The measurement basis of assets and liabilities arising from life and pensions business contracts is dependent upon the
classification of those contracts as either insurance or investment contracts. A contract is classified as insurance only if it transfers significant insurance risk. Insurance risk is significant if an insured event could cause an insurer to pay significant additional benefits to those payable if no insured event occurred, excluding scenarios that lack commercial substance. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. When a policyholder exercises an option within an investment contract to utilise withdrawal proceeds from the investment contract to secure future benefits which contain significant insurance risk, the related investment contract liability is derecognised and an insurance contract liability is recognised. The withdrawal proceeds which are used to secure the insurance contract are recognised as premium income in accordance with accounting policy (g)(ii). Life and pensions business contracts that are not considered to be insurance contracts are classified as investment contracts.
The Group has written insurance and investment contracts which contain discretionary participating features (e.g. with profits business). These contracts provide a contractual right to receive additional benefits as a supplement to guaranteed benefits. These additional benefits are based on the performance of with profits funds and their amount and timing is at the discretion of the Group. These contracts are referred to as participating contracts.
Generally, life and pensions business product classes are sufficiently homogeneous to permit a single classification at the level of the product class. However, in some cases, a product class may contain individual contracts that fall across multiple classifications (hybrid contracts). For certain significant hybrid contracts the product class is separated into the insurance element, a non-participating investment element and a participating investment element, so that each element is accounted for separately. Contracts with reinsurers are assessed to determine whether they contain significant insurance risk. Contracts that do not give rise to a significant transfer of insurance risk to the reinsurer are considered financial reinsurance and are accounted for and disclosed in a manner consistent with financial instruments.
Contracts that give rise to a significant transfer of insurance risk to the reinsurer are assessed to determine whether they contain an element that does not transfer significant insurance risk and which can be measured separately from the insurance component. Where such elements are present, they are accounted for separately with any deposit element being accounted for and disclosed in a manner consistent with financial instruments. The remaining elements, or where no such separate elements are identified, the entire contracts, are classified as a reinsurance contracts.
(g) Revenue recognition
(g)(i) Deposit accounting for non-participating investment contracts
Contributions received on non-participating investment contracts are treated as policyholder deposits and not reported as revenue in the consolidated income statement.
Deposit accounting is also applied to contracts with reinsurers that do not qualify as reinsurance contracts under policy (f). The fee income associated with non-participating investment contracts is dealt with under policy (g)(iv).
(g)(ii) Premiums
Premiums received on insurance contracts and participating investment contracts are recognised as revenue when due for payment, except for unit linked premiums which are accounted for when the corresponding liabilities are recognised. For single premium business, this is the date from which the policy is effective. For regular (and recurring) premium contracts, receivables are established at the date when payments are due.
(g)(iii) Net investment return
Gains and losses resulting from changes in both market value and foreign exchange on investments classified as at fair value through profit or loss, including investment income received (such as interest payments), are recognised in the consolidated income statement in the period in which they occur.
Changes in the fair value of derivative financial instruments that are not hedging instruments are recognised immediately in the consolidated income statement.
For debt securities classified as available-for-sale (AFS), interest income recognised in the consolidated income statement is calculated using the effective interest rate (EIR) method.
Unrealised gains and losses on AFS financial assets are recognised in other comprehensive income unless an impairment loss is recognised. On disposal any accumulated gain or loss previously recognised in other comprehensive income is recycled to the consolidated income statement.
For loans measured at amortised cost, interest income recognised in the consolidated income statement is calculated using the EIR method.
Dividend income is recognised in the consolidated income statement when the right to receive payment is established. Rental income is recognised in the consolidated income statement on a straight-line basis over the term of the lease.
3. Financial information – Group accounting policies continued
Group accounting policies continued
(g) Revenue recognition continued
(g)(iv) Fee and commission income
All fees related to unit linked non-participating investment contracts are deemed to be associated with the provision of investment management services. Fees related to the provision of investment management services and administration services are
recognised as the services are provided. Front-end fees, which are charged at the inception of service contracts, are deferred as a liability and recognised over the expected life of the contract. Ongoing fees that are charged periodically, either directly or by making a deduction from invested funds, are recognised as received, which corresponds to when the services are provided. Commissions received or receivable are recognised as revenue on the commencement or renewal date of the related policies. However, when it is probable that the Group will be required to render further services during the life of the policy, the commission is deferred as a liability and is recognised as the services are provided.
