IVZ.10Q.3Q.2013
Table of Contents     

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-13908
Invesco Ltd.
(Exact Name of Registrant as Specified in Its Charter)
Bermuda
(State or Other Jurisdiction of
Incorporation or Organization)
 
98-0557567
(I.R.S. Employer
Identification No.)
 
 
 
1555 Peachtree Street, N.E., Suite 1800, Atlanta, GA
(Address of Principal Executive Offices)
 
30309
(Zip Code)
 (404) 892-0896
(Registrant’s telephone number, including area code)
 
 
 
 
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o(Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ
As of October 31, 2013, the most recent practicable date, 443,280,063 of the company’s common shares par value $0.20 per share, were outstanding.


Table of Contents     

TABLE OF CONTENTS
We include cross references to captions elsewhere in this Quarterly Report on Form 10-Q, which we refer to as this “Report,” where you can find related additional information. The following table of contents tells you where to find these captions.
 
 
 
Page
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 EX-10.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

2

Table of Contents     

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Invesco Ltd.
Condensed Consolidated Balance Sheets
(Unaudited)
 
As of
$ in millions, except share data
September 30, 2013
 
December 31, 2012
ASSETS
 

 
 
Cash and cash equivalents
1,174.5

 
835.5

Unsettled fund receivables
1,003.1

 
550.1

Accounts receivable
475.6

 
449.4

Investments
705.0

 
610.7

Assets of consolidated sponsored investment products (CSIP)
94.3

 

Assets of consolidated investment products (CIP):
 
 
 
   Cash and cash equivalents of CIP
445.0

 
287.8

   Accounts receivable and other assets of CIP
62.2

 
84.1

   Investments of CIP
4,514.6

 
4,550.6

Assets held for policyholders
1,449.0

 
1,153.6

Prepaid assets
111.4

 
99.9

Assets held for sale
106.7

 

Other assets
107.6

 
146.8

Deferred tax asset, net
10.9

 
38.4

Property and equipment, net
336.4

 
349.6

Intangible assets, net
1,268.6

 
1,287.7

Goodwill
6,898.6

 
7,048.2

Total assets
18,763.5

 
17,492.4

LIABILITIES
 
 
 
Accrued compensation and benefits
565.5

 
609.8

Accounts payable and accrued expenses
660.3

 
626.4

Liabilities of CIP:
 
 
 
Debt of CIP
4,003.1

 
3,899.4

Other liabilities of CIP
251.0

 
104.3

Policyholder payables
1,449.0

 
1,153.6

Unsettled fund payables
993.8

 
552.5

Long-term debt
1,387.6

 
1,186.0

Deferred tax liabilities, net
333.8

 
311.4

Total liabilities
9,644.1

 
8,443.4

Commitments and Contingencies (See Note11)


 


EQUITY
 
 
 
Equity attributable to common shareholders:
 
 
 
 Common shares ($0.20 par value; 1,050.0 million authorized; 490.4 million shares issued as of September 30, 2013 and December 31, 2012)
98.1

 
98.1

Additional paid-in-capital
6,080.1

 
6,141.0

Treasury shares
(1,363.5
)
 
(1,382.9
)
Retained earnings
3,175.0

 
2,801.3

Retained earnings appropriated for investors in CIP
106.3

 
128.8

Accumulated other comprehensive income, net of tax
434.8

 
530.5

Total equity attributable to common shareholders
8,530.8

 
8,316.8

Equity attributable to nonredeemable noncontrolling interests in consolidated entities
588.6

 
732.2

Total equity
9,119.4

 
9,049.0

Total liabilities and equity
18,763.5

 
17,492.4

See accompanying notes.

3

Table of Contents     

Invesco Ltd.
Condensed Consolidated Statements of Income
(Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
$ in millions, except per share data
2013
 
2012
 
2013
 
2012
Operating revenues:
 
 
 
 
 
 
 
Investment management fees
914.4

 
790.6

 
2,644.5

 
2,309.6

Service and distribution fees
220.7

 
196.0

 
642.7

 
572.1

Performance fees
5.1

 
3.0

 
47.2

 
39.0

Other
31.6

 
24.3

 
85.1

 
83.0

Total operating revenues
1,171.8

 
1,013.9

 
3,419.5

 
3,003.7

Operating expenses:
 
 
 
 
 
 
 
Employee compensation
330.3

 
315.2

 
995.9

 
906.0

Third-party distribution, service and advisory
380.9

 
326.2

 
1,093.0

 
958.2

Marketing
22.6

 
26.3

 
68.6

 
79.1

Property, office and technology
71.9

 
66.1

 
207.0

 
195.0

General and administrative
80.1

 
66.2

 
224.9

 
222.7

Transaction and integration

 
3.0

 
3.2

 
5.6

Total operating expenses
885.8

 
803.0

 
2,592.6

 
2,366.6

Operating income
286.0

 
210.9

 
826.9

 
637.1

Other income/(expense):
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
10.3

 
5.2

 
25.3

 
21.8

Interest and dividend income
2.5

 
2.5

 
6.8

 
7.1

Interest expense
(9.7
)
 
(12.6
)
 
(29.4
)
 
(39.6
)
Other gains and losses, net
2.7

 
18.4

 
20.8

 
29.3

CIP:
 
 
 
 
 
 
 
   Interest and dividend income of CIP
46.5

 
68.7

 
147.5

 
206.4

   Interest expense of CIP
(33.5
)
 
(41.9
)
 
(96.8
)
 
(134.4
)
   Other gains/(losses) of CIP, net
38.2

 
(25.2
)
 
15.5

 
(69.9
)
Income from continuing operations before income taxes
343.0

 
226.0

 
916.6

 
657.8

Income tax provision
(92.9
)
 
(72.3
)
 
(262.7
)
 
(205.8
)
Income from continuing operations, net of taxes
250.1

 
153.7

 
653.9

 
452.0

Income/(loss) from discontinued operations, net of taxes
(1.4
)
 
3.2

 
(1.9
)
 
7.3

Net income
248.7

 
156.9

 
652.0

 
459.3

Net (income)/loss attributable to noncontrolling interests in consolidated entities
(20.6
)
 
13.7

 
0.9

 
59.1

Net income attributable to common shareholders
228.1

 
170.6

 
652.9

 
518.4

Earnings per share:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Earnings per share from continuing operations

$0.51

 

$0.37

 

$1.46

 

$1.13

Earnings per share from discontinued operations

 

$0.01

 

 

$0.02

Basic earnings per share

$0.51

 

$0.38

 

$1.46

 

$1.14

Diluted:
 
 
 
 
 
 
 
Earnings per share from continuing operations

$0.51

 

$0.37

 

$1.46

 

$1.12

Earnings per share from discontinued operations

 

$0.01

 

 

$0.02

Diluted earnings per share

$0.51

 

$0.38

 

$1.45

 

$1.14

Dividends declared per share

$0.2250

 

$0.1725

 

$0.6225

 

$0.4675

See accompanying notes.

