Appendix B
Restated preliminary opening balance sheet as at 1 January 2004 under International Financial Reporting Standards
Introduction of International Financial Reporting Standards (IFRS)
Introduction
From 2005 all European Union listed groups will be required to prepare their consolidated financial statements using standards issued by the International Accounting Standards Board (IASB) as adopted by the European Union. Aviva will therefore prepare consolidated accounts in 2005 in accordance with IFRS rather than with UK GAAP. The listing rules in the UK require that the 2005 interim results must also be presented on an IFRS basis. Aviva intends to publish its first IFRS results in August 2005. This will include income statement, balance sheet and cash flow statement comparatives for half year and full year 2004.
In January 2004 The Committee of European Securities Regulators issued guidance regarding the transition to IFRS which encourages companies to provide markets with appropriate and useful information during the transition phase from local accounting standards to IFRS. Aviva believes that it is important to remove some of the uncertainty regarding IFRS and in line with the recommendations in the guidance has chosen to publish early its consolidated summarised balance sheet prepared in accordance with IFRS at the date of transition, namely 1 January 2004, together with a reconciliation of shareholders’ equity at this date. The Group’s preparations for reporting under IFRS are well advanced, however, Aviva is not yet required to publish full restated 2004 comparatives. This information will be provided as part of the 2005 interim reporting.
Basis of preparation
The Group’s preliminary consolidated balance sheet at 1 January 2004 (“the restated IFRS preliminary opening balance sheet”) has been prepared in accordance with IFRS issued by the IASB and endorsed by the European Commission effective for 2005 year ends. In addition the Group plans to adopt early the recently issued Amendment to IAS19 Employee Benefits (2004). It is assumed that the amendment will be endorsed by the European Commission so as to be available for adoption in 2005. The IFRS themselves are subject to possible amendment by interpretative guidance from the IASB or other external bodies and are therefore subject to change prior to publication of the Group’s first IFRS results in August 2005.
In October 2004 the European Commission voted to partially adopt International Accounting Standard 39 - Financial Instruments: Recognition and Measurement (IAS39). In summary this "carve-out version" of IAS39 removes the use of the fair value option for financial liabilities and relaxes the rules for hedge accounting. It is Aviva's intention to comply as far as possible with the full version of IAS39 issued by the IASB. Recent guidance issued by the UK's Accounting Standards Board, clarifies that UK companies are able to apply the hedge accounting provisions within IAS39 in full, and fair value those liabilities that were permitted to be held at current value under UK Company Law. This would include liabilities arising from unit linked contracts. Aviva has applied the guidance in this case.
The restated IFRS preliminary opening balance sheet does not reflect any changes in respect of any amendments to IAS39 on the fair value option currently being discussed by the IASB. Proposals to restrict the fair value option are being considered by the IASB and are the subject of continuing debate between the IASB, industry and regulators, in which Aviva is actively participating. It is too early to anticipate the outcome of these discussions and therefore its eventual impact on the Group.
Within the restated IFRS preliminary opening balance sheet, those assets held to cover the Group's linked liabilities are no longer disclosed in a single line but have been reported in the various asset classifications. The method of presentation of these assets is currently being debated by the industry and so is subject to change, but in any event we will provide in our full financial statements additional disclosure so that the amounts included in individual asset lines can be separately identified.
The industry is still debating the consolidation of mutual funds, such as OEICs and OPCVMs. Aviva has chosen to consolidate these vehicles but will continue to monitor industry developments.
Financial Reporting Standard 27 - Life Assurance (FRS27) was issued by the UK's Accounting Standards Board (ASB) on 13 December 2004, in the wake of the Penrose enquiry and is mandatory for reporting periods starting on or after 23 December 2005. Aviva along with other major insurance companies and the Association of British Insurers (ABI) has signed a Memorandum of Understanding (MoU) with the ASB relating to FRS27. Under this MoU, Aviva has agreed to provide voluntarily early disclosure of the requirements for 2004 and then to fully adopt the standard from 2005, including within the Group's IFRS financial statements.
Within FRS27 the ASB acknowledged the difficulty of applying the requirements retrospectively and indeed it is the Group's view that it would be impractical to do so. Hence in accordance with IAS8 only the balance sheet at 31 December 2004 will be restated for the impact of FRS27. No adjustments are therefore required, nor have any been made, to the restated preliminary IFRS opening balance sheet below.
A summary of the IFRS accounting policies adopted by the Group in preparing the restated preliminary IFRS opening balance sheet have been included.
The restated preliminary IFRS opening balance sheet has been audited by Ernst & Young. A copy of their opinion can be found in the Report & Accounts on page 127 of that document.
Transitional arrangements upon first time adoption of IFRS
In general, a company is required to determine its IFRS accounting polices and apply these retrospectively to determine its opening balance sheet under IFRS. However, International Financial Reporting Standard 1 – First-Time Adoption of International Financial Reporting Standards (IFRS1) allows a number of exemptions to this general principle upon adoption of IFRS. The Group has taken advantage of the following transitional arrangements:
Business combinations
The Group has elected not to apply retrospectively the provisions of International Financial Reporting Standard 3 – Business Combinations, to business combinations that occurred prior to 1 January 2004. At the date of transition no adjustment was made between UK GAAP and IFRS shareholders' funds for any historical business combination.
Cumulative translation differences
The Group has elected that the cumulative translation differences of foreign operations were deemed to be zero at the transition date to IFRS.
Equity compensation plans
The Group has elected not to apply the provisions of International Financial Reporting Standard 2 - Share-based Payment, to options and awards granted on or before 7 November 2002 which had not vested by 1 January 2005.
Employee benefits
All cumulative actuarial gains and losses on the Group's defined benefit pension schemes have been recognised in equity at the transition date.
