Setting new standards - Friends Life

FINANCIAL STATEMENTS
IFRS FINANCIAL STATEMENTS
EEV SUPPLEMENTARY INFORMATION
Notes to the consolidated accounts continued
1. Accounting policies continued
settlement of the carrying amount of the assets and liabilities. The
tax rates used are the rates that have been enacted or substantively
enacted by the balance sheet date.
Deferred taxation is recognised in the income statement for the
period, except to the extent that it is attributable to a gain or loss
that is recognised directly in equity. In this case the gain or loss is
shown net of the attributable deferred tax.
Deferred tax liabilities are generally recognised for all taxable
temporary differences and deferred tax assets are recognised to the
extent that it is probable that taxable future profits will be available
against which deductible temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient future taxable profits will be available to
allow all or part of the asset to be recovered.
1.3.16 Insurance and other receivables
Insurance and other receivables are recognised when due and
measured on initial recognition at the fair value of the amount
receivable plus incremental costs. Subsequent to initial recognition,
receivables are measured at amortised cost using the effective
interest rate method.
The carrying value of receivables is the present value of estimated
future cash flows discounted at the original effective interest rate.
1.3.17 Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call
with banks, other short-term highly liquid investments with original
maturities of three months or less, and bank overdraft facilities, where
there is a legal right of offset against cash and cash equivalents.
1.3.18 Insurance contracts
Insurance contracts are measured using accounting policies
consistent with those previously adopted under the Modified
Statutory Solvency (MSS) basis, as amended following the adoption
of the principles contained in FRS 27 Life Assurance.
Insurance contract liabilities are determined separately for each life
operation following an annual investigation of the long-term funds at
31 December. For UK operations the liabilities are calculated in
accordance with the relevant Financial Services Authority (FSA) rules
contained in the Prudential Sourcebook for Insurers. For overseas
operations, insurance contract liabilities are calculated on recognised
actuarial principles, based on local regulatory requirements. The
valuations are subject to adjustments to reflect relevant accounting
requirements as set out below.
For the conventional with-profits business in Friends Provident Life
and Pensions Limited (FPLP), the liabilities to policyholders are
determined in accordance with the Realistic Balance Sheet (RBS)
regulations and in accordance with the principles contained in
FRS 27. These liabilities include both declared and constructive
obligations for future bonuses not yet declared (excluding the
shareholders’ share of future bonuses) and includes the cost of
options and guarantees measured on a market consistent basis.
The RBS basis of valuation does not recognise deferred acquisition
costs, but allows for future profits of non-profit and unit-linked
business written in the With-Profits Fund to be recognised.
The calculation of the liabilities to policyholders in respect of
conventional with-profits contracts in Friends Provident Life
Assurance Limited (FPLA), is on a net premium basis and in
accordance with the MSS basis. These liabilities include an implicit
provision for future regular bonuses, but not final bonuses, by
means of a reduction in the valuation interest rate and an
assessment of options and guarantees on a deterministic basis.
The calculation of liabilities to policyholders for non-profit contracts is
on a gross premium basis and in accordance with the MSS basis.
These liabilities include explicit allowance for future expenses.
The provision for insurance contract liabilities can never be definitive
as to the overall level of liabilities or their timing and is subject to
regular reassessment.
The Group carries out an annual liability adequacy test on its
insurance contract liabilities less related deferred acquisition costs
and other related intangible assets to ensure that the carrying amount
of its liabilities is sufficient in the light of estimated future cash flows.
Where a shortfall is identified, an additional provision is made.
The Group applies shadow accounting in relation to certain insurance
contract liabilities, which are supported by owner occupied
properties, on which unrealised gains and losses are recognised
within equity. Adjustments are made to the insurance contract
provisions to reflect the movements that would have arisen if the
unrealised gains and losses had been recognised in the income
statement. The corresponding change in the value of these balances
is also recognised in equity.
1.3.19 Investment contracts
Investment contracts are either unit-linked or contracts with DPF
(mainly unitised with-profits contracts).
A unit-linked investment contract is recognised at fair value through
the income statement. The fair value is calculated as the number of
units allocated to policyholders in each of the unit-linked funds
multiplied by the unit price of those funds at the balance sheet date.
The fund assets and liabilities used to determine the unit prices at
the balance sheet date are valued on a basis that is consistent with
their measurement basis in the consolidated Group balance sheet,
adjusted to take account of the effect on the liabilities of discounting
for the time value of future tax on unrealised gains on assets held in
the fund. Provision is made for renewal commissions at the
inception of an investment contract as intermediaries are not
required to perform any service once the policy is incepted.
Unitised with-profits investment contracts are measured using
Realistic Balance Sheet principles as amended by FRS 27.
80 Friends Provident Annual Report & Accounts 2006