4

Table of Contents     

Invesco Ltd.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
$ in millions
2013
 
2012
 
2013
 
2012
Net income
248.7

 
156.9

 
652.0

 
459.3

Other comprehensive income/(loss), before tax:
 
 
 
 
 
 
 
Currency translation differences on investments in foreign subsidiaries
202.7

 
171.3

 
(94.2
)
 
155.2

Actuarial (loss)/gain related to employee benefit plans
(5.5
)
 
(2.7
)
 
1.3

 
(1.6
)
Reclassification of amortization of prior service costs/(credit) into employee compensation expense
(0.5
)
 
(0.5
)
 
(1.5
)
 
(1.5
)
Reclassification of amortization of actuarial (gains)/losses into employee compensation expense
0.5

 
0.4

 
1.9

 
1.2

Share of other comprehensive income/(loss) of equity method investments
(3.5
)
 
1.6

 
(5.1
)
 
4.6

Unrealized (losses)/gains on available-for-sale investments
4.5

 
6.2

 
8.5

 
10.0

Reclassification of net (gains)/losses realized on available-for-sale investments included in other gains and losses, net
(1.0
)
 
(1.3
)
 
(2.4
)
 
(1.7
)
Other comprehensive income/(loss), before tax
197.2

 
175.0

 
(91.5
)
 
166.2

Income tax related to items of other comprehensive income/(loss):
 
 
 
 
 
 
 
Tax benefit/(expense) on foreign currency translation adjustments
0.7

 
0.1

 
(0.4
)
 
0.9

Tax on actuarial (loss)/gain related to employee benefit plans
(1.7
)
 
(1.8
)
 
(3.2
)
 
(1.9
)
Reclassification of tax on amortization of prior service costs/(credit) into income tax provision
0.1

 
0.2

 
0.3

 
0.3

Reclassification of tax on amortization of actuarial (gains)/losses into income tax provision
(0.1
)
 
(0.1
)
 
(0.4
)
 
(0.3
)
Tax on net unrealized (losses)/gains on available-for-sale investments
0.2

 
2.5

 
(0.4
)
 
2.7

Reclassification of tax on net (gains)/losses realized on available-for-sale investments included in income tax provision
(0.3
)
 
(2.9
)
 
(0.6
)
 
(2.9
)
Total income tax benefit (expense) related to items of other comprehensive income
(1.1
)
 
(2.0
)
 
(4.7
)
 
(1.2
)
Other comprehensive income/(loss), net of tax
196.1

 
173.0

 
(96.2
)
 
165.0

Total comprehensive income/(loss)
444.8

 
329.9

 
555.8

 
624.3

Comprehensive loss/(income) attributable to noncontrolling interests in consolidated entities
(25.8
)
 
(11.0
)
 
1.4

 
59.0

Comprehensive income attributable to common shareholders
419.0

 
318.9

 
557.2

 
683.3

See accompanying notes.


5

Table of Contents     

Invesco Ltd.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine months ended September 30,
$ in millions
2013
 
2012
Operating activities:
 
 
 
Net income
652.0

 
459.3

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
 
 
 
Amortization and depreciation
66.0

 
72.5

Share-based compensation expense
103.0

 
102.9

(Gains)/losses on disposal of property and equipment, net
0.5

 
(0.5
)
Purchase of trading investments
(10,952.4
)
 
(7,573.2
)
Sale of trading investments
10,954.7

 
7,564.6

Other gains and losses, net
(20.8
)
 
(29.3
)
Other (gains)/losses of CIP, net
(15.5
)
 
69.9

Tax benefit from share-based compensation
62.8

 
47.7

Excess tax benefits from share-based compensation
(19.4
)
 
(13.7
)
Equity in earnings of unconsolidated affiliates
(25.3
)
 
(21.8
)
Dividends from unconsolidated affiliates
15.6

 
14.7

Changes in operating assets and liabilities:
 
 
 
(Increase)/decrease in cash held by CIP
(165.1
)
 
(296.0
)
(Increase)/decrease in receivables
(710.4
)
 
151.9

Increase/(decrease) in payables
644.2

 
(231.3
)
Net cash provided by/(used in) operating activities
589.9

 
317.7

Investing activities:
 
 
 
Purchase of property and equipment
(67.0
)
 
(68.4
)
Disposal of property and equipment

 
0.6

Purchase of available-for-sale investments
(30.0
)
 
(73.9
)
Sale of available-for-sale investments
23.3

 
32.9

Purchase of investments by CIP
(3,496.4
)
 
(2,338.9
)
Sale of investments by CIP
3,705.9

 
2,484.5

Purchase of investments by CSIP
(51.4
)
 

Sale of investments by CSIP
3.5

 

Purchase of other investments
(205.2
)
 
(87.7
)
Sale of other investments
74.3

 
63.4

Returns of capital and distributions from unconsolidated partnership investments
25.3

 
12.2

Acquisition earn-out payments
(1.2
)
 
(5.6
)
Sale of management contracts

 
16.4

Net cash provided by/(used in) investing activities
(18.9
)
 
35.5

Financing activities:
 
 
 
Proceeds from exercises of share options
13.0

 
17.2

Purchases of treasury shares
(120.5
)
 
(190.0
)
Dividends paid
(279.2
)
 
(211.5
)
Excess tax benefits from share-based compensation
19.4

 
13.7

Capital invested into CIP
13.4

 
19.4

Capital distributed by CIP
(146.6
)
 
(122.0
)
Net borrowings/(repayments) of debt of CIP
63.5

 
255.4

Net borrowings/(repayments) under credit facility
201.5

 
215.5

Repayments of senior notes

 
(215.1
)
Net cash provided by/(used in) financing activities
(235.5
)
 
(217.4
)
Increase/(decrease) in cash and cash equivalents
335.5

 
135.8

Foreign exchange movement on cash and cash equivalents
3.5

 
16.9

Cash and cash equivalents, beginning of period
835.5

 
727.4

Cash and cash equivalents, end of period
1,174.5

 
880.1

Supplemental Cash Flow Information:
 
 
 
Interest paid
(20.5
)
 
(39.0
)
Interest received
3.6

 
3.5

Taxes paid
(183.0
)
 
(154.4
)
See accompanying notes.

6

Table of Contents     



Invesco Ltd.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
 
 
Equity Attributable to Common Shareholders
 
 
 
 
 
$ in millions
 
Common Shares
 
Additional Paid-in-Capital
 
Treasury Shares
 
Retained Earnings
 
Retained Earnings
Appropriated for
Investors in
CIP
 
Accumulated Other
Comprehensive Income
 
Total Equity
Attributable to Common Shareholders
 
Nonredeemable Noncontrolling
Interests in
Consolidated Entities
 
Total Equity
 
December 31, 2012
 
98.1

 
6,141.0

 
(1,382.9
)
 
2,801.3

 
128.8

 
530.5

 
8,316.8

 
732.2

 
9,049.0

 
Net income
 

 

 

 
652.9

 

 

 
652.9

 
(0.9
)
 
652.0

 
Other comprehensive income (loss)
 

 

 

 

 

 
(95.7
)
 
(95.7
)
 
(0.5
)
 
(96.2
)
 
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
557.2

 
(1.4
)
 
555.8

 
Net income (loss) reclassified to appropriated retained earnings
 

 

 

 

 
(19.4
)
 

 
(19.4
)
 
19.4

 

 
Currency translation differences on investments in foreign subsidiaries reclassified to appropriated retained earnings
 

 

 

 

 
0.5

 

 
0.5

 
(0.5
)
 

 
Deconsolidation of CIP
 

 

 

 

 
(3.6
)
 

 
(3.6
)
 
(27.7
)
 
(31.3
)
 
Change in noncontrolling interests in consolidated entities, net
 

 

 

 

 

 

 

 
(133.4
)
 
(133.4
)
 
Dividends
 

 

 

 
(279.2
)
 

 

 
(279.2
)
 

 
(279.2
)
 
Employee share plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation
 

 
103.0

 

 

 

 

 
103.0

 

 
103.0

 
Vested shares
 

 
(170.2
)
 
170.2

 

 

 

 

 

 

 
Exercise of options
 

 
(14.2
)
 
27.2

 

 

 

 
13.0

 

 
13.0

 
Settlement of ESPP purchases
 

 
1.1

 
4.0

 

 

 

 
5.1

 

 
5.1

 
Tax impact of share-based payment
 

 
19.4

 

 

 

 

 
19.4

 

 
19.4

 
Purchase of shares
 

 

 
(182.0
)
 

 

 

 
(182.0
)
 

 
(182.0
)
 
September 30, 2013
 
98.1

 
6,080.1

 
(1,363.5
)
 
3,175.0

 
106.3

 
434.8

 
8,530.8

 
588.6

 
9,119.4

 
See accompanying notes.