Comparatives
The Group has not taken advantage of the exemption within IFRS1 that allows comparative information presented in the first year of adoption of IFRS not to comply with International Accounting Standard 32 - Financial Instruments: Disclosure and Presentation (IAS32), International Accounting Standard 39 - Financial Instruments: Recognition and Measurement (IAS39) and International Financial Reporting Standard 4 - Insurance Contracts (IFRS4).
Estimates
Where estimates had previously been made under UK GAAP, consistent estimates (after adjustments to reflect any difference in accounting policies) have been made for the same date on transition to IFRS (i.e., judgements affecting the Group's opening balance sheet have not been revisited for the benefit of hindsight).
Summarised preliminary consolidated balance sheet at date of transition to IFRS - 1 January 2004
| UK GAAP (MSSB) as published £m |
Adjustments £m |
IFRS £m |
||
|---|---|---|---|---|
| Assets | ||||
| Intangible assets | ||||
| Goodwill | 1,105 | 40 | 1,145 | |
| Acquired value of in-force business and other intangible assets | 488 |
- |
488 |
|
| 1,593 | 40 | 1,633 | ||
| Property and equipment | 320 | 563 | 883 | |
| Investment property | 9,106 | 618 | 9,724 | |
| Investments in joint ventures and associates | 1,912 | 69 | 1,981 | |
| Financial investments and loans | 129,032 | 40,480 | 169,512 | |
| Assets held to cover linked liabilities | 40,665 | (40,665) | - | |
| Reinsurance assets | 6,883 | 328 | 7,211 | |
| Tax assets | 215 | 633 | 848 | |
| Other assets | 15,955 | (3,580) | 12,375 | |
| Cash and cash equivalents | 2,999 | 6,524 | 9,523 | |
| Total assets | 208,680 | 5,010 | 213,690 | |
| Equity | ||||
| Share capital | 764 | - | 764 | |
| Capital reserves | 3,859 | - | 3,859 | |
| Shares held by employee trusts | (1) | - | (1) | |
| Revaluation and other reserves | - | 568 | 568 | |
| Retained earnings | 1,932 | (818) | 1,114 | |
| Equity attributable to shareholders’ of Aviva plc | 6,554 | (250) | 6,304 | |
| Minority interests | 811 | (7) | 804 | |
| Total Equity | 7,365 | (257) | 7,108 | |
| Liabilities | ||||
| Insurance liabilities | 175,304 | (61,401) | 113,903 | |
| Liability for investment contracts | - | 57,445 | 57,445 | |
| Unallocated divisible surplus | 8,443 | 1,730 | 10,173 | |
| Pension obligations and other provisions | ||||
| Provisions including pension obligations as measured under IAS 19 | 336 | 1,469 | 1,805 | |
| Non-transferable investment in life fund | - | (598) | (598) | |
| 336 | 871 | 1,207 | ||
| Tax liabilities | 1,276 | 631 | 1,907 | |
| Borrowings (inc. subordinated debt) | 4,722 | 3,555 | 8,277 | |
| Other liabilities | 11,234 | 830 | 12,064 | |
| Net asset value attributable to unitholders | - | 1,606 | 1,606 | |
| Total liabilities | 201,315 | 5,267 | 206,582 | |
| Total equity and liabilities | 208,680 | 5,010 | 213,690 | |
Analysis of adjustments to the balance sheet at 1 January 2004 as a result of the transition to IFRS
| Invest-ment valuation (Note 1) |
Insurance changes (Note 2) |
Employee benefits (Note 3) |
Good-will (Note 4) |
Dividend recog-nition (Note 5) |
Deferred taxation (Note 6) |
Borrow-ings/ Cash (Note 7) |
Other items (Note 8) |
Total adjust-ments | |
|---|---|---|---|---|---|---|---|---|---|
| Assets | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Intangible assets: | |||||||||
| Goodwill | 40 | 40 | |||||||
| Acquired value of in-force business and other intangible assets | - | ||||||||
| Property and equipment | 563 | 563 | |||||||
| Investment property | 618 | 618 | |||||||
| Investments in joint ventures and associates | 7 | 62 | 69 | ||||||
| Financial investments and loans | 1,854 | 6 | 38,620 | 40,480 | |||||
| Assets held to cover linked liabilities | (40,665) | (40,665) | |||||||
| Reinsurance assets | (134) | 462 | 328 | ||||||
| Tax assets | 617 | 16 | 633 | ||||||
| Other assets | (6) | (427) | 67 | (3,214) | (3,580) | ||||
| Cash and cash equivalents | 3,547 | 2,977 | 6,524 | ||||||
| Total assets | 1,861 | (140) | (427) | 40 | - | 617 | 3,620 | (561) | 5,010 |
| Equity | |||||||||
| Share capital | - | ||||||||
| Capital reserves | - | ||||||||
| Shares held by employee trusts | - | ||||||||
| Revaluation and other reserves | 568 | 568 | |||||||
| Retained earnings | (377) | 289 | (834) | 40 | 344 | (351) | - | 71 | (818) |
| Equity attributable to shareholders’ of Aviva plc | 191 | 289 | (834) | 40 | 344 | (351) | - | 71 | (250) |
| Minority interests | (7) | (7) | |||||||
| Total Equity | 191 | 289 | (834) | 40 | 344 | (351) | - | 64 | (257) |
| Liabilities | |||||||||
| Insurance liabilities | 161 | (530) | 58 | (61,090) | (61,401) | ||||
| Liability for investment contracts | 57,445 | 57,445 | |||||||
| Unallocated divisible surplus | 1,509 | 1 | (48) | 268 | 1,730 | ||||
| Pension obligations and other provisions | 760 | 111 | 871 | ||||||
| Tax liabilities | (353) | 958 | 26 | 631 | |||||
| Borrowings (inc. subordinated debt) | 3,394 | 161 | 3,555 | ||||||
| Other liabilities | 100 | (344) | 226 | 848 | 830 | ||||
| Net asset value attributable to unitholders | 1,606 | 1,606 | |||||||
| Total liabilities | 1,670 | (429) | 407 | - | (344) | 968 | 3,620 | (625) | 5,267 |
| Total equity and liabilities | 1,861 | (140) | (427) | 40 | - | 617 | 3,620 | (561) | 5,010 |
Notes to the analysis of adjustments to the balance sheet at
1 January 2004 as a result of the transition to IFRS
The UK GAAP balance sheet has been presented in a format consistent with IFRS. The only significant change in heading is that the Fund for Future Appropriations is now called Unallocated Divisible Surplus. The basis for the material adjustments between UK GAAP and IFRS are as follows:
Note 1: Investment valuation
The adjustments in respect of investment valuation arise from the following:
| £m | |
|---|---|
| Increase in valuation of debt securities | 1,718 |
| Change in valuation of certain mortgages | 113 |
| Other sundry adjustments | 23 |
| 1,854 | |
The principle changes are discussed further below:
- Debt securities
Under UK GAAP, equity securities and unit trusts are carried at current value. Debt and other fixed income securities are carried at current value, with the exception of many non-linked long-term business debt securities and fixed income securities, which are carried at amortised cost.
