QBE European Operations plc

QBE European Operations plc Annual report 2011
52
Notes to the financial statements
continued
For the year ended 31 December 2011
1 Accounting policies continued
depreciate all properties, which conflicts with SSAP 19. The directors
consider that, as these properties are held for investments, to depreciate
them would not give a true and fair view, hence it is necessary to adopt
SSAP 19.
h) Taxation
The charge for taxation is based on the result for the year adjusted for
disallowable items. Deferred taxation is measured on an undiscounted
basis at the tax rates that are expected to apply in the periods in which
timing differences reverse, based on tax rates and laws enacted or
substantively enacted at the balance sheet date. Deferred tax assets are
recognised to the extent that it is regarded as more likely than not that
they will be recovered.
i) Investments
Except where noted below, all investments are designated as fair value
through profit and loss on initial recognition. They are initially recorded
at fair value, being the cost of acquisition excluding transaction costs
and are subsequently remeasured to fair value at each reporting date.
Financial assets are managed on a fair value basis in accordance with
the Group’s documented investment strategy.
Listed investments are stated at fair value on current bid prices quoted
by the relevant exchanges. Unlisted investments are carried at the
directors’ estimate of the current fair value.
Derivatives are initially recognised at fair value on the date on which
a derivative contract is entered into and are subsequently stated at
fair value determined using generally accepted valuation techniques,
including the use of forward exchange rates for the valuation of forward
foreign exchange contracts.
Loans to Group undertakings are stated at amortised cost converted
at the relevant exchange rates at balance sheet date.
Financial assets are derecognised when the right to receive future
cash flows from the assets has expired, or has been transferred
and the Group has transferred substantively all the risks and rewards
of ownership.
j) Hedging transactions
Derivatives held for risk management purposes which meet the criteria
specified in FRS 26 are accounted for using net investment in foreign
operating hedge accounting or cash flow hedge accounting.
When a financial instrument is designated as a hedge, the Group
formally documents the relationship between the hedging instrument
and hedged item as well as its risk management objectives and its
strategy for undertaking the various hedging transactions. The Group
also documents its assessment, both at hedge inception and on an
ongoing basis, of whether the hedging instruments are highly effective
in offsetting changes in cash flows of hedged items.
Hedge accounting is discontinued when:
• it is determined that a derivative is not, or has ceased to be, highly
effective as a hedge;
• the derivative expires, or is sold, terminated or exercised; or
• the hedged item matures, is sold or repaid.
For qualifying hedges, the fair value gain or loss associated with the
effective portion of the hedge is recognised initially directly in reserves
and transferred to the profit and loss account in the period when the
hedged item will affect profit or loss. The gain or loss on any ineffective
portion of the hedging instrument is recognised in the profit and loss
account immediately. When a hedging instrument expires or is sold,
or when a hedge no longer meets the criteria for hedge accounting,
any cumulative gain or loss existing in equity at that time remains in
reserves and is recognised when the hedged item affects the profit and
loss account. When a transaction is no longer expected to occur, the
cumulative gain or loss that was recognised in reserves is recognised
immediately through the profit and loss account.
k) Financial liabilities
Creditors are initially recognised at fair value, net of directly attributable
transaction costs and are subsequently stated at amortised cost through
the profit and loss account using the effective interest method. The
exception being derivatives are initially recognised at fair value on the date
on which a derivative contract is entered into and are subsequently stated
at fair value determined using generally accepted valuation techniques,
including the use of forward exchange rates for the valuation of forward
foreign exchange contracts.
l) Shares in Group undertakings
Shares in Group undertakings are included in the company’s balance
sheet at cost less any impairment, based on the directors having prudent
regard for their likely realisable value. Dividends from Group undertakings
are taken into account when the right to receive payment is established,
for interim dividends, when they are paid and, for final dividends, when
they are approved by shareholders.
m) Investment income
Interest income is recognised on an accruals basis. Dividends are
recognised when the right to receive payment is established. Investment
income includes realised and unrealised gains or losses on financial
assets which are reported on a combined basis as fair value gains or
losses on financial assets.
A transfer is made from the non-technical account to the technical account
of the return on investments supporting the insurance technical provisions.
n) Realised and unrealised gains and losses
Realised gains and losses on investments carried at fair value through
profit and loss are calculated as the difference between net sales
proceeds and purchase price.
Unrealised gains and losses represent the difference between the
valuation of the investment at the balance sheet date and their purchase
price, or if they have been previously valued, their valuation at the last
balance sheet date, together with a reversal of unrealised gains and
losses recognised in earlier accounting periods in respect of investment
disposals in the current year.
All realised and unrealised gains and losses on investments are initially
recorded in the profit and loss non-technical account. A transfer is made
from the non-technical account to the technical account of the realised
and unrealised gains and losses on investments supporting the insurance
technical provisions.
o) Foreign currency translations
The functional currency of the company is UK pound sterling (£). The
company and Group present its accounts in thousands of pounds sterling.