Setting new standards - Friends Life

PARENT COMPANY ACCOUNTS
ABBREVIATIONS AND DEFINITIONS
Notes to the consolidated accounts continued
1. Accounting policies continued
(b) Fee and commission income and income from service activities
Insurance and investment contract policyholders are charged for
policy administration services, investment management services and
for surrenders. Investment management services comprise primarily
fees and charges from unit-linked investment contracts issued by the
Life & Pensions business. Fees earned by the Asset Management
business relate to the sale and management of retail investment
products and from managing investments in the institutional market.
These fees and charges are recognised as revenue in the accounting
period in which the services are rendered.
Front-end fees are charged to the policyholder at the inception of the
contract. This is primarily used for single premium contracts. The
consideration received is deferred as a liability and recognised over
the expected term of the contract on a straight-line basis.
Regular fees charged to the policyholder periodically (monthly,
quarterly or annually), are recognised on a straight-line basis over the
period in which the service is rendered.
In respect of Asset Management a number of contracts have
performance fees based on an agreed level of performance in a set
time period. Performance fees are recognised when the quantum of
the fee can be estimated reliably, which is when the performance
period ends, when this occurs on or before the reporting date, or
where there is a period of less than six months remaining to the end
of the performance period, and there is evidence at the reporting date
which suggests that the current performance will be sustainable.
(c) Investment income
All income received from investments is recognised in the income
statement and includes dividends, interest, rental income, and gains
and losses relating to investment properties, financial assets at fair
value through the income statement and derivative financial instruments.
Dividend income from listed and unlisted securities is recognised as
revenue when the right to receive payment is established. For listed
securities this is the date the security is listed as ex-dividend. For
unlisted securities this is the due date of payment.
Interest income is recognised in the income statement as it accrues,
taking into account the effective yield of the asset or an applicable
floating rate. Interest income includes the amortisation of any
discount or premium.
Rental income from investment properties under operating leases is
recognised in the income statement on a straight-line basis over the
term of the lease. Lease incentives received are recognised in the
income statement as an integral part of the total lease income.
1.3.6 Expense recognition
(a) Claims and benefits paid
Insurance claims reflect the cost of all claims incurred during the
year, including claims handling costs. Death claims and surrenders
are recorded on the basis of notifications received. Maturities and
annuity payments are recorded when due. Claims and benefits
recorded are accrued to the policyholder and included within
insurance and investment contracts liabilities.
Claims handling costs include internal and external costs incurred in
connection with the negotiation and settlement of claims. Internal
costs include all direct expenses of the claims department and any
general administrative costs directly attributable to the claims function.
Reinsurance recoveries are accounted for in the same period as the
related claim.
(b) Finance costs
Finance costs are recognised as an expense in the period in which
they are incurred.
(c) Operating lease payments
Payments made under operating leases are recognised in the
income statement on a straight-line basis over the term of the lease.
Lease incentives paid are recognised in the income statement as an
integral part of the total lease expense.
(d) Investment properties related expenses
Expenses with regards to investment properties are treated as
administrative expenses and are recognised when incurred.
1.3.7 Impairment
Assets are reviewed at each reporting date to assess whether there
are any circumstances that might indicate that they are impaired. If
such circumstances exist, impairment testing is performed and any
resulting impairment losses are charged to the income statement. The
carrying value is adjusted to the recoverable amount. Goodwill is tested
annually for impairment or more frequently if events or changes in
circumstances indicate that the carrying value may be impaired.
Impairment is determined by assessing the recoverable amount of
the asset, or in respect of goodwill, the cash generating unit to which
the goodwill relates. The recoverable amount is the higher of the
asset’s fair value less costs to sell and value in use.
Each cash generating unit to which goodwill is allocated represents
the lowest level within the Group at which the goodwill is monitored
for internal management purposes and is not larger than any of the
Group’s primary or secondary segments used for segment reporting.
1.3.8 Intangible assets
(a) Goodwill
Goodwill arising on business combinations is the future economic
benefit arising from assets that are not capable of being individually
identified and separately recognised.
(b) Investment management contracts
Investment management contracts acquired separately are
measured on initial recognition at cost. The cost of intangible assets
acquired in a business combination is the fair value as at the date of
acquisition. Following initial recognition intangible assets are carried
at cost less accumulated amortisation and any accumulated
impairment losses. The useful lives of investment management
Friends Provident Annual Report & Accounts 2006 77