As a result of applying IAS39, the Group now carries all investments in debt and equity securities at fair value. The change in valuation of debt securities from amortised cost to fair value increases the valuation of investments by £1,718 million at 1 January 2004. This change in the valuation of debt securities is largely offset by corresponding movements in the unallocated divisible surplus and to a small extent technical liabilities. The net impact on shareholders’ funds at 1 January 2004 is to increase them by £191 million.
- Commercial mortgages backing certain annuity business
Under IFRS, the Group has chosen to move certain of its commercial mortgage portfolio to an active fair valuation basis in accordance with IAS39, which has increased the value of investments by £113 million. The annuity liabilities which are backed by these assets have been correspondingly revalued, with the result that there is an insignificant impact on shareholders' funds at 1 January 2004.
Revaluation reserve
Under IFRS, changes in the fair value of securities classified as "at fair value through profit or loss" are recognised in the income statement. Changes in the fair value of securities classified as available-for-sale (AFS), except for impairment losses and relevant foreign exchange gains and losses, are recorded as a component of shareholders' equity, net of related deferred taxes. When securities classified as AFS are sold or impaired the accumulated fair value adjustments are transferred out of this reserve to the income statement. Accounting policy Q - Financial Investments, explains further how the Group has classified its investments.
Furthermore, owner-occupied properties are carried at their revalued amounts and movements are taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings.
Under UK GAAP, fair value movements on all investments, including those classified as AFS securities under IFRS and owner-occupied properties, are recorded in the consolidated profit and loss account.
The above requirements have resulted in a transfer from retained earnings of £568 million into separate revaluation reserves at 1 January 2004.
Note 2: Insurance change
The impact on Shareholders' funds of insurance changes is as follows:
| £m | |
|---|---|
| Change in valuation of non-participating investment contracts | (55) |
| Derecognition of claims equalisation provision | 364 |
| Change in the valuation of reinsurance treaties | (48) |
| Other sundry items | 28 |
| 289 |
The principal changes to the Group's insurance accounting upon transition to IFRS are discussed further below:
- Product classification
International Financial Reporting Standard 4 - Insurance Contracts (IFRS4) requires all products issued to be classified for accounting purposes into either insurance or investment contracts, depending on whether significant insurance risk exists. In the case of a life contract, insurance risk exists if the amount payable on death differs from the amount payable if the policyholder survives. The Group has deemed insurance risk to be significant if the difference exceeds 5% of the policy value, though the classification would be similar if a 10% test had been used.
Following a detailed review, 61% of life policy reserves on an MSSB basis at 31 December 2003 have been classified as insurance, and 24% have been classified as participating investment contracts (being those investment contracts containing a discretionary participating feature as defined within IFRS4) and both classes will continue to be accounted for under the Group's existing (UK GAAP) accounting policies. The remaining 15% have been classified as non-participating investment contracts and therefore are required to be accounted for under IAS39 and International Accounting Standard 18 - Revenue (IAS18). Virtually all our general insurance products are classified as insurance.
This product classification change results in technical provisions being allocated between insurance and investment contracts. As described in Note 8, the "other" column includes £57,445 million of liabilities being classified as investment contracts.
- Non-participating investment contracts
As noted above, the liability for contracts classified as non-participating investment contracts is valued in accordance with IAS39. This generally requires all financial liabilities to be valued at amortised cost unless previous company regulations permitted a fair valuation of liabilities to be used, such as in the case of unit-linked liabilities. The majority of the Group's contracts classified as non-participating investment contracts are unit-linked contracts and have been valued at fair value. For unit-linked contracts the fair value liability is deemed to equal the current unit fund value, plus positive non-unit reserves if required on a fair value basis. This replaces the reserve held under UK GAAP which equals the unit fund value plus any positive or negative non-unit reserves determined on the local valuation basis, which differs from that required on a fair value basis.
In addition to the change in liability valuation, the accounting for deferred acquisition costs has been revised in accordance with IAS18. This restricts the types of acquisition costs that can be deferred leading to a reduction in deferred acquisition costs as compared to UK GAAP.
The net impact on shareholders' funds of the above changes is a reduction of £55 million.
In addition to the above, IFRS now requires that any front-end fees received on non-participating investment contracts are included within an explicit deferred income reserve within creditors. Under UK GAAP, any deferred acquisition cost asset created would have been net of these fees. This has led to an increase in "Other assets" and "Other liabilities" of £100 million.
