– the investee is managed by the Group’s assets manager, prior
to its disposal, and the Group holds a significant investment in the investee. It is generally presumed that the Group has rights to variable returns and has the ability to use its power to affect its returns where the Group’s holding is greater than 50%. For holdings between 25% and 50% the Group performs an assessment of power and associated control on a case by case basis. This assessment includes establishing the nature of the decision making rights that the asset manager has over the investee and whether these rights give it the power to control the investee.
Where Group companies are deemed to control such collective investment schemes they are consolidated in the Group financial
statements, with the interests of external third parties recognised
as a liability, see policy (j) ‘Net asset value attributable to unitholders’. Certain of the collective investment schemes have non-coterminous
period ends and are consolidated on the basis of additional financial
statements prepared to the period end.
(b) CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the Group’s business that typically require such estimates are the measurement of insurance and investment contract liabilities, determination of the fair value of financial assets and liabilities,
impairment tests for intangible assets, income tax assets and liabilities and pension scheme assets and liabilities. The consolidation of collective investment schemes requires management to make judgements which are critical to the consolidation process. Insurance and investment contract liabilities
Insurance and investment contract liability accounting is discussed in more detail in accounting policies (e) and (f) with further detail of the key assumptions made in determining insurance and investment contract liabilities included in note 40.
Fair value of financial assets and liabilities
Financial assets and liabilities are measured at fair value and accounted for as set out in accounting policies (r) and (g) respectively.
Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities. These are categorised as Level
1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued where valuation techniques based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued using valuation techniques based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level
3 financial instruments therefore involve the use of estimates. Further details of the estimates made are included in note 34. Impairment of intangible assets
Intangible assets are subject to regular impairment reviews as detailed in accounting policy (n). Impairments are measured as the difference between the carrying value of a particular asset and its recoverable amount. Impairments are recognised in the consolidated income statement in the period in which they occur. Further details of judgements made in testing intangible assets for impairment are included in note 31.
Income tax assets and liabilities
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all the available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which the losses can be relieved. Forecasts of future profitability are made which by their nature involve management’s judgement.
The UK taxation regime applies separate rules to trading and capital
profits and losses. The distinction between temporary differences that arise from items of either a capital or trading nature may affect the recognition of deferred tax assets.
The determination of tax provisions included in current tax liabilities involves the use of estimates and judgements.
The accounting policy for income taxes (both current and deferred)
is discussed in more detail in accounting policy (l). Pension scheme assets and liabilities
The valuation of pension scheme assets and liabilities is determined using actuarial valuations that include a number of assumptions. As defined benefit pension schemes are long-term in nature, such
assumptions are subject to significant uncertainty. Details of the key assumptions used are shown in note 30.
1. ACCOUNTING POLICIES CONTINUED
(b) CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS CONTINUED Consolidation of collective investment schemes
Collective investment schemes are consolidated where it
is determined that the Group controls the investee. Such an assessment requires the application of judgement with regard
to the factors discussed in note 1(a) ‘Basis of consolidation’.
Operating profit
Operating profit is the Group’s non-GAAP measure of performance. The Group is required to make judgements as to the appropriate longer-term rates of investment return for the determination of
operating profit, as detailed in note 6.3, and as to what constitutes
an operating or non-operating item in accordance with the accounting
policy detailed in note 1(v).
(c) FOREIGN CURRENCY TRANSACTIONS
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in sterling, which is the Group’s presentation currency.
The results and financial position of all Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
– assets and liabilities are translated at the closing rate at the period end;
– income, expenses and cash flows denominated in foreign currencies are translated at average exchange rates; and – all resulting exchange differences are recognised through the
statement of consolidated comprehensive income. Foreign currency transactions are translated into the functional currency of the transacting Group entity using exchange rates prevailing at the date of translation. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement.
Translation differences on debt securities and other monetary financial
assets measured at fair value through profit or loss are included in foreign exchange gains and losses. Translation differences on non-monetary items at fair value through profit or loss are reported
as part of the fair value gain or loss.
(d) CLASSIFICATION OF CONTRACTS
Contracts under which the Group accepts significant insurance risk are classified as insurance contracts.
Contracts under which the transfer of insurance risk to the
Group from the policyholder is not significant are classified as investment contracts.
Some insurance and investment contracts contain a DPF. This feature entitles the policyholder to additional discretionary benefits as a
supplement to guaranteed benefits. Investment contracts with a
DPF are recognised, measured and presented as insurance contracts.
(e) INSURANCE CONTRACTS AND INVESTMENT CONTRACTS WITH DPF Under current IFRS requirements the Group’s insurance contracts and investment contracts with DPF are measured using accounting policies consistent with those previously adopted under UK GAAP. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.
Insurance liabilities
Insurance contract liabilities for non-participating business, other than unit-linked insurance contracts, are calculated on the basis of current data and assumptions, using either a net premium or gross premium method. Where a gross premium method is used, the liability includes allowance for prudent lapses. Negative policy values are allowed for on individual policies:
– where there are no guaranteed surrender values; or
– in the periods where guaranteed surrender values do not apply even though guaranteed surrender values are applicable after a
specified period of time.
For unit-linked insurance contract liabilities the provision is based on the fund value, together with an allowance for any excess of future expenses over charges, where appropriate.
For participating business, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the following methodology:
– liabilities to policyholders arising from the with-profit business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners’ share of projected future bonuses; – acquisition costs are not deferred; and
– reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.
The with-profit bonus reserve for an individual contract is determined by either a retrospective calculation of ‘accumulated asset share’ approach or by way of a prospective ‘bonus reserve valuation’ method. The cost of future policy related liabilities is determined using a market consistent approach, mainly based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market related assumptions (for example, persistency, mortality and expenses) are based on experience adjusted to take into account of future trends.