| Summary of significant accounting policies | 2. Summary of significant accounting policies Restatement The Company has restated in this Annual Report its previously issued consolidated financial statements at December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019. The Company has also restated impacted amounts within the accompanying notes to the consolidated financial statements, as applicable. Restatement background Following comments from and engagement with the staff of the SEC, the Company has, in consultation with its independent auditor Ernst & Young LLP, revised its approach to fair value accounting for its capital provision assets in consideration of Accounting Standards Codification Topic 820— Fair Value Measurement ASC 820 In addition to applying this revised valuation approach to the Company’s consolidated financial statements for the year ended December 31, 2022, the Company has applied it retroactively to the prior three years of its consolidated financial statements. Management and the Audit Committee concluded on May 2, 2023 that the Company’s consolidated financial statements for the years ended December 31, 2021, 2020 and 2019 and the six months ended June 30, 2022 should be restated to correct a material understatement of capital provision assets and capital provision income given the application of the revised valuation approach; definitionally, any such restatement is considered to be for the correction of an error. The following tables summarize the impact of the restatement on the consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of financial position and consolidated statements of cash flows at December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019. In addition to the impacts noted below there is an immaterial difference to opening balances reported in the consolidated statement of changes in equity retained earnings for the year ended December 31, 2019. Consolidated statements of operations For the year ended December 31, 2021 2020 2019 ($ in thousands, except share data) Previously reported Restated Previously reported Restated Previously reported Restated Capital provision income 127,549 194,554 340,103 314,948 409,156 579,792 Gain/(loss) relating to third-party interests in capital provision assets 2,028 195 947 (5,157) (57,500) (72,836) Total revenues 152,158 217,330 359,121 327,862 379,170 534,470 Operating expenses - Annual incentive compensation 22,145 22,145 22,772 22,772 24,503 24,503 Operating expenses - Equity compensation 9,272 9,272 5,281 5,281 4,519 4,519 Operating expenses - Legacy asset recovery incentive compensation including accruals 36,364 35,488 - - - - Operating expenses - Long-term incentive compensation including accruals 7,942 11,741 18,125 16,628 33,496 38,870 Total operating expenses 145,823 148,746 120,580 119,083 132,691 138,065 Operating income 6,335 68,584 238,541 208,779 246,479 396,405 Foreign currency transactions losses/(gains) 5,482 5,499 (10,746) (10,746) (1,956) (1,956) Total other expenses 65,778 65,795 28,302 28,302 36,791 36,791 (Loss)/gain before income taxes (59,443) 2,789 210,239 180,477 209,688 359,614 Benefit from/(provision for) income taxes 3,015 (9,727) (36,937) (23,502) (13,417) (31,915) Net (loss)/(income) (56,428) (6,938) 173,302 156,975 196,271 327,699 Net income attributable to non-controlling interests 15,638 21,813 8,187 13,700 15,309 27,153 Net (loss)/income attributable to Burford Capital Limited shareholders (72,066) (28,751) 165,115 143,275 180,962 300,546 Net (loss)/income attributable to Burford Capital Limited per ordinary share Basic (0.33) (0.13) 0.75 0.65 0.83 1.37 Diluted (0.33) (0.13) 0.75 0.65 0.83 1.37 Weighted average ordinary shares outstanding Basic 219,049,877 219,049,877 218,919,822 218,919,822 218,649,877 218,649,877 Diluted 219,699,459 219,049,877 218,919,822 219,635,784 219,061,999 219,107,925 Consolidated statements of comprehensive income For the year ended December 31, 2021 2020 2019 ($ in thousands, except share data) Previously reported Restated Previously reported Restated Previously reported Restated Foreign currency translation adjustment (2,443) (2,222) (10,206) (11,543) (17,525) (17,273) Comprehensive (loss)/income (58,871) (9,160) 163,096 145,432 178,746 310,426 Comprehensive (loss)/income attributable to Burford Capital Limited shareholders (74,509) (30,973) 154,909 131,732 163,437 283,273 Consolidated statements of financial position At December 31, 2021 2020 ($ in thousands, except share data) Previously reported Restated Previously reported Restated Capital provision assets 2,900,465 3,117,263 2,564,742 2,714,314 Total assets 3,524,706 3,741,504 3,118,013 3,267,585 Other liabilities 126,057 133,494 109,747 114,244 Financial liabilities relating to third-party interests in capital provision assets 398,595 424,733 400,660 424,965 Deferred tax liability 22,889 38,785 24,742 27,896 Total liabilities 1,584,016 1,633,487 1,212,519 1,244,475 Accumulated other comprehensive income 4,108 2,920 6,551 5,142 Retained earnings 922,503 1,067,773 1,034,319 1,136,274 Total Burford Capital Limited equity 1,551,790 1,695,872 1,662,212 1,762,758 Non-controlling interests 388,900 412,145 243,282 260,352 Total shareholders' equity 1,940,690 2,108,017 1,905,494 2,023,110 Total liabilities and shareholders' equity 3,524,706 3,741,504 3,118,013 3,267,585 Consolidated statements of cash flows For the year ended December 31, 2021 2020 2019 ($ in thousands, except share data) Previously reported Restated Previously reported Restated Previously reported Restated Cash flows from operating activities: Net (loss)/income (56,428) (6,938) 173,302 156,975 196,271 327,699 Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities: Capital provision income (127,549) (194,554) (340,103) (314,948) (409,156) (579,792) Share-based compensation 