- Equalisation provision
An equalisation provision is recorded in the accounts of individual general insurance companies in the UK and in a limited number of other countries, to eliminate, or reduce, the volatility in incurred claims arising from exceptional levels of claims in certain classes of business. The provision is required by law even though no actual liability exists at the balance sheet date and is included in the UK GAAP consolidated balance sheet. The annual change in the equalisation provision is recorded in the UK GAAP profit and loss account. Under IFRS, no equalisation provision is recorded, as no actual liability exists at the balance sheet date. There is an increase of £364 million in shareholders' funds as a result of the removal of the equalisation provision.
- Reinsurance treaties
Following a full review of all our reinsurance contracts, a small number of the Group's long term reinsurance treaties have been revalued under IFRS, leading to a reduction in the value of reassurance assets of £134 million. The majority of these changes relate to participating contracts and so these value changes affect principally the unallocated divisible surplus rather than shareholders' funds.
Note 3: Employee benefits
- Pensions
Under the Group's UK GAAP pension policy, as set out in Statement of Standard Accounting Practice 24, Accounting for Pension Costs (SSAP 24), the cost of providing pension benefits is expensed using actuarial valuation methods which gives a substantially even charge over the expected service lives of employees and results in either a prepayment or an accrual to the extent that this charge does not equate to the cash contributions made into the schemes. Under International Accounting Standard 19, Employee Benefits (IAS19), the projected benefit obligation is matched against the fair value of the underlying assets and other unrecognised actuarial gains and losses in determining the pension expense for the year. Any pension asset or obligation must be recorded in the balance sheet. Aviva does not currently intend to apply the "corridor approach" to valuing pension deficits in the future.
This change in accounting has resulted in the removal of the Group's SSAP24 balances, a net debtor of £251 million, after allowing for deferred tax, at 1 January 2004 and the recognition of a deficit of £583 million, net of deferred tax, valued in accordance with IAS19. This gives an overall impact on shareholders' funds of £834 million at 1 January 2004.
In some countries, the pension schemes have invested in the Group's life funds. IAS19 requires us to consider the liquidity of the schemes' assets and, if these are non-transferable, the relevant scheme surplus or deficit must be stated before taking account of such assets. Because of the medium-term nature of the contract, the Dutch scheme's investment in the Delta Lloyd life fund is considered non-transferable and, under the terms of IAS19, the reported deficit in this scheme increased by £598 million at 1 January 2004 compared to the equivalent deficit under FRS17. The corresponding liability to the scheme has been retained within insurance liabilities and the scheme asset has been offset against the gross deficit for presentation purposes. This has had no effect on shareholders' funds.
There are a number of adjustments impacting the Group's "pension obligations and other provisions" line. However, the most significant adjustment relates to the recognition of the gross pension deficit as illustrated in the table below:
| £m | £m | |
|---|---|---|
| “Pension obligations and other provisions” as stated under UK GAAP | 336 | |
| Less: SSAP 24 pension obligation | (78) | |
| Add: Pension deficit measured in accordance with IAS19 | 1,436 | |
| Less: Non-transferable investment in life funds included in insurance liabilities | (598) | |
| Pension deficit disclosed under FRS17 | 838 | |
| Adjustments to other provisions arising
under IFRS (included in note 8) |
111 |
|
| 1,207 |
All amounts above are stated gross of deferred tax.
- Equity Compensation plans
Under UK GAAP, the costs of awards to employees under equity compensation plans, other than the Save As You Earn plans, are recognised immediately if they are not conditional on performance criteria. If the award is conditional upon future performance criteria, the cost is recognised over the period to which the employee's service relates. The minimum cost for the award is the difference between the fair value of the shares at the date of grant less any contribution required from employee or exercise price. The cost is based on a reasonable expectation of the extent that the performance criteria will be met. Any subsequent changes in that expectation are reflected in the income statement as necessary.
Under IFRS2 - Share-based Payment, compensation costs for stock-based compensation plans that were granted after 7 November 2002, but had not yet vested at 1 January 2005, are determined based on the fair value of the share-based compensation at grant date, which is recognised in the income statement over the period of the expected life of the share-based instrument.
This change in accounting has not resulted in any material change to the balance sheet at 1 January 2004.
Note 4: Goodwill
Under International Accounting Standard 36 - Impairment of Assets (IAS36), goodwill is no longer amortised but is tested for impairment, at least annually. Any goodwill previously amortised or, for goodwill arising before 1 January 1998, eliminated against shareholders' funds has not been reinstated. Negative goodwill previously recognised under UK GAAP, has been recognised directly in retained earnings at 1 January 2004, increasing shareholders' funds by £40 million.
Note 5: Dividend recognition
Under UK GAAP, dividends are accrued in the period to which they relate regardless of when they are declared and approved. Under International Accounting Standard 10 - Events after the Balance Sheet Date (IAS10), shareholders' dividends are accrued only when declared and appropriately approved. This has increased shareholders' funds by £344 million.
Note 6: Deferred taxes
Under UK GAAP, provision is made for deferred tax assets and liabilities, using the liability method, arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation. No provision is made for tax that might arise on undistributed earnings of subsidiaries unless a binding agreement for distribution exists. Deferred tax is recognised as a liability or asset if the transactions or events that give the entity an obligation to pay more tax in future or a right to pay less tax in future have occurred by the balance sheet date. The Group policy is to discount its deferred tax balances.
Under International Accounting Standard 12 - Income Taxes (IAS12), deferred taxes are provided under the liability method for all relevant temporary differences, being the difference between the carrying amount of an asset or liability in the balance sheet and its value for tax purposes. IAS12 does not require all temporary differences to be provided for, in particular the Group does not provide for deferred tax on undistributed earnings of subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to reverse in the foreseeable future. Deferred tax assets are recognised for unused tax losses and other deductible temporary differences to the extent that it is probable that future taxable profit will be utilised against the unused tax losses and credits. Discounting is prohibited under IAS12.
