The Group KD Group and KD Group dd

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The Group KD Group Annual Report 2009 Notes to Consolidated Financial Statements as at and for the year ended 31 December 2009 3.1.3 Estimate of future benefit payments and premiums arising from long-term insurance contracts The determination of the liabilities under long-term insurance contracts is dependent on estimates made by the Group. Estimates are made as to the expected number of deaths for each of the years in which the Group is exposed to risk. The Group bases these estimates on standard industry and national mortality tables that reflect recent historical mortality experience, restated where appropriate to reflect the Group’s own experience. For contracts that insure the risk of longevity, appropriate but not excessively prudent allowance is made for expected mortality improvements. The estimated number of deaths determines the value of the benefit payments and the value of the valuation premiums. The main source of uncertainty is that epidemics such as AIDS, SARS and wide-ranging lifestyle changes, such as in diet, smoking and exercise habits, could result in future mortality being significantly worse than in the past for the age groups in which the Group has significant exposure to mortality risk. However, continuing improvements in medical care and social conditions could result in improvements in longevity in excess of those allowed for in the estimates used to determine the liability for contracts where the Group is exposed to longevity risk. For long-term insurance contracts with fixed and guaranteed terms, estimates are made in two stages. Estimates of future deaths, voluntary terminations, investment returns and administration expenses are made at the inception of the contract and form the assumptions used for calculating the liabilities during the life of the contract. A margin for risk and uncertainty is added to these assumptions. These assumptions are "locked in" for the duration of the contract. New estimates are made each subsequent year in order to determine whether the previous liabilities are adequate in light of these latest estimates. If the liabilities are considered adequate, the assumptions are not altered. If they are not adequate, the assumptions are altered ("unlocked") to reflect the best estimate assumptions. A key feature of the adequacy testing for these contracts is that the effects of changes in the assumptions on the measurement of the liabilities and related assets are not symmetrical. Any improvements in estimates have no impact on the value of the liabilities and related assets until the liabilities are derecognised, while significant enough deterioration in estimates is immediately recognised to make the liabilities adequate. 3.1.4 Impairment of available-for-sale equity financial assets The Group determines that available-for-sale equity financial assets are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgement the Group evaluates among other factors, the normal volatility in share price, the financial health of the investee, industry and sector performance, changes in technology and operational and financing cash flows. Impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and financing and operational cash flows. 3.1.5 Impairment losses on loans and receivables In determining whether an impairment loss should be recorded in the income statement, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in estimated future cash flows. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to that in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. 3.1.6 Held-to-maturity investments The Group follows the guidance of IAS 39 when classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held to maturity. This classification requires significant judgement. In making this judgement, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturity other than for specific circumstances – for example, selling an insignificant amount close to maturity – it will be required to reclassify the entire class as available for sale. The investments would therefore be measured at fair value and not at amortised cost. 3.1.7 Employee benefits The employee benefits obligations (loyalty bonuses and retirement benefit bonuses) are measured using actuarial valuations; therefore, some actuarial estimates and assumptions are needed, such as rates of employee turnover, early retirement, discount rate and future salary levels. 108
The Group KD Group Annual Report 2009 Notes to Consolidated Financial Statements as at and for the year ended 31 December 2009 3.1.8 Income taxes The Group is subject to income taxes in different jurisdictions. Some estimates are required in determining the amount of provisions for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Due to changes in the future income tax rate, some estimates regarding the disposal of the available-for-sale portfolio have to be made by the management when calculating the deferred tax liability. Additionally, the management’s best estimates of future taxable profits are used for calculating the deferred tax assets regarding carry-forward tax losses. 4. Comparatives During the review of the insurance company operating within the Group, which was performed by the Insurance Supervision Agency, it was found that some types of life insurance contracts and investment contracts were not kept in accordance with the policy’s terms and conditions regarding the participation of policyholders in the profits. The insurance company of the Group complied with the order and changed the methodology used for attributing profits, and restated all the amounts under the new methodology. Additional mathematical provisions were made for the attribution of profits for groups of contracts where the calculations under the new methodology were higher. The amount of these provisions as at 1 January 2009 stood at 1,824,016 euros. In 2009, the insurance company for the first time formed provisions resulting from guaranteed premium factors used to calculate the supplementary retirement pension. As at 1 January 2009, mathematical provisions for the entitlement total 261,323 euros. The insurance company made additional provisions for investment contracts relating to attributed profits for groups of contracts where the calculations under the new methodology were higher. The amount of these provisions as at 1 January 2009 amounted to 64,144 euros. In its financial statements, the KD Group eliminated the error by restating each individual category in the 2008 financial statements. Adjustments to the 2008 financial statements refer entirely to the reporting of life insurance segment, namely standard life insurances and investment insurances. In the process of eliminating the error, the amount of insurance technical provisions (mathematical provisions) and investment contracts for 2008 increased. The increase in mathematical provisions consequently resulted in reduction of retained earnings of 824,710 euros on the liabilities side, and increase of deferred tax assets of 219,227 euros on the assets side. The increase in investment contracts resulted in reduction of retained earnings of 873,381 euros and increase in deferred tax assets of 232,165 euros. Given that the life insurance business at the end of 2008 showed a loss, this adjustment had no impact on the 2008 income statement, and the audited income statement for 2008 was not restated. However, the adjustment of the investment contracts for the past years did affect the 2008 income statement. Balance sheet 2008 2008 reported restatements- restated correction of (in EUR) past years Total assets 795,012,309 451,392 795,463,701 Deferred income tax assets 20,207,937 219,227 20,427,164 Income tax receivables 7,027,916 232,165 7,260,081 Equity 193,945,385 (1,698,091) 192,247,294 Retained earnings (8,597,223) (1,698,091) (10,295,314) Liabilities 294,044,113 2,149,483 296,193,596 Insurance contracts 277,680,949 2,085,339 279,766,288 Gross non-current insurance contracts with DPF 66,935,728 2,085,339 69,021,067 Gross non current insurance contracts with DPF-math.prov.-guaranteed element 66,898,431 261,323 67,159,754 Gross non-current insurance contracts with DPF-math.prov.-DPF element 37,297 1,824,016 1,861,313 Investment contracts 16,330,164 64,144 16,394,308 Investment contract with DPF 16,272,396 64,144 16,336,540 Investment contracts with DPF-non-current-DPF element 11,857 64,144 76,001 Total equity and liabilites 487,989,498 451,392 488,440,890 109
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