7

Table of Contents     





Invesco Ltd.
Condensed Consolidated Statements of Changes in Equity (continued)
(Unaudited)
 
 
Equity Attributable to Common Shareholders
 
 
 
 
 
$ in millions
 
Common Shares
 
Additional Paid-in-Capital
 
Treasury Shares
 
Retained Earnings
 
Retained Earnings
Appropriated for
Investors in
CIP
 
Accumulated Other
Comprehensive Income
 
Total Equity
Attributable to Common Shareholders
 
Nonredeemable Noncontrolling
Interests in
Consolidated Entities
 
Total Equity
 
December 31, 2011
 
98.1

 
6,180.6

 
(1,280.4
)
 
2,413.2

 
334.3

 
373.3

 
8,119.1

 
1,018.5

 
9,137.6

 
Net income
 

 

 

 
518.4

 

 

 
518.4

 
(59.1
)
 
459.3

 
Other comprehensive income
 

 

 

 

 

 
164.9

 
164.9

 
0.1

 
165.0

 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
683.3

 
(59.0
)
 
624.3

 
Net income (loss) reclassified to appropriated retained earnings
 

 

 

 

 
(51.3
)
 

 
(51.3
)
 
51.3

 

 
Currency translation differences on investments in foreign subsidiaries reclassified to appropriated retained earnings
 

 

 

 

 
(7.0
)
 

 
(7.0
)
 
7.0

 

 
Deconsolidation of CIP
 

 

 

 

 
(116.9
)
 

 
(116.9
)
 

 
(116.9
)
 
Change in noncontrolling interests in consolidated entities, net
 

 

 

 

 

 

 

 
(135.5
)
 
(135.5
)
 
Dividends
 

 

 

 
(211.5
)
 

 

 
(211.5
)
 

 
(211.5
)
 
Employee share plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation
 

 
102.9

 

 

 

 

 
102.9

 

 
102.9

 
Vested shares
 

 
(156.9
)
 
156.9

 

 

 

 

 

 

 
Exercise of options
 

 
(17.7
)
 
34.9

 

 

 

 
17.2

 

 
17.2

 
Tax impact of share-based payment
 

 
13.7

 

 

 

 

 
13.7

 

 
13.7

 
Purchase of shares
 

 

 
(234.4
)
 

 

 

 
(234.4
)
 

 
(234.4
)
 
September 30, 2012
 
98.1

 
6,122.6

 
(1,323.0
)
 
2,720.1

 
159.1

 
538.2

 
8,315.1

 
882.3

 
9,197.4

 
See accompanying notes.

8

Table of Contents     

Invesco Ltd.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. ACCOUNTING POLICIES
Corporate Information
Invesco Ltd. (Parent) and all of its consolidated entities (collectively, the company or Invesco) provide clients with an array of global investment management capabilities. The company’s sole business is investment management.
In the opinion of management, the Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented. All significant intercompany transactions, balances, revenues and expenses are eliminated in consolidation.
Certain disclosures included in the company’s annual report are not required to be included on an interim basis in the company’s quarterly reports on Forms 10-Q. The company has condensed or omitted these disclosures. Therefore, this Form 10-Q (Report) should be read in conjunction with the company’s annual report on Form 10-K for the year ended December 31, 2012. The company has, however, provided enhanced disclosures of its accounting policies for investments and consolidation in this Report.
Use of Estimates
In preparing the financial statements, company management is required to make estimates and assumptions that affect reported revenues, expenses, assets, liabilities and disclosure of contingent liabilities. The primary estimates relate to investment valuation, goodwill and intangible impairment, and taxes. Use of available information and application of judgment are inherent in the formation of estimates. Actual results in the future could differ from such estimates and the differences may be material to the financial statements.
Basis of Presentation
Effective September 30, 2013, the company changed the presentation of its Condensed Consolidated Balance Sheets from a classified basis to a non-classified basis. Under the non-classified basis, balances are not separately presented as current or noncurrent. Management believes that this presentation is more meaningful to readers because it aggregates assets and liabilities of the same nature, which is consistent with the manner in which management monitors its financial position. The company's previously classified balance sheets were not utilized to derive any ratios or metrics by which the company is measured. Additionally, the presentation of a non-classified balance sheet reduces the presentation complexities resulting from the classification of consolidated managed funds, which do not present classified balance sheet information in their underlying financial statements. Certain previously reported amounts in the Condensed Consolidated Balance Sheets and notes have been reclassified to conform to the new presentation.
As discussed in Note 15, "Discontinued Operations," the results of Atlantic Trust Private Wealth Management (Atlantic Trust) have been presented as a discontinued operation in the Condensed Consolidated Statements of Income for all periods presented. As a result of this change, certain previously reported amounts in the Condensed Consolidated Financial Statements and notes have been reclassified to conform to the current period presentation.
Investments
The majority of the company’s investment balances relate to balances held in affiliated funds. In the normal course of business, the company invests in various types of affiliated investment products, either as “seed money” or as longer-term investments alongside third-party investors, typically referred to as “co-investments.” Seed money investments are investments held in open-ended Invesco managed funds with the purpose of providing capital to the funds during their development periods to allow the funds to achieve critical mass, establish their track records, and obtain third-party investments. Seed money may also be held for regulatory purposes in certain jurisdictions. Co-investments are often required of the asset manager by third-party investors in closed-ended funds to demonstrate an alignment of the asset manager’s interests with those of the third-party investors. The company also invests in affiliated funds in connection with its deferred compensation plans, whereby certain employees defer portions of their annual bonus into funds.
Investments are categorized in this Report as available-for-sale, trading, equity method, foreign time deposits, and other investments. See Note 3, “Investments” for additional details.