8,823 8,823 5,328 5,328 4,519 4,519 Deferred tax (benefit)/expense (1,129) 11,613 34,502 21,067 9,405 27,903 Other 3,879 3,879 (7,875) (7,875) (754) (754) Changes in operating assets and liabilities: (Increase) in other assets (2,330) (2,330) (9,846) (9,846) 3,777 3,777 Increase in other liabilities 22,342 25,282 21,884 20,387 32,454 37,828 Net (increase) on financial liability to third-party investment (2,065) (232) (784) 5,320 57,500 72,836 Net cash used in operating activities (585,364) (585,364) 53,827 53,827 (273,555) (273,555) Basis of presentation The Group’s audited consolidated financial statements at and for the year ended December 31, 2022 and comparative periods contained in this Annual Report have been prepared in accordance with US GAAP. Use of estimates The preparation of the Group’s consolidated financial statements requires management to make estimates that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Such estimates include, among others, the valuation of capital provision assets, which requires the use of Level 3 valuation inputs, and other financial instruments, the measurement of deferred tax balances (including valuation allowances) and the accounting for goodwill. Actual results could differ from those estimates, and such differences could be material. Consolidation The consolidated financial statements include the accounts of (i) the Company, (ii) its wholly owned or majority owned subsidiaries, (iii) the consolidated entities which are considered to be variable interest entities (“ VIEs In connection with private funds and other related entities where the Group does not own 100% of the relevant entity, the Group makes judgments about whether it is required to consolidate such entities by applying the factors set forth in US GAAP for VIEs or voting interest entities under Accounting Standards Codification (“ ASC Consolidation VIEs are entities that, by design, either (i) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, (ii) have equity investors that (A) do not have the ability to make significant decisions relating to the entity’s operations through voting rights, (B) do not have the obligation to absorb the expected losses or (C) do not have the right to receive the residual returns of the entity or (iii) have equity investors’ voting rights that are not proportional to the economics, and substantially all of the activities of the entity either involve or are conducted on behalf of an investor that has disproportionately few voting rights. An entity is deemed to be the primary beneficiary of the VIE if such entity has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. In determining whether the Group is the primary beneficiary of a VIE, the Group considers both qualitative and quantitative factors regarding the nature, size and form of its involvement with the VIE, such as its role establishing the VIE and its ongoing rights and responsibilities, the design of the VIE, its economic interests, servicing fees and servicing responsibilities and certain other factors. The Group performs ongoing reassessments to evaluate whether changes in the entity’s capital structure or changes in the nature of its involvement with the entity result in a change to the VIE designation or a change to its consolidation conclusion. The most significant judgments relate to the assessment of the Group’s exposure or rights to variable returns in Burford Opportunity Fund C LP (“ BOF-C Strategic Value Fund Advantage Fund Colorado The Group is deemed to have a controlling financial interest in VIEs in which it is the primary beneficiary and in other entities in which it owns more than 50% of the outstanding voting shares and other shareholders do not have substantive rights to participate in management. The assets of these consolidated VIEs are not available to the Company, and the creditors of these consolidated VIEs do not have recourse to the Company. For entities the Group controls but does not wholly own, the Group generally records a non-controlling interest within shareholders’ equity for the portion of the entity’s equity attributed to the non-controlling ownership interests. Accordingly, third-party share of net income or losses relating to non-controlling interests in consolidated entities is treated as a reduction or increase, respectively, of net income in the consolidated statements of operations. With respect to Colorado, an entity the Group controls but does not wholly own, the Group records a financial liability within financial liabilities related to third-party interests in capital provision assets for the portion of the entity’s equity held by third parties. The third-party share of income or losses is included in gain/(loss) relating to third-party interests in capital provision assets in the consolidated statements of operations. All significant intercompany balances, transactions and unrealized gains and losses on such transactions are eliminated in consolidation. Reclassifications Certain reclassifications of the amounts for prior periods have been made to conform to the presentation for the current period. Covid-19 pandemic and global economic market conditions The Covid-19 pandemic and restrictions on certain non-essential businesses have caused disruption in the United States and global economies. Although an economic recovery is partially underway, it continues to be gradual, uneven and characterized by meaningful dispersion across sectors and regions. The estimates and assumptions underlying the consolidated financial statements at December 31, 2022, 2021 and 2020 and for the years ended December 31, 2022, 2021, 2020 and 2019 include judgments about the financial markets and economic conditions, which may change over time. Among estimates and assumptions, certain inputs to the valuation of our capital provision