The changes to deferred tax arise from the removal of discounting, changes to the valuation of the Group's assets and liabilities under IFRS and presentational changes to disclosure of tax assets and liabilities. The main net increases in deferred tax at 1 January 2004 that reduce shareholders' funds are:
| £m | ||
|---|---|---|
| Reversal discounting (the total discounting applied to UK GAAP deferred tax liabilities was £151 million, of which £110 million relates to non-life and shareholders’ interests) | 110 | |
| Deferred tax impact of the removal of the equalisation provision | 108 | |
| Deferred tax impact of other changes to technical provisions, valuation of investments and other sundry adjustments | 133 | |
| Net decrease to shareholders’ funds | 351 |
Note 7: Borrowings and cash
IFRS requires a number of presentational changes to borrowings and cash. The most significant change is that the linked presentation can no longer be adopted for the Group's borrowing securitised on certain of its mortgage portfolios. This increases borrowings and investments by £3,143 million. In addition, £3,307 million of the Group's investments meet the definition of cash equivalents and so have been reclassified to "cash and cash equivalents".
Note 8: Other items
The other changes that arise as a result of the transition to IFRS are principally reclassifications and presentational changes. The total effect of the other changes to shareholders' funds is £71 million, which mainly represents the pre-tax impact of consolidating certain entities, such as real estate companies in France, for the first time. The other significant reclassification and presentational changes which have no impact on shareholders' funds are:
- Assets held to cover linked liabilities of £40,665 million are no longer disclosed in a single line but have been reported in the various asset classifications. Of this amount assets of £3,343 million have been netted off technical liabilities, reducing the gross assets and investment contract liabilities of the Group. There is no impact on profit or shareholders' funds as a result of this change.
- Technical provisions are disclosed as either insurance contracts or investment contracts, reflecting the product classification included in Note 2(a). The Group held investment contracts of £57,445 million at 1 January 2004.
- The assets and liabilities of the banking business are no longer disclosed entirely in "other debtors" and "other creditors" but have been reported in the appropriate balance sheet classifications.
- Owner occupied properties have been reclassified from "investment property" to property and equipment. We continue to hold these properties at fair value.
- Though the industry is still debating the treatment of mutual funds, we have chosen to consolidate those vehicles that meet the definition of a subsidiary. This has resulted in an increase in gross assets of £1,606 million, representing the part of the funds owned by third parties. This third party interest is recorded in the line "net assets attributable to unitholders" within liabilities. The consolidation of mutual funds has no impact on shareholders' funds or profit after tax.
Accounting policies
The principal accounting policies adopted in the preparation of the restated preliminary IFRS opening balance sheet are set out below. Full accounting policies for the income statement have not been included and will be published with our interim announcement in August 2005.
(A) Basis of presentation
The restated preliminary IFRS opening balance sheet has been prepared in accordance with International Financial Reporting Standards (IFRS) expected to be applicable at 31 December 2005. The Standards themselves are subject to possible amendment by interpretative guidance from the IASB or other external bodies and are therefore subject to change prior to publication of the Group's first IFRS results in August 2005.
The IASB issued an amendment to IAS19, Employee Benefits, in December 2004. Its requirements are applicable for accounting periods beginning on or after 1 January 2006, but the Group intends to adopt them early. This has no impact on the opening balance sheet presented.
In accordance with the standard for Phase I of insurance contracts (IFRS4), the Group has applied existing accounting practices for insurance and participating investment contracts, modified, as appropriate, to comply with the IFRS framework and applicable standards.
Items included in the financial statements of each of the Group's entities are measured in the currency of the primary economic environment in which that entity operates "the functional currency". The restated IFRS opening balance sheet is stated in sterling, which is the Company's functional and presentation currency.
(B) Use of estimates
The preparation of financial statements requires the Group to make estimates and assumptions that affect items reported in the restated IFRS opening balance sheet. Although these estimates are based on management's best knowledge of current facts, circumstances and, to some extent, future events and actions, actual results ultimately may differ from those estimates, possibly significantly.
(C) Consolidation principles
Subsidiaries
Subsidiaries are those entities (including Special Purpose Entities) in which the Group, directly or indirectly, has power to exercise control over financial and operating policies in order to gain economic benefits. Subsidiaries are consolidated from the date on which effective control is transferred to the Group and are excluded from consolidation from the date of disposal. All inter-company transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated.
From 1 January 2004, the date of first time adoption of IFRS, the Group is required to use the purchase method of accounting to account for the acquisition of subsidiaries. Prior to 1 January 2004, certain significant business combinations were accounted for using the "pooling of interests method" (or merger accounting), which treats the merged groups as if they had been combined throughout the current and comparative accounting periods. Merger accounting principles for these combinations have given rise to a merger reserve in the consolidated balance sheet. These transactions have not been restated as permitted by the IFRS1 transitional arrangements.
Associates and joint ventures
Associates are entities over which the Group has significant influence but which it does not control. Generally, it is presumed that the Group has significant influence where it has between 20% and 50% of voting rights. Joint ventures are entities whereby the Group and other parties undertake an economic activity which is subject to joint control arising from a contractual agreement. In a number of these, the Group's share of the underlying assets and liabilities may be greater than 50% but the terms of the relevant agreements make it clear that control is not exercised. Such jointly-controlled entities are referred to as joint ventures in these IFRS disclosures.
Gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's interest in the associates and joint ventures. Losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred between entities.
Investments in associates and joint ventures are accounted for using the equity method of accounting. Under this method, the cost of the investment in a given associate or joint venture, together with the Group's share of that entity's post-acquisition changes to shareholders' funds, is included as an asset in the consolidated balance sheet. Equity accounting is discontinued when the Group no longer has significant influence over the investment.
When the Group's share of losses in an associate or joint venture equals or exceeds its interest in the entity, the Group does not recognise further losses unless it has incurred obligations or made payments on behalf of the entity.