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Available-for-sale investments include seed money, co-investments in affiliated collateralized loan obligations (CLOs), and investments in other debt securities. Available-for-sale investments are measured at fair value. Gains or losses arising from changes in the fair value of available-for-sale investments are recognized in accumulated other comprehensive income, net of tax, until the investment is sold or otherwise disposed of, or until the investment is determined to be other-than-temporarily impaired, at which time the cumulative gain or loss previously reported in equity is included in income. The specific identification method is used to determine the realized gain or loss on securities sold or otherwise disposed.
Trading investments include investments held to settle the company’s deferred compensation plan liabilities, sponsored UIT product-related equity and debt securities, and other equity securities. Trading investments are securities bought and held principally for the purpose of selling them in the near term. Trading investments are measured at fair value. Gains or losses arising from changes in the fair value of trading investments are included in income.
Equity method investments include investments over which the company is deemed to have significant influence, including corporate joint ventures and non-controlled subsidiaries in which the company's ownership is between 20 and 50 percent, and co-investments in certain managed funds generally structured as partnerships or similar vehicles. Investments in joint ventures are investments jointly controlled by the company and external parties. Co-investments in managed funds structured as partnerships or similar vehicles include private equity, real estate, and fund-of-funds. The equity method of accounting requires that the investment is initially recorded at cost. The carrying amount of the investment is increased or decreased to recognize the company's share of the after-tax profit or loss of the investee after the date of acquisition. The proportionate share of income or loss is included in equity in earnings of unconsolidated affiliates in the Condensed Consolidated Statements of Income, and the proportionate share of other comprehensive income or loss is included in accumulated other comprehensive income in the Condensed Consolidated Balance Sheets.
Seed money and co-investments in managed funds are required to be consolidated by the company if certain criteria are met. Upon consolidation of material balances, the company’s seed money or co-investment balance is eliminated, and the underlying securities of the managed fund are reflected on the company’s Condensed Consolidated Balance Sheets at fair value. These underlying securities are presented in the company’s financial statements as either Consolidated Sponsored Investment Products (CSIP) or Consolidated Investment Products (CIP). See the “Basis of Accounting and Consolidation” below for additional information regarding the consolidation criteria as well as the basis for the distinction between the CSIP and CIP classifications. If the company subsequently determines that it no longer controls the managed funds in which it has invested, the company will deconsolidate the funds. Any remaining holding in the managed funds is then accounted for on the bases described above as available-for-sale or equity method investments, as appropriate.
Basis of Accounting and Consolidation
The company provides investment management services to, and has transactions with, various private equity funds, real estate funds, fund-of-funds, CLOs, and other investment products sponsored by the company in the normal course of business for the investment of client assets. The company serves as the investment manager, making day-to-day investment decisions concerning the assets of these products. Certain of these entities, typically CLOs and funds that are structured as partnership entities (such as private equity funds, real estate funds, and fund-of-funds), are considered to be variable interest entities (VIEs) if the VIE criteria are met. A VIE, in the context of the company and its managed funds, is a fund that does not have sufficient equity to finance its operations without additional subordinated financial support, or a fund for which the risks and rewards of ownership are not directly linked to voting interests.

The Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP and consolidate the financial statements of the Parent and all of its controlled subsidiaries. Additionally, the Condensed Consolidated Financial Statements include the consolidation of certain managed funds that meet the definition of a VIE if the company has been deemed to be the primary beneficiary of those funds, any non-VIE general partnership investments where the company is deemed to have control, and other sponsored investment products in which the company has a controlling financial interest. Control is deemed to be present when the Parent holds a majority voting interest or otherwise has the power to govern the financial and operating policies of the subsidiary or managed fund so as to obtain the majority of the benefits from its activities. The company is generally considered to have a controlling financial interest in a managed fund when it owns a majority of the fund's outstanding shares, which may arise as a result of a seed money investment in a newly launched investment product from the time of initial launch to the time that the fund becomes majority-held by third-party investors.
Investment products that are consolidated are referred to in this Report as either Consolidated Sponsored Investment Products (CSIP), which generally includes consolidated majority-held sponsored investment products, or Consolidated Investment Products (CIP), which includes consolidated nominally-held investment products. This distinction is important, as it differentiates the company's economic risk associated with each type of consolidated managed fund. The company's economic risk with respect to each investment in a CSIP and a CIP is limited to its equity ownership and any uncollected management

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fees. Gains and losses arising from nominally-held CIP do not have a significant impact on the company's results of operations, liquidity, or capital resources. Gains and losses arising from majority-held CSIP could have a significant impact on the company's results of operations, as the company has greater economic risk associated with its investment. See Note 12, "Consolidated Sponsored Investment Products," and Note 13, "Consolidated Investment Products," for additional information regarding the impact of consolidation of investment products.
Consolidation Accounting. The U.S. GAAP consolidation model in Accounting Standards Codification (ASC) Topic 810, "Consolidation," differs for entities that are considered to be VIEs versus those that do not meet the VIE criteria (and are thus referred to as voting interest entities, or VOEs). Additionally, the consolidation criteria for VIEs differs depending on the structure of the VIE as a result of Accounting Standards Update (ASU) No. 2010-10, "Amendments for Certain Investment Funds." The consolidation models are summarized below:
- For all VIE investment products except CLOs, if the company is deemed to have the majority of rewards/risks of ownership associated with these funds, then the company is deemed to be their primary beneficiary and is required to consolidate these funds. For those private equity funds, real estate funds and fund-of-funds that are determined to be VIEs, the company evaluates the structure of each partnership to determine if it is the primary beneficiary of the fund. This evaluation includes assessing the rights of the limited partners to transfer their economic interests in the investment product. If the limited partners' lack rights to manage their economic interests, they are considered to be de facto agents of the company, resulting in the company determining that it is the primary beneficiary of the investment product.
- For VIE CLOs, if the company is deemed to have the power to direct the activities of the CLO that most significantly impact the CLO's economic performance, and the obligation to absorb losses/right to receive benefits from the CLO that could potentially be significant to the CLO, then the company is deemed to be the CLO's primary beneficiary and is required to consolidate the CLO.
- Non-VIE general partnership investments are deemed to be controlled by the company and are consolidated under a VOE model, unless the limited partners have the substantive ability to remove the general partner without cause based upon a simple majority vote or can otherwise dissolve the partnership, or unless the limited partners have substantive participating rights over decision-making. The company also consolidates certain non-VIE sponsored investment products in which the company has a controlling interest under a VOE model, which, as discussed above, may arise as a result of a seed investment in a newly launched investment product.
Consolidation Analysis. The company inventories its funds by vehicle type on a quarterly basis. The company assesses modifications to existing funds on an ongoing basis to determine if a significant reconsideration event has occurred. All newly created funds are evaluated for consolidation based upon a variety of factors, including the legal form of the investment vehicle, the management/performance fee structure, and any investment the company may have in the fund. Certain fund vehicle-types, such as CLOs and partnerships are more susceptible to consolidation due to the combination of these factors. The consolidation analysis for these structures includes a detailed review of the terms of the fund's governing documents and a comparison of the significant terms against the consolidation criteria in ASC 810, including a determination of whether the fund is a VIE or a VOE. Seed money and co-investments in managed funds in which the company has determined that it is the primary beneficiary or in which the company has a controlling financial interest are consolidated if the impact of doing so is deemed material. Otherwise, these investments are accounted for as described in the “Investments” accounting policy above.
Consolidation of CLOs. The company has elected the fair value option under ASC Topic 825-10-25 to measure the assets and liabilities of all consolidated CLOs at fair value, as the company has determined that measurement of the notes issued by consolidated CLOs at fair value better correlates with the value of the assets held by consolidated CLOs, which are held to provide the cash flows for the note obligations.
Upon consolidation of the CLOs, the company's and the CLOs' accounting policies are effectively aligned, resulting in the reclassification of the company's gain or loss (representing the changes in the market value of the company's holding in the consolidated CLOs) from other comprehensive income into other gains/losses. The company's gain on its investment in the CLOs (before consolidation) eliminates with the company's share of the offsetting loss on the CLOs' debt. The net income/loss impact during the period of consolidation of these CLOs is therefore completely attributed to other investors in these CLOs, as the company's share has been eliminated through consolidation. The Condensed Consolidated Balance Sheets reflect the consolidation of assets held and debt issued by these CLOs, despite the fact that the assets cannot be used by the company, nor is the company obligated for the debt. The surplus of consolidated CLO assets over consolidated CLO liabilities is reflected in the company's Condensed Consolidated Balance Sheets as retained earnings appropriated for investors in CIP. Current period gains/(losses) attributable to investors in consolidated CLOs are included in (gains)/losses attributable to noncontrolling interests in consolidated entities in the Condensed Consolidated Statements of Income and in the retained earnings appropriated

