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, Malaysia, Singapore, Indonesia and other Asian 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, Prudential Annuities Limited, Prudential Retirement Income Limited and M&G Investment Management Limited. The Company is responsible for the financing of each of its subsidiaries.

2 Basis of preparation

The financial statements of the Company, which comprise the balance sheet and related notes, are prepared in accordance with Part 15 of the Companies Act 2006. The Company has taken advantage of the exemption under Section 408 of the Companies Act 2006 from presenting its own profit and loss account.

The financial statements are prepared in accordance with applicable accounting standards under UK Generally Accepted Accounting Practice (UK GAAP), including Financial Reporting Standards (FRS) and Statements of Standard Accounting Practice (SSAP).

The Company has not prepared a cash flow statement on the basis that its cash flow is included within the cash flow statement in the consolidated financial statements. The Company has also taken advantage of the exemption within FRS 29, ‘Financial Instruments: Disclosures’, from the requirements of this standard on the basis that the Company’s results are included in the publicly available consolidated financial statements of the Group that include disclosures that comply with IFRS 7, ‘Financial Instruments: Disclosures’, which is equivalent to FRS 29.

3 Significant accounting policies

Shares in subsidiary undertakings

Shares in subsidiary undertakings are shown at the lower of cost and estimated realisable value.

Loans to subsidiary undertakings

Loans to 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 hybrid debt, over the expected life of the instrument.

Dividends

Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders.

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

Foreign currency 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.

Other assets and liabilities denominated in foreign currencies are also converted at year end exchange rates with the related foreign currency exchange gains or losses reflected in 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 operations 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 FRS 19, ’Deferred tax’. The Company has chosen not to apply the option available of recognising such assets and liabilities on a discounted basis to reflect the time value of money. Except as set out in FRS 19, deferred tax is recognised in respect of all timing differences that have originated but not reversed by the balance sheet date. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.

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’) and applied the requirements of FRS 17 ‘Retirement Benefits’ (as amended in December 2006) to its interest in the PSPS surplus or deficit. Further details are disclosed in note 9.

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 its present value. These calculations are performed by independent actuaries.

The aggregate of the actuarially determined service costs of the currently employed personnel and the unwind of the discount on liabilities at the start of the period, gains and losses on settlements and curtailments, less the expected investment return on the scheme assets at the start of the period, is recognised in the profit and loss account. To the extent that part or all of the Company’s interest in the pension surplus is not recognised as an asset, the unrecognised surplus is initially applied to extinguish any past service costs, losses on settlements or curtailments that would otherwise be included in the profit and loss account. Next, the expected investment return on the scheme’s assets is restricted so that it does not exceed the total of the current service cost, interest cost and any increase in the recoverable surplus. Any further adjustment for the unrecognised surplus is treated as an actuarial gain or loss.

Actuarial gains and losses as a result of the changes in assumptions, the difference between actual and expected investment return on scheme assets and experience variances are recorded in the statement of total recognised gains and losses. Actuarial gains and losses also include adjustment for unrecognised pension surplus as described above.

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 FRS 20 ‘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 UK GAAP to IFRS

The Company financial statements are prepared in accordance with UK GAAP and the consolidated financial statements are prepared in accordance with IFRS as issued by the IASB and endorsed by the EU. The tables below provide a reconciliation between UK GAAP and IFRS.

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  2013 £m 2012 £m
Profit after tax    
Profit (loss) for the financial year of the Company in accordance with UK GAAP 1,579 (216)
IFRS adjustment* 16 71
Profit (loss) for the financial year of the Company (including dividends from subsidiaries) in accordance with IFRS 1,595 (145)
Share in the IFRS result of the Group, net of distributions to the Company (249) 2,308
Profit after tax of the Group attributable to shareholders in accordance with IFRS 1,346 2,163

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  2013 £m 2012 £m

* ‘IFRS adjustment’ in the above table represents the difference in the accounting treatment for pension schemes between UK GAAP and IFRS.

The ‘shares in the IFRS result and net equity of the Group’ lines represent the Company’s equity in the earnings and net assets of its subsidiaries and associates.