(D) Foreign currency translation
Balance sheets of foreign entities are translated into the Group's presentation currency at the year end exchange rates. Exchange differences arising from the translation of the net investment in foreign subsidiaries, associates and joint ventures, and of borrowings and other currency instruments designated as hedges of such investments, are taken to a separate reserve within equity. At 1 January 2004 this reserve had been deemed to be zero in accordance with IFRS1. The euro exchange rate employed in the translation of the restated IFRS preliminary opening balance sheet is €1 = £0.70.
(E) Product classification
Insurance contracts are defined as those containing significant insurance risk if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Contracts can be reclassified as insurance contracts after inception if insurance risk becomes significant. Any contracts not considered to be insurance contracts under IFRS are classified as investment or service contracts. Some insurance and investment contracts contain a discretionary participating feature, which is a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts.
As noted in policy A above, insurance contracts and participating investment contracts continue to be measured and accounted for under existing accounting practices at the date of transition to IFRS.
(F) Premiums earned
Premiums on long-term insurance contracts and participating investment contracts are recognised as income when receivable, except for investment-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 premium contracts, receivables are taken at the date when payments are due.
General insurance and health premiums written reflect business incepted during the year. Unearned premiums are those proportions of the premiums written in a year that relate to periods of risk after the balance sheet date. Unearned premiums are computed principally on either a daily or monthly pro rata basis. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience, and are included in premiums written.
(G) Other Investment contract fee revenue
Investment contract policyholders are charged fees for mortality, policy administration, investment management, surrenders or other contract services. These fees are recognised as revenue in the period in which they are assessed unless they relate to services to be provided in future periods. Amounts are considered to be assessed when the policyholder's balance has been adjusted for those fees. If the fees are for services to be provided in future periods, then they are deferred and recognised as the service is provided.
Initiation and other "front-end" fees (fees that are assessed against the policyholder balance as consideration for origination of the contract) are charged on some non-participating investment and investment fund management contracts. Where the investment contract is recorded at amortised cost, these fees are deferred and recognised over the term of the policy. Where the investment contract is measured at fair value, the front-end fees that relate to the provision of investment management services are deferred and recognised as the services are provided.
(H) Other fee and commission income
Other fee and commission income consists primarily of investment fund management fees, distribution fees from mutual funds, commission revenue from the sale of mutual fund shares, and transfer agent fees for shareholder record keeping. Revenue from investment management fees, distribution fees and transfer agent fees is recognised when earned. Reinsurance commissions receivable and other commission income are recognised on the trade date.
(I) Net investment income
Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest income is recognised as it accrues, taking into account the effective yield on the investment. It includes the interest rate differential on forward foreign exchange contracts. Rental income is recognised on an accruals basis.
(J) Insurance and participating investment contract liabilities
Long-term business provisions
Under current IFRS requirements, insurance and participating investment contract liabilities are measured using accounting policies consistent with those adopted previously under existing accounting practices. Accounting for insurance contracts is determined in accordance with the Statement of Recommended Practice issued by the Association of British Insurers in November 2003. As stated in the basis of preparation, no changes are required to the accounting policies adopted for the restated preliminary IFRS opening balance sheet for FRS27.
The long-term business provisions are calculated separately for each life operation, based on local regulatory requirements and actuarial principles consistent with those applied in the UK. Each calculation represents a determination within a range of possible outcomes, where the assumptions used in the calculations depend on the circumstances prevailing in each life operation. Within the long-term business provisions, explicit allowance is made for vested bonuses, including those added following the current valuation, but allowances are not generally made for future reversionary or terminal bonuses.
The liability in respect of guaranteed benefits for participating insurance contracts is calculated in accordance with local actuarial principles, using a deterministic approach and a prudent set of valuation assumptions.
Unallocated divisible surplus
In certain participating long-term insurance and investment business, the nature of the policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain. Amounts whose allocation either to policyholders or shareholders has not been determined by the end of the financial year are held within liabilities as an unallocated divisible surplus.
General insurance and health provisions
(i) Outstanding claims provisions
General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling costs and a reduction for the expected value of salvage and other recoveries. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the balance sheet date. Provisions for certain claims are discounted, using rates having regard to the returns generated by the assets supporting the liabilities. Any estimate represents a determination within a range of possible outcomes.
Outstanding claims provisions are valued net of an allowance for expected future recoveries. Recoveries include non-insurance assets that have been acquired by exercising rights to salvage and subrogation under the terms of insurance contracts.
(ii) Provision for unearned premiums
The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent periods is deferred as a provision for unearned premiums. The change in this provision is taken to the income statement in order that revenue is recognised over the period of risk.
(iii) Liability adequacy
At each reporting date, the Group carries out a liability adequacy test for any overall excess of expected claims and deferred acquisition costs over unearned premiums, using the current estimates of future cash flows under its contracts after taking account of the investment return expected to arise on assets relating to the relevant general business provisions. If these estimates show that the carrying amount of its insurance liabilities (less related deferred acquisition costs and additional value in-force) is insufficient in light of the estimated future cash flows, the Group recognises the deficiency in the income statement by setting up a provision in the consolidated balance sheet.
Other assessments and levies
The Group is subject to various periodic insurance-related assessments or guarantee fund levies. Related provisions are established where there is a present obligation (legal or constructive) as a result of a past event. Such amounts are not included within insurance liabilities but are included under "Pension Obligations and Other Provisions", within the balance sheet.
(K) Non-participating investment contract liabilities
Liabilities for non-participating investment contracts are measured at amortised cost unless previous company regulations permitted a fair valuation of liabilities to be used, such as in the case of unit-linked liabilities. The majority of the Group's contracts classified as non-participating investment contracts are unit-linked contracts and are measured at fair value.
The fair value liability is in principle established through the use of prospective discounted cash flow techniques. For unit-linked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit reserves if required on a fair value basis.