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for investors in CIP in the Condensed Consolidated Balance Sheets, as they are considered noncontrolling interests of the company. Interest income and expense of consolidated CLOs are presented as other income/(expense) in the company's Consolidated Income Statements. See Note 13, “Consolidated Investment Products,” for additional details. In addition, the company's Consolidated Cash Flow Statement reflects the cash flows of these CLOs.
Consolidation of Private Equity, Real Estate, and Fund-of-Funds. The company also consolidates certain private equity and real estate funds that are structured as partnerships in which the company is the general partner receiving a management and/or performance fee. Private equity investments made by the underlying funds consist of direct investments in, or fund investments in other private equity funds that hold direct investments in, equity or debt securities in operating companies that are generally not initially publicly traded. Private equity funds are considered investment companies and are therefore accounted for under ASC Topic 946, “Financial Services - Investment Companies.” The company has retained the specialized industry accounting principles of these investment products in its Consolidated Financial Statements. See Note 13, “Consolidated Investment Products,” for additional details.
Consolidation basis. The financial statements have been prepared primarily on the historical cost basis; however, certain items are presented using other bases such as fair value, where such treatment is required or voluntarily elected. The financial statements of subsidiaries, with the exception of certain consolidated managed funds as discussed above, are prepared for the same reporting period as the Parent and use consistent accounting policies, which, where applicable, have been adjusted to U.S. GAAP from local generally accepted accounting principles or reporting regulations. The financial information of the CSIP and CIP is included in the company's consolidated financial statements on a one-month or a one-quarter lag based upon the availability of fund financial information. Noncontrolling interests in consolidated entities and retained earnings appropriated for investors in CIP represent the interests in certain entities consolidated by the company either because the company has control over the entity or has determined that it is the primary beneficiary, but of which the company does not own all of the entity's equity.
Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements
In February 2013, the FASB issued Accounting Standards Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-02). ASU 2013-02 amends Topic 220 to require an entity to present current period reclassifications out of accumulated other comprehensive income and other amounts of current-period other comprehensive income, separately, for each component of other comprehensive income. ASU 2013-02 also requires an entity to provide information about the effects on net income of significant amounts reclassified out of each component of accumulated other comprehensive income, if those amounts are required under other Topics to be reclassified to net income in their entirety in the same reporting period. The amendments to Topic 220 made by ASU 2013-02 are effective for interim and annual periods beginning on or after December 15, 2012 and are reflected in these financial statements.


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2. FAIR VALUE OF ASSETS AND LIABILITIES
The carrying value and fair value of financial instruments is presented in the summary table below. The fair value of financial instruments held by CSIP and CIP are presented in Note 12 "Consolidated Sponsored Investment Products," and Note 13, “Consolidated Investment Products.”
 
September 30, 2013
 
December 31, 2012
$ in millions
Footnote Reference
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Cash and cash equivalents
 
 
1,174.5

 
1,174.5

 
835.5

 
835.5

Available-for-sale investments
3

 
134.3

 
134.3

 
122.1

 
122.1

Trading investments
3

 
242.5

 
242.5

 
218.7

 
218.7

Foreign time deposits*
3

 
29.6

 
29.6

 
31.3

 
31.3

Assets held for policyholders
 
 
1,449.0

 
1,449.0

 
1,153.6

 
1,153.6

Support agreements*
11

 

 

 
(1.0
)
 
(1.0
)
Policyholder payables
 
 
(1,449.0
)
 
(1,449.0
)
 
(1,153.6
)
 
(1,153.6
)
Put option contracts

 

 

 

 

UIT-related financial instruments sold, not yet purchased
 
 
(2.0
)
 
(2.0
)
 
(1.5
)
 
(1.5
)
Note payable
 
 
(1.2
)
 
(1.2
)
 
(3.4
)
 
(3.4
)
Long-term debt*
4

 
(1,387.6
)
 
(1,343.1
)
 
(1,186.0
)
 
(1,204.8
)

*
These financial instruments are not measured at fair value on a recurring basis. See the indicated footnotes for additional information about the carrying and fair values of these financial instruments. Foreign time deposits are measured at cost plus accrued interest, which approximates fair value, and are accordingly classified as Level 2 securities.

A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.

An asset or liability's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

There are three types of valuation approaches: a market approach, which uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities; an income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount; and a cost approach, which is based on the amount that currently would be required to replace the service capacity of an asset.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Cash equivalents
Cash equivalents include cash investments in money market funds and time deposits. Cash investments in money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the net asset value of the underlying funds, and are classified within level 1 of the valuation hierarchy.

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Available-for-sale investments
Available-for-sale investments include amounts seeded into affiliated investment products, investments in affiliated CLOs, and investments in other debt securities. Seed money investments are investments held in Invesco managed funds with the purpose of providing capital to the funds during their development periods. Seed money is valued under the market approach through the use of quoted market prices available in an active market and is classified within level 1 of the valuation hierarchy; there is no modeling or additional information needed to arrive at the fair values of these investments. Investments in CLOs are valued using an income approach through the use of certain observable and unobservable inputs and are classified within level 3 of the valuation hierarchy. Other debt securities are valued using a cost valuation technique due to the lack of available cash flow and market data and are accordingly also classified within Level 3 of the valuation hierarchy.
Assets held for policyholders and policyholder payables
Assets held for policyholders represent investments held by one of the company’s subsidiaries, which is an insurance entity that was established to facilitate retirement savings plans in the U.K. The assets held for policyholders are accounted for at fair value pursuant to ASC Topic 944, “Financial Services — Insurance,” and are comprised primarily of affiliated unitized funds. The assets are measured at fair value under the market approach based on the quoted prices of the underlying funds in an active market and are classified within level 1 of the valuation hierarchy. The policyholder payables are indexed to the value of the assets held for policyholders.
Put option contracts
The company has purchased several put option contracts to hedge economically foreign currency risk on the translation of a portion of its pound sterling-denominated earnings into U.S. dollars (purchases of none and $1.8 million in the three and nine months ended September 30, 2013, respectively; purchases of none and $2.5 million in the three and nine months ended September 30, 2012). These were the only contracts entered into during the period to hedge economically foreign currency risk. These contracts provide coverage through March 25, 2014. The economic hedge is predominantly triggered upon the impact of a significant decline in the pound sterling/U.S. dollar foreign exchange rate, which could arise as a result of European economic uncertainty. Open put option contracts are marked-to-market through earnings, which are recorded in the company's Condensed Consolidated Statements of Income in other gains and losses. These derivative contracts are valued using option valuation models and are included in other assets in the company's Condensed Consolidated Balance Sheets. The significant inputs in these models (volatility, forward points and swap curves) are readily available in public markets or can be derived from observable market transactions for substantially the full terms of the contracts and are classified within level 2 of the valuation hierarchy. The company recognized a loss of $1.1 million and $1.8 million in the three and nine months ended September 30, 2013 related to the change in market value of these put option contracts (three and nine months ended September 30, 2012: $1.2 million and $2.4 million, respectively).
Trading investments
Trading investments include investments held to hedge economically against costs the company incurs in connection with certain deferred compensation plans in which the company participates, as well as trading and investing activities in equity and debt securities entered into in its capacity as sponsor of unit investment trusts (UITs).
Investments related to deferred compensation plans
Investments related to deferred compensation plans are primarily invested in affiliated funds that are held to hedge economically deferred compensation liabilities. Investments related to deferred compensation plans are valued under the market approach through the use of quoted prices in an active market and are classified within level 1 of the valuation hierarchy.
UIT-related equity and debt securities
The company invests in UIT-related equity and debt securities consisting of investments in corporate stock, UITs, U.S. state and political subdivision securities. Each is discussed more fully below.
Corporate stock
The company temporarily holds investments in corporate stock for purposes of creating a UIT. Corporate stocks are valued under the market approach through use of quoted prices on an exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized within level 1 of the valuation hierarchy; otherwise, they are categorized in level 2.
UITs
The company may hold units of its sponsored UITs at period-end for sale in the primary market or secondary market. Equity UITs are valued under the market approach through use of quoted prices on an exchange.

