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annual report 2011

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IOOF | <strong>annual</strong> <strong>report</strong> <strong>2011</strong><br />

awards for which the related service and non-market vesting<br />

conditions are expected to be met, such that the amount<br />

ultimately recognised as an expense is based on the number<br />

of awards that meet the related service and non-market<br />

performance conditions at vesting date.<br />

For share-based payment awards with non-vesting conditions,<br />

the grant date fair value of the share-based payment is<br />

measured to reflect such conditions and there is no true-up for<br />

differences between expected and actual outcomes.<br />

The fair value at grant date is independently determined where<br />

considered appropriate. The option pricing model used takes<br />

into account the exercise price, the term of the option, the<br />

impact of dilution, the share price at grant date and expected<br />

price volatility of the underlying share, the expected dividend<br />

yield and the risk free interest rate for the term of the option.<br />

A small number of shares remain held by the IOOF Executive<br />

Performance Share Plan Trust (the “Trust”) as at the<br />

comparative <strong>report</strong>ing date. These shares will contribute to<br />

the employee allocation of shares on satisfaction of vesting<br />

performance hurdles. The Group has no right to recall placed<br />

shares. However, a subsidiary Company acts as the Trustee of<br />

the Trust, and can direct the voting rights of shares held and<br />

strategic direction.<br />

Shares in the Company held by the Trust are classified and<br />

disclosed as Treasury shares, and deducted from share capital.<br />

Dividends received by the Trust are recorded as dividend<br />

income in the financial statements of the Trust.<br />

Non-Executive Directors have the opportunity to participate<br />

in the IOOF Deferred Share Purchase Plan. The plan provides<br />

a facility for Non-Executive Directors to salary sacrifice base<br />

salary or future incentive entitlements in order to acquire<br />

shares. As the purchase is funded by Directors’ salary sacrifice,<br />

no additional expense is recorded by the Group.<br />

(j)<br />

Provisions<br />

A provision is recognised if, as a result of a past event, the<br />

Group has a present legal or constructive obligation that can<br />

be estimated reliably, and it is probable that an outflow of<br />

economic benefits will be required to settle the obligation.<br />

Provisions are determined by discounting the expected<br />

future cash flows at a pre-tax rate that reflects current market<br />

assessments of the time value of money.<br />

(i)<br />

Restructuring<br />

A provision for restructuring is recognised when the Group<br />

has approved a detailed and formal restructuring plan, and the<br />

restructuring either has commenced or has been announced<br />

publicly. Future operating losses are not provided for.<br />

(ii)<br />

Onerous contracts<br />

A provision for onerous contracts is recognised when the<br />

expected benefits to be derived by the Group from a contract<br />

are lower than the unavoidable cost of meeting its obligations<br />

under the contract. The provision is measured at the present<br />

value of the lower of the expected cost of terminating the<br />

contract and the expected net cost of continuing with<br />

the contract. Before a provision is established, the Group<br />

recognises any impairment loss on the assets associated with<br />

that contract.<br />

(k) Contract classification<br />

The accounting treatment of certain transactions varies<br />

depending on the nature of the contract underlying the<br />

transaction. The major contract classifications are insurance<br />

contracts and investment contracts.<br />

(i)<br />

Insurance contracts<br />

Insurance contracts are those containing significant insurance<br />

risk at the inception of the contract, or those where at the<br />

inception of the contract there is a scenario with commercial<br />

substance where the level of insurance risk may be significant.<br />

The significance of insurance risk is dependent on both the<br />

probability of an insured event and the magnitude of its<br />

potential effect.<br />

Once a contract has been classified as an insurance contract, it<br />

remains an insurance contract for the remainder of its lifetime,<br />

even if the insurance risk reduces significantly during the<br />

period.<br />

(ii)<br />

Investment contracts<br />

Contracts not considered insurance contracts are classified<br />

as investment contracts. The accounting treatment of<br />

investment contracts depends on whether the investment has<br />

a discretionary participation feature (‘DPF’). A DPF represents<br />

a contractual right to receive, as a supplement to guaranteed<br />

benefits, additional benefits that are:<br />

• likely to be a significant portion of the total benefits;<br />

• distributed at the discretion of the insurer; and<br />

• are based on the performance of a specified pool of assets.<br />

Deposits collected and benefits paid under investment<br />

contracts with DPF are accounted for through profit or loss.<br />

The gross change in the liability to these policyholders for<br />

the period, which includes any participating benefits vested<br />

in policyholders and any undistributed surplus attributed to<br />

policyholders, is also recognised in profit or loss.<br />

Deposits collected and withdrawals processed for investment<br />

contracts without DPF are accounted for directly through<br />

the statement of financial position as a movement in the<br />

page 61

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