Amortised cost is calculated as the fair value of consideration received at the date of initial recognition, less the net effect of principal payments such as transaction costs and front end fees, plus or minus the cumulative amortisation (using the effective interest rate method) of any difference between that initial amount and the maturity value, and less any write-down for surrender payments. The effective interest rate is the one that equates the discounted cash payments to the initial amount. At each reporting date, the amortised cost liability is determined as the value of future best estimate cash flows discounted at the effective interest rate.
(L) Reinsurance
The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies, using assumptions consistent with those used to account for these policies. Gains or losses on buying retroactive reinsurance are recognised in the income statement immediately at the date of purchase and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the restated IFRS opening balance sheet.
Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract.
Reinsurance contracts that principally transfer financial risk are accounted for directly through the balance sheet and are included in reinsurance assets or liabilities. A deposit asset or liability is recognised, based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the reinsured.
If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises that impairment loss in profit and loss. A reinsurance asset is impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract, and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
(M) Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets of the acquired subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisitions prior to 1 January 2004 (the date of transition to IFRS) is carried at book value (original cost less amortisation) on that date, less any impairment subsequently incurred. Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated.
Goodwill arising on the Group's investments in associates and joint ventures since that date is included within the carrying value of these investments.
Under UK GAAP, goodwill previously written off to shareholders' funds is taken back through the profit and loss account when calculating the profit and loss account in the event of any subsequent disposal of the underlying investment. There is no requirement for this adjustment under IFRS.
Acquired value of in-force business (AVIF)
The present value of future profits on a portfolio of long-term insurance and investment contracts, acquired either directly or through the purchase of a subsidiary, is recognised as an intangible asset. If this arises through the acquisition of an investment in an associate, the AVIF is held within the carrying amount of that associate. In all cases, the AVIF is amortised over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the additional value of in-force business acquired and the expected depletion in its value. The value of the acquired in-force long-term business is reviewed annually for any impairment in value and any reductions are charged as expenses in the income statement.
Other intangible assets
Other intangible assets consist primarily of access to distribution networks. These are amortised over their useful lives using the straight-line method.
(N) Property and equipment
Owner-occupied properties are carried at their revalued amounts, which are supported by market evidence, and movements are taken to a separate reserve within equity. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. All other items classed as property and equipment within the balance sheet are carried at historical cost less accumulated depreciation.
Investment properties under construction are included in property and equipment until completion, and are stated at cost less provision for any impairment in their values.
Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.
All borrowing costs are expensed as they are incurred. Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the most recently assessed standard of performance of the existing asset will flow to the Group and that the renovation replaces an identifiable part of the asset.
(O) Investment property
Investment property is held for long-term rental yields and is not occupied by the Group. Completed investment property is stated at its fair value, which is supported by market evidence, as assessed by qualified external valuers or by local qualified staff of the Group in overseas operations. Changes in fair values are recorded in the income statement within net investment income.
(P) Derecognition and offset of financial assets and financial liabilities
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where:
- the rights to receive cash flows from the asset have expired;
- the company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a "pass-through" arrangement; or
- the company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
The Group classifies its investments as either financial assets at fair value through profit or loss (FV), available for sale financial assets (AFS), or loans and receivables. The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. In general, the FV category is used, but the AFS category is used where the relevant life liability (including shareholders' funds) is passively managed and carried at amortised cost.
The FV category has two sub-categories - those that meet the definition as being held for trading and those the Group chooses to designate as at fair value through profit or loss (referred to in this accounting policy as "other than trading"). Fixed maturities, purchased loans and equity securities, which the Group buys with the intention to resell in the near term (typically between three and six months), are classified as trading. All other securities in the FV category are classified as other than trading.
Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair values less transaction costs. Debt securities are initially recorded at their fair value which is taken to be amortised cost, with amortisation credited or charged to the income statement. Investments classified as trading, other than trading and AFS are subsequently carried at fair value. Changes in the fair value of trading and other than trading investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS, except for impairment losses and relevant foreign exchange gains and losses, are recorded in a separate reserve within equity.
The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. Equity securities for which fair values cannot be measured reliably are recognised at cost less impairment.
(R) Derivative financial instruments and hedging
Derivative financial instruments include foreign exchange contracts, interest rate futures, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange rates, commodity values or equity instruments. All derivatives are initially recognised in the balance sheet at their fair value, which usually represents their cost. They are subsequently re-measured at their fair value, with the method of recognising movements in this value depending on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Premiums paid for derivatives are recorded as an asset on the balance sheet at the date of purchase, representing their fair value at that date.
Derivative instruments for hedging
On the date a derivative contract is entered into, the Group designates certain derivatives as either:
- a hedge of the fair value of a recognised asset or liability (fair value hedge);
- a hedge of a future cash flow attributable to a recognised asset or liability, a highly probable forecast transaction or a firm commitment (cash flow hedge); or
- a hedge of a net investment in a foreign operation (net investment hedge).
The Group does not currently have any material fair value or cash flow hedges.
Hedge accounting is used for derivatives designated in this way, provided certain criteria are met. At the inception of the transaction, the Group documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and the strategy for undertaking the hedge transaction. The Group also documents its assessment, both on inception and on an on-going basis, of whether the hedge is expected to be, and has been, highly effective in offsetting the risk in the hedged item.
Changes in the fair value of derivatives that are designated and qualify as net investment hedges, and that prove to be highly effective in relation to the hedged risk, are recognised in a separate reserve within equity. Gains and losses accumulated in this reserve are included in the income statement on disposal of the relevant investment. Upon transition to IFRS this reserve is deemed to be zero.
(S) Loans
Loans with fixed maturities, including policyholder loans, mortgage loans on investment property, securitised mortgages and collateral loans, are recognised when cash is advanced to borrowers. The majority of these loans are carried at their unpaid principal balances and adjusted for amortisation of premium or discount, non-refundable loan fees and related direct costs. These amounts are deferred and amortised over the life of the loan as an adjustment to loan yield using the effective interest rate method. Loans with indefinite future lives are carried at unpaid principal balances or cost.