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Table of Contents     

Fixed income UITs are valued using recently executed transaction prices, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturities as the underlying bonds. If the spread data does not reference the issuers, then data that references comparable issuers is used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default spreads, and recovery rates based on collateral value as key inputs. Depending on the nature of the inputs, these investments are categorized as level 1, 2, or 3.
Municipal securities
Municipal securities are valued using recently executed transaction prices, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturities as the underlying bonds. If the spread data does not reference the issuers, then data that references comparable issuers is used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default spreads, and recovery rates based on collateral value as key inputs. Depending on the nature of the inputs, these investments are categorized as level 1, 2, or 3.
UIT-related financial instruments sold, not yet purchased, and derivative instruments
The company uses U.S. Treasury futures, which are types of derivative financial instruments, to hedge economically fixed income UIT inventory and securities in order to mitigate market risk. Open futures contracts are marked-to-market daily through earnings, which are recorded in the company’s Condensed Consolidated Statements of Income in other revenue, along with the mark-to-market on the underlying trading securities held. Fair values of derivative contracts in an asset position are included in other assets in the company’s Condensed Consolidated Balance Sheets. Fair values of derivative contracts in a liability position are included in other liabilities in the company’s Condensed Consolidated Balance Sheets. These derivative contracts are valued under the market approach through use of quoted prices in an active market and are classified within level 1 of the valuation hierarchy. At September 30, 2013, there were 4 open futures contracts with a notional value of $0.5 million (December 31, 2012: 10 open futures contracts with a notional value of $1.4 million). Additionally, to hedge economically the market risk associated with equity and debt securities and UITs temporarily held as trading investments, the company will hold short corporate stock, exchange-traded fund, or U.S. treasury security positions. These transactions are recorded as financial instruments sold, not yet purchased and are included in accounts payable and accrued expenses in the company’s Condensed Consolidated Balance Sheets. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized within level 1 of the valuation hierarchy; otherwise, they are categorized in level 2.
Note payable
The note payable represents a payable associated with Invesco’s acquired ownership interest in two consolidated real estate funds. As the underlying assets in the funds are carried at fair value, management elected the fair value option for the note payable in order to offset the fair value movements recognized from the funds and has recorded the note payable as a level 3 liability. The fair value of the note payable is measured by reference to the value of the company's ownership interest in the equity of the funds, as this is the contractual amount payable at the reporting date.

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Table of Contents     

The following table presents, for each of the hierarchy levels described above, the carrying value of the company’s assets and liabilities, including major security type for equity and debt securities, which are measured at fair value on the face of the statement of financial position as of September 30, 2013.

 
As of September 30, 2013
$ in millions
Fair Value Measurements
 
Quoted Prices in
Active Markets for
Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
398.1

 
398.1

 

 

Investments:*
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Seed money
125.8

 
125.8

 

 

CLOs
2.2

 

 

 
2.2

Other debt securities
6.3

 

 

 
6.3

Trading investments:
 
 
 
 
 
 
 
Investments related to deferred compensation plans
239.0

 
239.0

 

 

UIT-related equity and debt securities:
 
 
 
 
 
 
 
Corporate stock
2.3

 
2.3

 

 

UITs
1.2

 
1.2

 

 

Municipal securities

 

 

 

Assets held for policyholders
1,449.0

 
1,449.0

 

 

Total assets at fair value
2,223.9

 
2,215.4

 

 
8.5

Liabilities:
 
 
 
 
 
 
 
Policyholder payables
(1,449.0
)
 
(1,449.0
)
 

 

UIT-related financial instruments sold, not yet purchased:
 
 
 
 
 
 
 
Corporate equities
(2.0
)
 
(2.0
)
 

 

Note payable
(1.2
)
 

 

 
(1.2
)
Total liabilities at fair value
(1,452.2
)
 
(1,451.0
)
 

 
(1.2
)

*
Foreign time deposits of $29.6 million are excluded from this table. Equity method and other investments of $292.4 million and $6.2 million, respectively, are also excluded from this table. These investments are not measured at fair value, in accordance with applicable accounting standards.

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Table of Contents     

The following table presents, for each of the hierarchy levels described above, the carrying value of the company’s assets and liabilities that are measured at fair value as of December 31, 2012:
 
As of December 31, 2012
$ in millions
Fair Value Measurements
 
Quoted Prices in
Active Markets for
Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
292.2

 
292.2

 

 

Investments:*
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Seed money
113.4

 
113.4

 

 

CLOs
2.4

 

 

 
2.4

Other debt securities
6.3

 

 

 
6.3

Trading investments:

 

 

 
 
Investments related to deferred compensation plans
213.5

 
213.5

 

 

Other equity securities
0.3

 
0.3

 

 

UIT-related equity and debt securities:
 
 
 
 
 
 
 
Corporate stock
1.5

 
1.5

 

 

UITs
1.6

 
1.6

 

 

Municipal securities
1.8

 

 
1.8

 

Assets held for policyholders
1,153.6

 
1,153.6

 

 

Total assets at fair value
1,786.6

 
1,776.1

 
1.8

 
8.7

Liabilities:
 
 
 
 
 
 
 
Policyholder payables
(1,153.6
)
 
(1,153.6
)
 

 

UIT-related financial instruments sold, not yet purchased:
 
 
 
 
 
 
 
Corporate equities
(1.5
)
 
(1.5
)
 

 

Note payable
(3.4
)
 

 

 
(3.4
)
Total liabilities at fair value
(1,158.5
)
 
(1,155.1
)
 

 
(3.4
)

*
Foreign time deposits of $31.3 million are excluded from this table. Equity method and other investments of $228.2 million and $10.4 million, respectively, are also excluded from this table. These investments are not measured at fair value, in accordance with applicable accounting standards.

