IFRS reports & accounts - Legal & General reclassifies £400m of debt as equity

In moving from UK GAAP to IFRS, UK insurance company Legal & General has reclassified £400m of subordinated borrowings as equity.

Last year Legal & General issued £400m of undated subordinated notes that are listed on the London Stock Exchange with coupon payments that may be deferred if no ordinary dividend is paid. These notes are callable only at the company's option in 2019 and every five years thereafter.

The company states that, because of their perpetual nature, in certain circumstances interest can be deferred indefinitely. They have therefore been reclassified as equity in line with

IAS 32, Financial Instruments: Disclosure and Presentation. This states that a financial instrument is an equity instrument where there is no contractual obligation to deliver cash or another financial asset to the holder.

Note that Legal & General's treatment differs from that of French banking and insurance company Societe Generale, which has classified EUR11.6bn of perpetual subordinated notes (which are similar though not identical to the UK company's) as debt.

In a note on post balance sheet events, Legal & General discloses that it has entered into a supplementary trust deed in respect of these subordinated notes, under the terms of which it may not be able to defer interest.

The effect is that the notes no longer qualify to be included in equity and will be classified as liabilities from 2006.

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