Net equity    
Shareholders’ equity of the Company in accordance with UK GAAP and IFRS 7,352 6,536
Share in the IFRS net equity of the Group 2,298 3,823
Shareholders’ equity of the Group in accordance with IFRS 9,650 10,359

The profit (loss) for the financial year of the Company in accordance with UK GAAP and IFRS includes dividends declared in the year from subsidiary undertakings of £2,332 million and £501 million for the years ended 31 December 2013 and 2012, respectively.

As stated in note 3, under UK GAAP, the Company accounts for its investments in subsidiary undertakings at the lower of cost and estimated realisable value. For the purpose of this reconciliation, no adjustment is made to the Company in respect of any valuation adjustments to shares in subsidiary undertakings which would be eliminated on consolidation.

The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits accounting standard, from 1 January 2013 as described in note A2 of the Group financial statements. Accordingly, the 2012 figures for profit after tax of the Group have been adjusted retrospectively from those previously published.

5 Investments of the Company

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  2013 £m
Shares in subsidiary undertakings Loans to subsidiary undertakings
At 1 January 11,929 1,164
Net investment in subsidiary undertakings 6,281
Net loan advance 340
Other movements 6
Foreign exchange movement (7)
At 31 December 18,216 1,497

In 2013, as part of a process of simplifying the Group’s corporate structure, the Company reorganised some of its interests in intermediate holding companies, resulting in a net increase of £6,281 million in the cost of shares in subsidiary undertakings.

In February 2014, the Company dissolved part of the structure, resulting in a reduction of £12,791 million in the cost of shares in subsidiary undertakings, and at the same time, an increase of £6,326 million in the value of loans to subsidiary undertakings.

Other movements relate to share-based payments and reflect the value of payments settled by the Company for employees of its subsidiary undertakings in the year.

The principal subsidiary undertakings of the Company at 31 December 2013 were:

  Main activity Country of incorporation

* Owned by a subsidiary undertaking of the Company.

The Prudential Assurance Company Limited Insurance England and Wales
Prudential Annuities Limited* Insurance England and Wales
Prudential Retirement Income Limited (PRIL)* Insurance Scotland
M&G Investment Management Limited* Asset management England and Wales
Jackson National Life Insurance Company* Insurance US
Prudential Assurance Company Singapore (Pte) Limited* Insurance Singapore
PT Prudential Life Assurance* Insurance Indonesia

The Company has 100 per cent of the voting rights of the subsidiaries except the Indonesian subsidiary, where the Company has 94.6 per cent of the voting rights attaching to the aggregate of the shares across the types of capital in issue.

Each subsidiary operates mainly in its country of incorporation, except for PRIL, which operates mainly in England and Wales.

6 Deferred tax asset

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  2013 £m 2012 £m
Short-term timing differences 2 3
Unused deferred tax losses 7 44
Total 9 47

Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.

For each category of deferred tax asset recognised, its recoverability against forecast taxable profits is not significantly impacted by expected changes to accounting standards.

The reductions in the UK corporation tax rate to 21 per cent from 1 April 2014 and 20 per cent from 1 April 2015 were substantively enacted on 2 July 2013. Accordingly, the effects of these changes are reflected in the financial statements for the year ended 31 December 2013. The changes have not had a material impact on the Company’s net deferred tax balances as at 31 December 2013.

7 Borrowings

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  Core structural borrowings   Other borrowings   Total
2013 £m 2012 £m 2013 £m 2012 £m 2013 £m 2012 £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. These borrowings support a short-term fixed income securities programme.
  3. The Company issued £200 million Floating Rate Notes in 2013 which mature in April 2014. These Notes have been wholly subscribed to by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. The Notes were originally issued in October 2008 and have been reissued upon their maturity.
  4. The interests of the holders of the subordinated liabilities are subordinate to the entitlements of other creditors of the Company.
Core structural borrowingsnote (i) 4,211 3,126     4,211 3,126
Other borrowings:                
Commercial papernote (ii)   1,634 1,535   1,634 1,535
Floating Rate Notes 2014note (iii)   200 200   200 200
Medium-Term Notes 2013note (ii)   250   250
Medium-Term Notes 2015note (ii)   299 299   299 299
Total borrowings 4,211 3,126   2,133 2,284   6,344 5,410
Borrowings are repayable as follows:                
Within 1 year or on demand   1,834 1,985   1,834 1,985
Between 1 and 5 years   299 299   299 299
After 5 years 4,211 3,126     4,211 3,126
  4,211 3,126   2,133 2,284   6,344 5,410
Recorded in the balance sheet as:      
Subordinated liabilitiesnote (iv) 3,662 2,577  
Debenture loans 549 549  
  4,211 3,126  