assets were impacted as a result of the Covid-19 pandemic, including expected timing and amount of cash flows in our cash flow forecasts and applicable discount rates. As a result of the Russian Federation’s invasion of Ukraine in February 2022 (the “Ukraine War”), various nations, including the United States, have instituted economic sanctions and other responsive measures, which have resulted in an increased level of global economic and political uncertainty. At and for the year ended December 31, 2022, the effects of the Ukraine War, including international sanctions imposed on Russian businesses and individuals, have not had a material impact on the Group’s consolidated financial statements. Cash and cash equivalents The Group considers all highly liquid short-term investments with original maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents include funds held by depository institutions, money market funds and US Treasury securities with original maturities of three months or less when purchased. Interest income from cash and cash equivalents is recorded in marketable securities income in the consolidated statements of operations. The carrying values of the money market funds and US Treasury securities included in cash and cash equivalents were $1.0 million, $21.6 million and $5.3 million at December 31, 2022, 2021 and 2020, respectively, which represented their fair values due to their short-term nature and were categorized as Level 1 within the fair value hierarchy. Substantially all of the Group’s cash on deposit is in interest bearing accounts with major financial institutions that exceed insured limits. Statement of cash flows The core business purpose of the Group is the provision of capital and expertise, to clients or as a principal, in connection with (i) the underlying asset value of litigation claims and enforcement of settlements, judgments and awards, (ii) the amount paid to law firms as legal fees and (iii) the value of assets affected by litigation. These contractual arrangements are presented as capital provision assets on the consolidated statements of financial position and the returns on those assets form the principal source of revenue earned by the Group. The cash flows associated with capital provision assets are reported within cash flows from operating activities as the ongoing management of the capital provision assets is a key operating activity for the Group. Bank interest income/(loss) Bank interest income/(loss) is recognized on an accruals basis and included in marketable securities income/(loss) and bank interest. Marketable securities Marketable securities include US Treasury bills with original maturities longer than three months when purchased and corporate bonds, mutual funds and asset-backed securities. Marketable securities are recorded at fair value. Interest income on marketable securities is included in the overall change in fair value which is recognized in marketable securities income in the consolidated statements of operations. Fair value of financial instruments The Group’s capital provision assets meet the definition of a financial instrument under ASC 825— Financial Instruments Derivatives and hedging The Group has elected the fair value option for the Group’s equity method investments, marketable securities, due from settlement of capital provision assets and capital provision asset subparticipations to provide a consistent fair value measurement approach for all capital provision related activity. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Except for the Group’s debt obligations, financial instruments are generally recorded at fair value or at amounts, the carrying values of which approximate fair value. Fair value hierarchy US GAAP establishes a hierarchical disclosure framework that prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values as follows: ▪ Level 1 —quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date ▪ Level 2 —inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly ▪ Level 3 —unobservable inputs for the asset or liability All transfers into and out of these levels are recognized as if they have taken place at the beginning of each reporting period. Valuation processes The Group’s senior professionals are responsible for developing the policies and procedures for fair value measurement of assets and liabilities. Following origination and at each reporting date, the movements in the values of assets and liabilities are required to be reassessed in accordance with the Group’s accounting policies. For this analysis, the reasonableness of material estimates and assumptions underlying the valuation is discussed and the major inputs applied are verified by comparing the information in the valuation computation to contracts, asset status and progress information and other relevant documents . Valuation methodology for Level 1 assets and liabilities Level 1 assets and liabilities are comprised of listed instruments, including equities, fixed income securities, investment funds and financial liabilities at fair value through profit or loss. All Level 1 assets and liabilities are valued at the quoted market price at the reporting date. Valuation methodology for Level 2 assets and liabilities Level 2 assets and liabilities are comprised of debt and equity securities that are not actively traded and are valued at the last quoted or traded price at the reporting date, provided there is evidence that the price is not assessed as significantly stale so as to warrant a Level 3 classification and due from settlement of capital provision assets, as the settlement amount, which is the key input to determining fair value, is an observable input. Valuation methodology for Level 3 assets and liabilities Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The methods and