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Table of Contents     

The following table shows a reconciliation of the beginning and ending fair value measurements for level 3 assets and liabilities during the three and nine months ended September 30, 2013 and September 30, 2012, which are valued using significant unobservable inputs:
 
Three months ended September 30, 2013
 
Nine months ended September 30, 2013
$ in millions
CLOs
 
Other Debt Securities
 
Note Payable
 
CLOs
 
Other Debt Securities
 
Note Payable
Beginning balance
2.4

 
6.3

 
(1.2
)
 
2.4

 
6.3

 
(3.4
)
Settlements
(0.1
)
 

 

 
(0.2
)
 

 
1.7

Net unrealized gains and losses included in accumulated other comprehensive income/(loss)*
(0.1
)
 

 

 

 

 

Net unrealized gains and losses included in earnings*

 

 

 

 

 
0.1

Foreign exchange gains/(losses)

 

 

 

 

 
0.4

Ending balance
2.2

 
6.3

 
(1.2
)
 
2.2

 
6.3

 
(1.2
)

 
Three months ended September 30, 2012
 
Nine months ended September 30, 2012
$ in millions
CLOs
 
Other Debt Securities
 
Note Payable
 
CLOs
 
Other Debt Securities
 
Note Payable
Beginning balance
2.5

 
6.3

 
(12.6
)
 

 

 
(16.8
)
Purchases

 

 

 

 
1.7

 

Settlements

 

 
1.6

 
(0.2
)
 

 
1.6

Deconsolidation of CIPs

 

 

 
2.5

 

 

Net unrealized gains and losses included in accumulated other comprehensive income/(loss)*

 

 

 
0.2

 

 

Net unrealized gains and losses included in earnings*

 

 

 

 

 
3.5

Reclassification

 

 

 

 
4.6

 

Foreign exchange gains/(losses)

 

 
(0.3
)
 

 

 
0.4

Ending balance
2.5

 
6.3

 
(11.3
)
 
2.5

 
6.3

 
(11.3
)

*
Included in other gains and losses, net in the Condensed Consolidated Statement of Income are $0.1 million in net unrealized gains for the nine months ended September 30, 2013, however there were no net unrealized gains or losses for the three months ended September 30, 2013 (three and nine months ended September 30, 2012: none and $3.5 million net unrealized gains, respectively) attributable to the note payable still held at September 30, 2013. There were $0.1 million net unrealized losses included in accumulated other comprehensive income/(loss) for the three months ended September 30, 2013, however there were no net unrealized gains or losses for the nine months ended September 30, 2013 (three and nine months ended September 30, 2012: none and $0.2 million net unrealized gains, respectively) attributed to the change in unrealized gains and losses related to assets still held at September 30, 2013.

Quantitative Information about Level 3 Fair Value Measurements
At September 30, 2013, investments in CLOs were valued using third-party pricing information. Quantitative unobservable inputs for such valuations were not developed or adjusted by the company. The following table shows significant unobservable inputs used in the fair value measurement of level 3 assets and liabilities at December 31, 2012:
Assets and Liabilities *
 
Fair Value at December 31, 2012 ($ in millions)
 
Valuation Technique
 
Unobservable Inputs
 
Range
 
 Weighted Average (by fair value)
CLOs
 
2.4
 
Discounted Cash Flow- Euro
 
Assumed Default Rate
 
1.8% - 5.0%
 
<1yr: 1.8% >1yr: 5.0%
 
 
 
 
 
 
Spread over Euribor
 
n/a
 
3300 bps
 
 
 
 
Discounted Cash Flow- USD
 
Assumed Default Rate
 
1.1% - 3.0%
 
<1yr: 1.1% >1yr: 3.0%
 
 
 
 
 
 
Spread over Libor
 
n/a
 
1496 bps

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*
Other debt securities of $6.3 million (at December 31, 2012: $6.3 million) are not included in the table above as they are valued using a cost valuation technique. The note payable of $1.2 million (at December 31, 2012: $3.4 million) is also not included in the table above as its value is linked to the underlying value of consolidated funds. Both items are more fully discussed in the "Available-for-sale investments" and "Note payable" disclosures above.

For CLO Notes, a change in the assumption used for spreads is generally accompanied by a directionally similar change in default rate. Significant increases in any of these inputs in isolation would result in significant decreases in fair value measurements. A directionally-opposite impact would apply for significant decreases in these inputs.

3. INVESTMENTS
The disclosures below include details of the company’s investments. Investments held by CSIP are detailed in Note 12, "Consolidated Sponsored Investment Products." Investments held by CIP are detailed in Note 13, “Consolidated Investment Products."
 
As of
 
September 30,
 
December 31,
$ in millions
2013
 
2012
Available-for-sale investments:
 
 
 
Seed money
125.8

 
113.4

CLOs
2.2

 
2.4

Other debt securities
6.3

 
6.3

Trading investments:

 
 
Investments related to deferred compensation plans
239.0

 
213.5

UIT-related equity and debt securities
3.5

 
4.9

Other equity securities

 
0.3

Equity method investments
292.4

 
228.2

Foreign time deposits
29.6

 
31.3

Other
6.2

 
10.4

Total investments
705.0

 
610.7

In March 2013, the company completed the purchase of a 49% equity interest in Religare Asset Management Limited, a company incorporated in India. The company has applied the equity method of accounting for its investment. The equity method investment balance above includes the difference between the carrying amount of the investment and its book value.
The portion of trading gains and losses for the three and nine months ended September 30, 2013 that relates to trading securities still held at September 30, 2013 was a $9.8 million net gain and $23.8 million net gain, respectively (three and nine months ended September 30, 2012: $9.7 million net gain and $16.0 million net gain, respectively).

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Realized gains and losses recognized in the income statement during the year from investments classified as available-for-sale are as follows:
 
For the three months ended September 30, 2013:
 
For the nine months ended September 30, 2013:
$ in millions
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
 
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
Seed money
0.2

 
1.0

 

 
23.1

 
2.7

 
(0.3
)
CLOs
0.1

 

 

 
0.2

 

 

 
For the three months ended September 30, 2012:
 
For the nine months ended September 30, 2012:
$ in millions
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
 
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
Seed money
9.1

 
1.4

 
(0.2
)
 
32.7

 
3.2

 
(0.7
)
CLOs

 

 

 
0.2

 

 

Upon the sale of available-for-sale securities, net realized gains of $1.0 million and $2.4 million were transferred from accumulated other comprehensive income into the Condensed Consolidated Statements of Income during the three and nine months ended September 30, 2013, respectively (net realized gains of $1.2 million and $2.5 million were transferred during the three and nine months ended September 30, 2012, respectively). The specific identification method is used to determine the realized gain or loss on securities sold or otherwise disposed.
Gross unrealized holding gains and losses recognized in other accumulated comprehensive income from available-for-sale investments are presented in the table below:
 
September 30, 2013
 
December 31, 2012
$ in millions
Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
 
Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Seed money
111.8

 
14.3

 
(0.3
)
 
125.8

 
105.5

 
8.4

 
(0.5
)
 
113.4

CLOs
2.2

 

 

 
2.2

 
2.4

 

 

 
2.4

Other debt securities
6.3

 

 

 
6.3

 
6.3

 

 

 
6.3

 
120.3

 
14.3

 
(0.3
)
 
134.3

 
114.2

 
8.4

 
(0.5
)
 