8 Derivative financial instruments

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  2013 £m 2012 £m
Fair value asset Fair value liabilities Fair value assets Fair value liabilities
Cross-currency swap 3 3
Inflation-linked swap 199 190
Total 3 199 3 190

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 £9 million (2012: gain before tax of £17 million).

The derivative financial instruments are valued internally using standard market practices. In accordance with the Company’s risk management framework, all internally generated valuations are subject to independent assessment against external counterparties’ valuations.

9 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 2013. The FRS 17 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 2011. Further details on the results of this valuation and the total employer contributions to the Scheme for the year are provided in note C9, together with the key assumptions adopted, including mortality assumptions.

Using external actuarial advice provided by the professionally qualified actuaries, Towers Watson, for the valuation of the Scheme, the most recent full valuations have been updated to 31 December 2013 applying the principles prescribed by FRS 17. The long-term expected rates of return are set out below:

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  Prospectively
for 2014 %
2013 % 2012 %
Equities 7.6 6.7 6.8
Bonds 3.8 2.8 3.0
Properties 6.4 5.5 5.55
Other assets 2.0 2.0 2.0
Weighted average long-term expected rate of return 3.7 2.9 3.1

The assets and liabilities of the Scheme were:

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  31 Dec 2013 31 Dec 2012 31 Dec 2011 31 Dec 2010 31 Dec 2009
  £m % £m % £m % £m % £m %
Equities 145 2.4 123 1.9 210 3.3 548 10.3 830 16.8
Bonds 5,048 83.5 5,247 82.0 5,547 86.2 3,864 72.2 3,406 68.8
Properties 71 1.2 167 2.6 297 4.6 199 3.7 272 5.5
Other assets 778 12.9 863 13.5 378 5.9 740 13.8 441 8.9
Total value of assets 6,042 100.0 6,400 100.0 6,432 100.0 5,351 100.0 4,949 100.0
Present value of Scheme liabilities (5,316)   (5,226)   (4,844)   (4,866)   (4,436)  
Underlying surplus in the Scheme 726   1,174   1,588   485   513  
Surplus in the Scheme recognised by the Company 37   49   52   56   52  
Amounts reflected in the balance sheet of the Company, net of deferred tax 30   38   39   41   37  

The surplus in the Scheme recognised in the balance sheet of the Company represents the amount which is recoverable through reduced future contributions and is net of the apportionment to the PAC with-profits fund.

Underlying Scheme liabilities and assets

The change in the present value of the underlying Scheme liabilities and the change in the fair value of the underlying Scheme assets are as follows:

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  2013 £m 2012 £m

* The past service cost in 2012 of £106 million resulted from an exceptional discretionary increase to pensions in payment of the Scheme.

Present value of Scheme liabilities, at 1 January 5,226 4,844
Current service cost 17 21
Past service cost* 3 106
Interest cost 225 227
Employee contributions 1 1
Actuarial losses 78 252
Benefit payments (234) (225)
Present value of Scheme liabilities, at 31 December 5,316 5,226

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  2013 £m 2012 £m

* The contributions include deficit funding, ongoing service contributions and expenses.

Fair value of Scheme assets, at 1 January 6,400 6,432
Expected return on Scheme assets 182 201
Employee contributions 1 1
Employer contributions* 11 36
Actuarial losses (318) (45)
Benefit payments (234) (225)
Fair value of Scheme assets, at 31 December 6,042 6,400

Pension charge and actuarial (losses) gains of the Scheme and attributable to the Company

The pension charge of the Scheme and the charge recognised in the Company’s profit and loss account are as follows:

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Pension charge: 2013 £m 2012 £m
Operating charge:    
Current service cost (17) (21)
Past service cost (3) (106)
Finance (expense) income:    
Interest on Scheme liabilities (225) (227)
Expected return on Scheme assets 182 201
  (43) (26)
Total pension charge of the Scheme (63) (153)
Pension charge attributable to the Company (25) (53)

The pension charge attributable to the Company is net of the apportionment to the PAC with-profits fund and is related to the surplus recognised on the balance sheet of the Company. No adjustment was made to the pension charge in 2013 or 2012 relating to the unrecognised portion of the Scheme’s surplus.