Certain mortgages which back long-term business have been classified at fair value through profit or loss in order to match the movement in those liabilities. Those loans are revalued to fair value at each period end, with movements in valuation being taken to the income statement.
To the extent that a loan is uncollectable, it is written off as impaired. Subsequent recoveries are credited to the income statement.
(T) Deferred acquisition costs
The costs directly attributable to the acquisition of new business for insurance and participating investment contracts are deferred to the extent that they are expected to be recoverable out of future margins in revenues on these contracts. For non-participating investment and investment fund management contracts, incremental acquisition costs that are directly attributable to securing an investment management service are also deferred. Where such business is reinsured, an appropriate proportion of the deferred acquisition costs is attributed to the reinsurer, and is treated as a separate liability.
Long-term business deferred acquisition costs are amortised systematically over a period no longer than that in which they are expected to be recoverable out of these margins. Deferrable acquisition costs for non-participating investment and investment fund management contracts are amortised over the period in which the service is provided. General business deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers' share of deferred acquisition costs is amortised in the same manner as the underlying asset.
Deferred acquisition costs are reviewed by category of business at the end of each reporting period and are written off where they are no longer considered to be recoverable.
(U) Cash and cash equivalents
Cash and cash equivalents consist of cash at banks and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments with less than 90 days maturity from the date of acquisition.
(V) Leases
Leases where a significant portion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made as lessees under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
There are no material finance leases affecting the Group as either lessor or lessee.
(W) Provisions and contingent liabilities
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is more probable than not.
The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract.
(X) Employee benefits
Employee entitlements to annual leave and long-service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the balance sheet date.
Pension obligations
The Group operates a number of defined benefit and defined contribution plans throughout the world, the assets of which are generally held in separate trustee-administered funds. The pension plans are generally funded by payments from employees and by the relevant Group companies, taking account of the recommendations of qualified actuaries.
For defined benefit plans, the pension costs are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to the income statement so as to spread the regular cost over the service lives of employees, in accordance with the advice of qualified actuaries. The pension obligation is measured as the present value of the estimated future cash outflows using a discount rate based on market yields for high quality corporate bonds. The resulting pension scheme surplus or deficit appears as an asset or obligation in the consolidated balance sheet. The Group intends to early adopt the December 2004 amendment to IAS19, Employee Benefits, with the result that all actuarial gains and losses will be recognised immediately in equity through the Statement of recognised income and expense.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension plans. Once the contributions have been paid, the Group, as employer, has no further payment obligations. In some countries, the pension schemes have invested in the Group's life funds.
Other post-retirement obligations
Some Group companies provide post-retirement healthcare or other benefits to their retirees. The entitlement to these benefits is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period. None of these schemes is material to the Group. The costs of the Dutch and Canadian schemes are included within pension obligations and other provisions. For such schemes in other countries, provisions are calculated in line with local regulations, with movements being charged to the income statement within staff costs.
Equity compensation plans
The Group offers share award and option plans over the Company's ordinary shares for certain employees, including a Save As You Earn plan (the "SAYE plan").
The Group accounts for share equity compensation plans, using the fair value based method of accounting (the "fair value method"). Under the fair value method, the cost of providing equity compensation plans is based on the fair value of the share awards or option plans at date of grant, which is recognised in the income statement over the expected service period of the related employees and credited to the equity compensation reserve, part of shareholders' funds.
Shares purchased by employee share trusts to fund these awards are shown as a deduction from shareholders' funds at their original cost.
When the options are exercised and new shares are issued, the proceeds received, net of any transaction costs, are credited to share capital (par value) and the balance to share premium. Where the shares are already held by employee trusts, the net proceeds are credited to this account, with the difference between cost and proceeds being taken to retained earnings. In both cases, the relevant amount in the equity compensation reserve is then credited to retained earnings.
(Y) Income taxes
Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.
The principal temporary differences arise from depreciation of property and equipment, revaluation of certain financial assets and liabilities including derivative contracts, provisions for pensions and other post-retirement benefits and tax losses carried forward; and, in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base. The rates enacted or substantively enacted at the balance sheet date are used to determine the deferred tax.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred tax is provided on temporary differences arising from investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future.
Deferred taxes are not provided in respect of temporary differences arising from the initial recognition of goodwill, or from goodwill for which amortisation is not deductible for tax purposes, or from the initial recognition of an asset or liability in a transaction which is not a business combination and affects neither the accounting profit nor taxable profit or loss at the time of the transaction.
Deferred tax related to fair value re-measurement of available-for-sale investments, owner-occupied properties and other amounts taken directly to equity is credited or charged to equity and is recognised in the balance sheet as a deferred tax asset or liability.
(Z) Borrowings
Borrowings are recognised initially at their issue proceeds less transaction costs incurred. Subsequently, borrowings are stated at amortised cost, and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method.
(AA) Share capital and treasury shares
Dividends
Dividends on ordinary shares are recognised in equity in the period in which they are declared and, for the final dividend, approved by shareholders. Dividends on preference shares are recognised in the period in which they are declared and appropriately approved.
Equity instruments
A financial instrument is treated as equity if:
a) there is no contractual obligation to deliver cash or other financial assets or to exchange financial assets or liabilities on terms that may be unfavourable; andb) the instrument will not be settled by delivery of a variable number of shares or is a derivative that can be settled other than for a fixed amount of cash, shares or other financial assets.
Treasury shares
Where the Company or its subsidiaries purchase the Company's share capital or obtains rights to purchase its share capital, the consideration paid (including any attributable transaction costs net of income taxes) is shown as a deduction from total shareholders' equity.
(AB) Fiduciary activities
Assets and income arising thereon, together with related undertakings to return such assets to customers, are excluded from the IFRS financial statements where the Group has no contractual rights in the assets and acts in a fiduciary capacity such as nominee, trustee or agent.