122.1

Available-for-sale debt securities by maturity, are set out below:
$ in millions
September 30, 2013
One to five years
1.7

Five to ten years
6.8

Total available-for-sale
8.5

The following table provides the breakdown of available-for-sale investments with unrealized losses at September 30, 2013:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
$ in millions
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Seed money (41 funds)
 
11.6

 
(0.2
)
 
0.2

 
(0.1
)
 
11.8

 
(0.3
)
The following table provides the breakdown of available-for-sale investments with unrealized losses at December 31, 2012:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
$ in millions
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Seed money (52 funds)
 
0.2

 

 
11.5

 
(0.5
)
 
11.7

 
(0.5
)

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The company has reviewed investment securities for other-than-temporary impairment (OTTI) in accordance with its accounting policy and has recognized no other-than-temporary impairment charges on available-for-sale investments during the nine months ended September 30, 2013 (nine months ended September 30, 2012: $0.8 million).
The gross unrealized losses of seed money investments at September 30, 2013 were immaterial and were primarily caused by foreign exchange movements. After conducting a review of the financial condition and near-term prospects of the underlying securities in the seeded funds as well as the severity and duration of the impairment, the company does not consider any material portion of its gross unrealized losses on these securities to be other-than-temporarily impaired. The securities are expected to recover their value over time and the company has the intent and ability to hold the securities until this recovery occurs.

4. LONG-TERM DEBT
The disclosures below include details of the company’s long-term debt. Debt of CIP is detailed in Note 13, “Consolidated Investment Products."
 
September 30, 2013
 
December 31, 2012
$ in millions
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Unsecured Senior Note*:
 
 
 
 
 
 
 
   3.125% - due November 30, 2022
599.6

 
555.1

 
599.5

 
618.3

Floating rate credit facility expiring June 3, 2016
788.0

 
788.0

 
586.5

 
586.5

Long-term debt
1,387.6

 
1,343.1

 
1,186.0

 
1,204.8


*
The company’s Senior Note indenture contains certain restrictions on mergers or consolidations. Beyond these items, there are no other restrictive covenants in the indenture. The issuer is a 100%-owned finance subsidiary of the Parent, and the Parent has fully and unconditionally guaranteed the securities. Certain of our subsidiaries are required to maintain minimum levels of capital. These and other similar provisions of applicable law may have the effect of limiting withdrawals of capital, repayment of intercompany loans and payment of dividends by such entities.
The fair value of the company’s Senior Note was determined by market quotes provided by Bloomberg L.P., which is considered a Level 2 valuation input.
Analysis of Borrowings by Maturity:
$ in millions
September 30, 2013
2016
788.0

2022
599.6

Long-term debt
1,387.6

At September 30, 2013, the outstanding balance on the credit facility was $788.0 million and the weighted average interest rate on the credit facility was 1.28%. Borrowings under the credit facility will bear interest at (i) LIBOR for specified interest periods or (ii) a floating base rate (based upon the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus 0.50% and (c) LIBOR for an interest period of one month plus 1.00%), plus, in either case, an applicable margin determined with reference to the company’s credit ratings and specified credit default spreads. Based on credit ratings as of September 30, 2013 of the company and such credit default spreads, the applicable margin for LIBOR-based loans was 1.10% and for base rate loans was 0.10%. In addition, the company is required to pay the lenders a facility fee on the aggregate commitments of the lenders (whether or not used) at a rate per annum which is based on the company’s credit ratings. Based on credit ratings as of September 30, 2013, the annual facility fee was equal to 0.15%.

The credit agreement governing the credit facility contains customary restrictive covenants on the company and its subsidiaries. Restrictive covenants in the credit agreement include, but are not limited to: prohibitions on creating, incurring or assuming any liens; entering into certain restrictive merger arrangements; selling, leasing, transferring or otherwise disposing of assets; making a material change in the nature of the business; making material amendments to organic documents; making a significant accounting policy change in certain situations; entering into transactions with affiliates. Many of these restrictions are subject to certain minimum thresholds and exceptions. Financial covenants under the credit agreement include: (i) the quarterly maintenance of a debt/EBITDA ratio, as defined in the credit agreement, of not greater than 3.25:1.00 through June

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30, 2014, and not greater than 3.00:1.00 thereafter, (ii) a coverage ratio (EBITDA, as defined in the credit agreement, divided by interest payable for the four consecutive fiscal quarters ended before the date of determination) of not less than 4.00:1.00.

The credit agreement governing the credit facility also contains customary provisions regarding events of default which could result in an acceleration or increase in amounts due, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control, certain judgments, ERISA matters, cross-default to other debt agreements, governmental action prohibiting or restricting the company or its subsidiaries in a manner that has a material adverse effect and failure of certain guaranty obligations. The company is in compliance with all regulatory minimum net capital requirements.

The lenders (and their respective affiliates) may have provided, and may in the future provide, investment banking, cash management, underwriting, lending, commercial banking, leasing, foreign exchange, trust or other advisory services to the company and its subsidiaries and affiliates. These parties may have received, and may in the future receive, customary compensation for these services.

The company maintains approximately $33.5 million in letters of credit from a variety of banks. The letters of credit are generally one-year automatically-renewable facilities and are maintained for various commercial reasons. Approximately $11.3 million of the letters of credit support office lease obligations.
 
5. SHARE CAPITAL
Movements in the number of common shares issued are represented in the table below:
In millions
September 30, 2013
 
September 30, 2012
Common shares issued
490.4

 
490.4

Less: Treasury shares for which dividend and voting rights do not apply
(47.2
)
 
(46.4
)
Common shares outstanding
443.2

 
444.0

During the three and nine months ended September 30, 2013, the company repurchased zero and 3.8 million shares, respectively, in the market at a cost of zero and $120.5 million, respectively (three and nine months ended September 30, 2012: 1.8 million and 8.1 million shares were repurchased at a cost of $40.0 million, and $190.0 million, respectively). Separately, an aggregate of 2.3 million shares were withheld on vesting events during the nine months ended September 30, 2013 to meet employees’ withholding tax (nine months ended September 30, 2012: 1.9 million). The fair value of these shares withheld at the respective withholding dates was $61.5 million during the nine months ended September 30, 2013 (nine months ended September 30, 2012: $44.4 million). As of September 30, 2013, $346.5 million remained authorized under the company’s share repurchase plan (September 30, 2012: $542.0 million). See Note 16, "Subsequent Events," for details regarding additional share repurchase authorization.
Total treasury shares at September 30, 2013 were 57.2 million (September 30, 2012: 56.8 million), including 10.0 million unvested restricted stock awards (September 30, 2012: 10.4 million) for which dividend and voting rights apply. The closing market price of common shares at September 30, 2013 was $31.90. The total market value of the company’s 57.2 million treasury shares was $1.8 billion on September 30, 2013.


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6. OTHER COMPREHENSIVE INCOME/(LOSS)

The components of accumulated other comprehensive income/(loss) were as follows:
 
 
For the three months ended September 30, 2013:
$ in millions
 
Foreign currency translation
 
Employee benefit plans
 
Equity method investments
 
Available-for-sale investments
 
Total
Other comprehensive income/(loss) before tax:
 
 
 
 
 
 
 
 
 
 
Currency translation differences on investments in foreign subsidiaries *
 
202.7

 

 

 

 
202.7

Actuarial (loss)/gain related to employee benefit plans
 

 
(5.5
)
 

&