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Actuarial (losses) gains: 2013 £m 2012 £m 2011 £m 2010 £m 2009 £m
Actual less expected return on Scheme assets (5% (2012: 1%) (2011: 15%) (2010: 5%) (2009: 2%) of assets) (318) (45) 973 275 85
Experience (losses) gains on Scheme liabilities (0% (2012: 0%) (2011: 6%) (2010: 0%) (2009: 1%) of liabilities) (2) (19) 295 1 59
Changes in assumptions underlying the present value of Scheme liabilities (76) (233) (426) (370) (374)
Total actuarial (losses) gains (7% (2012: 6%) (2011: 17%) (2010: 2%) (2009: 5%) of the present value of Scheme liabilities) (396) (297) 842 (94) (230)
Actuarial gains (losses) attributable to the Company before tax 8 35 (16) (14) (3)

The total actual return on Scheme assets was a loss of £136 million (2012: gain of £156 million).

The experience gains on Scheme liabilities in 2011 of £295 million related mainly to improvements in data consequent upon the 2011 triennial valuation of the Scheme.

The actuarial gains (losses) 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 2013, the actuarial losses attributable to the Company included an amount credited of £127 million (2012: £124 million) for the adjustment to the unrecognised portion of surplus which has not been deducted from the pension charge.

The actuarial gains before tax of £8 million (2012: £35 million) attributable to the Company are recorded in the statement of total recognised gains and losses. Cumulative actuarial gains as at 31 December 2013 amount to £101 million (2012: £93 million).

Total employer contributions expected to be paid into the Scheme for the year ending 31 December 2014 amount to £11 million, reflecting the annual accrual cost and expenses.

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 2013 is set out in note C10 of the Group financial statements.

11 Profit of the Company and reconciliation of the movement in shareholders’ funds

The profit after tax of the Company for the year was £1,579 million (2012: loss of £216 million). After dividends of £781 million (2012: £655 million), actuarial gains net of tax in respect of the pension scheme of £6 million (2012: £27 million) and share-based payment credits of £6 million (2012: £6 million), retained profit at 31 December 2013 amounted to £5,329 million (2012: £4,519 million). Retained profit includes £2,683 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. Because the gains relate to intra-group transactions, the amount of £2,683 million is not able to be regarded as part of the distributable reserves of the parent company. 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 undistributable reserves (such as for example the share premium account) and the payment of the dividend does not reduce the amount of its net assets to less than that aggregate. At 31 December 2013, the UK GAAP retained earnings of the holding company from which distributable reserves may be derived were £5,329 million.

A reconciliation of the movement in shareholders’ funds of the Company is given below:

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  2013 £m 2012 £m
Profit (loss) for the yearnote 4 1,579 (216)
Dividends (781) (655)
  798 (871)
Actuarial gains recognised in respect of the pension scheme, net of related taxnote 9 6 27
Share-based paymentsnote 5 6 6
New share capital subscribed 6 17
Net increase (decrease) in shareholders’ funds 816 (821)
Shareholders’ funds at beginning of year 6,536 7,357
Shareholders’ funds at end of yearnote 4 7,352 6,536

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 D8 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 (2012: £0.1 million) and for other services were £0.1 million (2012: £0.6 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

In February 2014, the Company dissolved part of the Group’s corporate structure, resulting in a gain on dissolution of £595 million and a reduction of £12,791 million in the cost of shares in subsidiary undertakings. At the same time, there were increases of £6,326 million in loans to subsidiary undertakings and £127 million in current assets, and a reduction of £6,933 million in amounts owed to subsidiary undertakings, of which £819 million related to amounts falling due within one year and £6,114 million to amounts falling due after more than one year.

Subject to shareholders’ approval, in May 2014 the Company will pay a final dividend for the year ended 31 December 2013. Further details are provided in note B7 of the Group financial statements.

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