the net periodic costs and sensitivity of IAS 19 benefit obligations to changes in the actuarial assumptions are also provided in note C9.

The assets and liabilities of the Scheme were:

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  31 Dec 2016 £m   31 Dec 2015 £m
  Quoted prices in an active market Other Total   Quoted prices in an active market Other Total

* 96 per cent (2015: 96 per cent) of the bonds are investment graded.
† The surplus in the Scheme recognised in the balance sheet of the Company represents the amount that is recoverable through reduced future contributions and is net of the apportionment to the PAC with-profits fund.

Scheme assets:              
Equities              
UK 7 11 18   118 8 126
Overseas 284 9 293   150 150
Bonds*              
Government 5,411 5,411   4,795 4,795
Corporate 1,125 44 1,169   925 45 970
Asset-backed securities 142 2 144   135 135
Properties 71 71   70 70
Derivatives 252 252   183 183
Other assets 269 269   272 26 298
Fair value of Scheme assets 7,490 137 7,627   6,578 149 6,727
Present value of benefit obligations     (6,910)       (5,758)
Underlying surplus in the Scheme     717       969
Effect of the application of IFRIC 14 for de-recognition of surplus     (558)       (800)
Surplus in the Scheme     159       169
               
Surplus in the Scheme recognised by the Company†     48       51

The changes in the fair value of the underlying Scheme assets and the present value of the underlying benefit obligations are as follows:

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  2016 £m
  Fair value of Scheme assets Present value of benefit obligations note (i) Net surplus without the effect of IFRIC 14 Effect of IFRIC 14 for derecognition of surplus IAS 19 basis net surplus
Balance at 1 January 6,727 (5,758) 969 (800) 169
Current service cost (19) (19) (19)
Net interest income (cost) 250 (213) 37 (32) 5
Administration expenses (4) (4) (4)
Actuarial gains (losses) note (ii) 949 (1,226) (277) 274 (3)
Contributions paid by the employer note (iii) 11 11 11
Contributions paid by the employee 1 (1)
Benefits paid (307) 307
Balance at 31 December 7,627 (6,910) 717 (558) 159

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  2015 £m
  Fair value of Scheme assets Present value of benefit obligations note (i) Net surplus without the effect of IFRIC 14 Effect of IFRIC 14 for derecognition of surplus IAS 19 basis net surplus

Notes

  1. The weighted average duration of the benefit obligations of the Scheme is 18 years (2015: 17 years). The following table provides an expected maturity analysis of the benefit obligations as at 31 December:

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    £m 1 year or less After 1 year to 5 years After 5 years to 10 years After 10 years to 15 years After 15 years to 20 years Over 20 years Total
    2016 227 1,013 1,439 1,474 1,407 5,930 11,490
    2015 225 974 1,422 1,489 1,438 6,303 11,851
  2. The actuarial gains attributable to policyholders and shareholders are analysed as follows:

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      2016 £m 2015 £m

    * The total return on Scheme assets in 2016 was a gain of £1,199 million (2015: loss of £8 million).
    † Actuarial gains attributable to the Company are net of the apportionment to the PAC with-profits fund and are related to the surplus recognised in the balance sheet of the Company. In 2016, the gains included a credit of £87 million (2015: charge of £15 million) for the adjustment to the unrecognised portion of surplus.
    The gains after tax of £4 million (2015: £4 million) are recorded in other comprehensive income.

    Return on Scheme assets excluding interest income* 949 (248)
    Actuarial gains (losses)    
    Experience gains on Scheme liabilities 87 28
    Actuarial losses – demographic assumptions (32) (3)
    Actuarial (losses) gains – financial assumptions (1,281) 287
      (1,226) 312
    Total actuarial gains without the effect of IFRIC 14 (277) 64
    Actuarial gains attributable to the Company before tax 4 4
  3. Employer contributions to be paid into the Scheme for the year ending 31 December 2017 are expected to amount to £11 million, comprising ongoing service contributions and expenses.
Balance at 1 January 6,997 (6,157) 840 (710) 130
Current service cost (21) (21) (21)
Negative past service cost 48 48 48
Net interest income (cost) 240 (209) 31 (26) 5
Administration expenses (4) (4) (4)
Actuarial gains (losses) note (ii) (248) 312 64 (64)
Contributions paid by the employer note (iii) 11 11 11
Contributions paid by the employee 1 (1)
Benefits paid (270) 270
Balance at 31 December 6,727 (5,758) 969 (800) 169

8 Borrowings

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  Core structural borrowings   Other borrowings   Total
  2016 £m 2015 £m   2016 £m 2015 £m   2016 £m 2015 £m

Notes

  1. Further details on the core structural borrowings of the Company are provided in note C6.1 of the Group financial statements.
  2. The interests of the holders of the subordinated liabilities are subordinate to the entitlements of other creditors of the Company.
  3. These borrowings support a short-term fixed income securities programme.
  4. The Floating Rate Notes matured in October 2016.
Core structural borrowings note (i)                
Subordinated liabilities note (ii) 5,772 4,018     5,772 4,018
Debenture loans 549 549     549 549
  6,321 4,567     6,321 4,567
Other borrowings:
note (iii)
               
Commercial paper   1,052 1,107   1,052 1,107
Floating Rate Notes note (iv)   200   200
Medium Term Notes 2018   599 598   599 598
Total borrowings 6,321 4,567   1,651 1,905   7,972 6,472
                 
Borrowings are repayable as follows:                
Within 1 year   1,052 1,307   1,052 1,307
Between 1 and 5 years   599 598   599 598
After 5 years 6,321 4,567     6,321 4,567
  6,321 4,567   1,651 1,905   7,972 6,472

9 Deferred tax liability

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Deferred tax liability 2016 £m 2015 £m
Short-term temporary differences related to pension scheme (9) (9)
Total (9) (9)

The reduction in the UK corporation tax rate to 17 per cent from 1 April 2020 was substantively enacted on 6 September 2016 and does not have a material impact on the financial statements for the year ended 31 December 2016.

10 Share capital and share premium

A summary of the ordinary shares in issue and the options outstanding to subscribe for the Company’s shares at 31 December 2016 is set out in note C10 of the Group financial statements.

11 Retained profit of the Company

Retained profit at 31 December 2016 amounted to £5,449 million (2015: £5,866 million). The retained profit includes distributable reserves of £2,962 million and non-distributable reserves of £2,487 million. The non-distributable reserves comprise £2,405 million relating to gains made by intermediate holding companies following the transfer at fair value of certain subsidiaries to other parts of the Group as part of internal restructuring exercises and £82 million of share-based payment reserves. The amount of £2,405 million is not able to be regarded as part of the distributable reserves of the parent company because the gains relate to intragroup transactions.

Under English company law, Prudential may pay dividends only if sufficient distributable reserves of the Company are available for the purpose and if the amount of its net assets is greater than the aggregate of its called up share capital and non-distributable reserves (such as the share premium account) and the payment of the dividend does not reduce the amount of its net assets to less than that aggregate.

12 Other information

  1. Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note B3.3 of the Group financial statements.
  2. Information on transactions of the directors with the Group is given in note D4 of the Group financial statements.
  3. The Company employs no staff.
  4. Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2015: £0.1 million) and for other services were £0.1 million (2015: £0.2 million).
  5. In certain instances, the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.

13 Post balance sheet events

The second interim ordinary dividend for the year ended 31 December 2016, which was approved by the Board of Directors after 31 December 2016, is described in note B7 of the Group financial statements.

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