procedures to determine fair value of assets and liabilities may include, among others, (i) The material estimates and assumptions used in the analyses of fair value include the status and risk profile of the underlying asset or liability and, as applicable, the timing and expected amount of cash flows based on the structure and agreement of the asset or liability, the appropriateness of any discount rates used and the timing of, and estimated minimum proceeds from, a favorable outcome. Discount rates and a discounted cash flow basis for estimating fair value are applied to assets and liabilities measured at fair value, as applicable, most notably the Group’s capital provision assets. Significant judgment and estimation go into the assumptions which underlie the analyses, and the actual values realized with respect to assets or liabilities, as applicable, could be materially different from values obtained based on the use of those estimates. The Group updated its valuation policy for capital provision assets during the year ended December 31, 2022. Capital provision assets are fair valued using an income approach. The income approach estimates fair value based on the Group’s estimated, risk-adjusted future cash flows, using a discount rate to reflect the funding risk of deploying capital for funding capital provision assets. The income approach requires management to make a series of assumptions, such as discount rate, the timing and amount of both expected cash inflows and additional fundings and a risk-adjustment factor reflecting the uncertainty inherent in the cash flows primarily driven by litigation risk, which changes as a result of observable litigation events. These assumptions are considered Level 3 inputs. A cash flow forecast is developed for each capital provision asset based on the anticipated capital commitments, damages or settlement estimates and the Group’s contractual entitlement. Capital provision assets are recorded at initial fair value, which is equivalent to the initial transaction price for a given capital provision asset, based on an assessment that it is an arm’s-length transaction between independent third parties and an orderly transaction between market participants. Using the cash flow forecast and a discount rate, an appropriate risk adjustment factor is calculated to be applied to the forecast cash inflows to calibrate the valuation model to the initial transaction price. Each reporting period, the cash flow forecast is updated based on the best available information on damages or settlement estimates and it is determined whether there has been an objective event in the underlying litigation process, which would change the litigation risk and thus the risk-adjustment factor associated with the capital provision asset. These objective events could include, among others: ▪ A significant positive ruling or other objective event prior to any trial court judgment ▪ A favorable trial court judgment ▪ A favorable judgment on the first appeal ▪ The exhaustion of as-of-right appeals ▪ In arbitration cases, where there are limited opportunities for appeal, issuance of a tribunal award ▪ An objective negative event at various stages in the litigation process Each reporting period, the updated risk-adjusted cash flow forecast is then discounted at the then current discount rate to measure fair value. See note 15 ( Fair value of assets and liabilities In a small number of instances, the Group has the benefit of a secondary sale of a portion of an asset or liability. When this occurs, the market evidence is factored into the valuation process to maximize the use of relevant observable inputs. Secondary sales are evaluated for relevance, including whether such transactions are orderly, and weight is attributed to the market price accordingly, which may include calibrating the valuation model to observed market price. Third-party interests in capital provision assets Third-party interests in capital provision assets include the financial liability relating to the third-party interests in Colorado as well as financial liabilities relating to third-party interests resulting from capital provision asset subparticipations recognized at fair value. Colorado holds a single financial asset and does not have any other business activity. Accordingly, Colorado does not meet the definition of a business, and the third-party interest in the entity is accounted for as a collateralized borrowing rather than a non-controlling interest in shareholders’ equity. Amounts included in the consolidated statements of financial position represent the fair value of the third-party interests in the related capital provision assets, and the amounts included in the consolidated statements of operations represent the third-party share of any gain or loss during the reporting period. Non-controlling interests For entities that are consolidated, but not wholly owned, a portion of the income or loss and corresponding equity is allocated to owners other than the Company. The aggregate of the income or loss and corresponding equity that is not owned by the Company is included in non-controlling interests in the consolidated financial statements. Non-controlling interests also include ownership interests in certain consolidated funds and VIEs. Non-controlling interests are presented as a separate component of shareholders’ equity in the consolidated statements of financial position. The primary components of non-controlling interests are separately presented in the consolidated statements of changes in equity to clearly distinguish the interest in the Group and other ownership interests in the consolidated entities. Net income/(loss) includes the net income/(loss) attributable to the holders of non-controlling interests in the consolidated statements of comprehensive