(h) Expense recognition
(h)(i) Deposit accounting for non-participating investment contracts
Withdrawals paid out to policyholders on non-participating investment contracts are treated as a reduction to policyholder deposits and not recognised as expenses in the consolidated income statement.
Deposit accounting is also applied to contracts with reinsurers that do not qualify as reinsurance contracts under policy (f) above. (h)(ii) Claims and benefits paid
Claims paid on insurance contracts and participating investment contracts are recognised as expenses in the consolidated income statement.
Maturity claims and annuities are accounted for when due for payment. Surrenders are accounted for when paid or, if earlier, on the date when the policy ceases to be included within the calculation of the insurance liability. Death claims and all other claims are accounted for when notified.
Claims payable include the direct costs of settlement. Reinsurance recoveries are accounted for in the same period as the related claim.
(h)(iii) Change in insurance and participating investment contract liabilities
The change in insurance and participating investment contract liabilities, comprising the full movement in the corresponding liabilities during the period, is recognised in the consolidated income statement. This also includes the movement in unallocated divisible surplus (UDS) in the period. However, where movements in assets and liabilities which are attributable to participating policyholders are taken directly to equity, the change in UDS arising from these movements is not recognised in the consolidated income statement as it is also recognised in equity.
(h)(iv) Change in investment contract liabilities
Investment return and related benefits credited in respect of non-participating investment contracts are recognised in the income statement as changes in investment contract liabilities.
(h)(v) Expenses under arrangements with reinsurers
Expenses, including interest, arising under elements of contracts with reinsurers that do not transfer significant insurance risk are recognised as they are incurred in the consolidated income statement as expenses under arrangements with reinsurers.
(i)
Impairment of non-financial assets
The carrying amounts of non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, at least at each reporting date. An impairment loss is recognised in the
consolidated income statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. Non- financial assets other than goodwill, which have been impaired are reviewed for possible reversal of impairment losses at each reporting date.
The recoverable amount of an asset is the greater of its net selling price (fair value less costs to sell) and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit, or group of units, to which the asset belongs.
(j)
Goodwill and intangible assets
(j)(i) Goodwill
In a business combination, goodwill represents the excess of the consideration transferred, the amount of any non-controlling interest and the fair value of any previously held interest, over the fair value of the Group’s share of the identifiable assets acquired and the liabilities and contingent liabilities assumed at the acquisition date.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated, from the acquisition date, to each of the Group’s cash generating units or groups of cash generating units that are expected to benefit from the business
combination. The carrying amount of goodwill for each cash generating unit or group of cash generating unit is reviewed when changes in circumstances or events indicate that there may be uncertainty over its carrying value, and at least annually. Goodwill is carried at cost less any accumulated impairment losses and is included in intangible assets.
(j)(ii) Intangible assets
Intangible assets are recognised on the consolidated statement of financial position if it is probable that the relevant future economic benefits attributable to the asset will flow to the Group and they can be measured reliably and are either identified as separable (i.e. capable of being separated from the entity and sold, transferred, rented, or exchanged) or they arise from contractual or other legal rights, regardless of whether those rights are transferable or separable.
Intangible assets are recognised at cost. For intangible assets acquired in a business combination the cost is the fair value at the acquisition date.
Intangible assets are carried at initial cost less accumulated amortisation and any accumulated impairment losses. Amortisation is charged to the consolidated income statement on a straight-line basis over the estimated useful life of the intangible asset. The estimated useful life of the Group’s classes of intangible assets is as follows:
• Intangible assets acquired through business combinations – between six and seventeen years
• Internally developed software – between two and ten years
• Other acquired intangible assets – between two and six years.
Impairment losses are calculated and recorded on an individual basis in a manner consistent with policy (i). Amortisation commences at the time from which an intangible asset is available for use.