income. Profits and losses are allocated to non-controlling interests in proportion to their relative ownership interests regardless of their basis. Non-controlling interests exclude the third-party interests in Colorado as it represents a consolidated entity that holds a single financial asset and does not have any other business activity. Asset management income Asset management income is derived from the governing agreements in place with the Group’s private funds. The rate or amount at which fees are charged, the basis on which such fees are calculated and the timing of payment vary across funds and, as to a particular fund, may also vary across investment options available to underlying investors in, or members of, the fund. Management fees are generally based on an agreed percentage of a fund’s commitments and amounts committed or deployed depending on the fund agreements. Management fees are recognized over time as the services are provided. Performance fees are earned when contractually agreed performance levels are exceeded within specified performance measurement periods. Performance fees are recognized when a reliable estimate of the performance fee can be made and it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Insurance activities The Group (i) acts as an administrator in the sale of legal expenses insurance policies issued in the name of Great Lakes Reinsurance (UK) plc, a subsidiary of MunichRe, under a binding authority agreement, and (ii) underwrites legal expenses insurance policies through its wholly owned Guernsey insurer, Burford Worldwide Insurance Limited. Insurance administration Income earned from acting as an insurance administrator represents commissions receivable, which are calculated based on the premium earned, net of reinsurance and insurance premium tax, less an allowance for claims, sales commissions, fees and the other direct insurance related costs, such as a levy under the Financial Services Compensation Scheme. The payment of premiums is often contingent on a case being won or settled, and the Group recognizes the associated income only at this point, while a deduction is made for claims estimated to be paid on all of the insurance policies in force. This income is separately identified as “Insurance administrator commissions” in note 9 ( Liabilities and income from insurance contracts Insurance underwriting Insurance policies written by Burford Worldwide Insurance Limited are subject to contractual reinsurance arrangements that transfer a significant portion of the insurance risk to the reinsurers with Burford Worldwide Insurance Limited retaining a portion of the insurance risk of each contract. Contracts are typically written with an upfront premium payable and may also include a conditional premium. The payment of conditional premiums is often contingent on a case being won or settled, and the Group recognizes the associated conditional premium amount only at this point. Premiums written relate to insurance business incepted during the reporting period. Full account is taken of premiums receivable and reinsurance premiums payable during the reporting period. Unearned premiums represent the proportion of premiums that relate to unexpired terms of policies in force at the reporting date, calculated on a time apportionment basis. Provision is made for all outstanding loss reserves as notified by the insured. The level of the provision is determined on the basis of the information available, including potential loss claims which have been intimated to the Group, experience of the development of similar claims and case law. While the Group considers that the provision for these claims is fairly stated on the basis of the available information, the ultimate liability may vary as a result of subsequent information and events and may result in adjustments to the amounts provided. Adjustments to the amounts provided are reflected in the consolidated financial statements for the reporting period in which the adjustments are made. Claims are recorded in the reporting period in which they are incurred. Leases At the inception of any arrangement, the Group determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. The Group recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. In calculating the present value, the Group uses its incremental borrowing rate at the lease commencement date as the interest rate implicit in the lease is not readily determinable. The lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. The Group combines fixed payments for non-lease components with its lease payments and accounts for them together as a single lease component which increases the amount of its lease assets and liabilities. Payments under the lease arrangements are primarily fixed. Variable rents, if any, are expensed as incurred. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the consolidated statements of operations over the period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. The right-of-use asset and associated lease liability are derecognized on the termination of a lease agreement. The Group has elected to not recognize leases with an original term of one year or less in the consolidated statements of financial position. The Group typically only includes an initial lease term in its assessment of a lease arrangement, whereas options to renew a lease are not included in this assessment unless there is a reasonable certainty that the lease will be renewed. In the statement of financial position, right-of-use assets are included within other assets, and lease liabilities are included in other liabilities. Ordinary shares held in the Burford Capital Employee Benefit Trust The Company’s ordinary shares held by the Burford Capital Employee Benefit Trust are held for the purposes of employee equity-b |
