Setting new standards - Friends Life

PARENT COMPANY ACCOUNTS
ABBREVIATIONS AND DEFINITIONS
Notes to the consolidated accounts continued
1. Accounting policies continued
A contract with DPF is a contractual right held by a policyholder to
receive, as a supplement to guaranteed minimum payments,
additional payments:
• that are likely to be a significant portion of the total contractual
payments, and
• whose amount or timing is contractually at the discretion of the
issuer and that are contractually based on:
– the performance of a specified pool of contracts, or a specified
type of contract, or
– realised and/or unrealised investment returns on a specified pool
of assets held by the issuer, or
– the profit or loss of the company that issues the contracts.
Investment contracts with DPF held within the FPLP and FPLA withprofits
funds are measured on a basis that is consistent with a
measurement basis for insurance contracts held within those funds.
Balances representing eligible surplus that has not yet been
allocated to shareholders, or policyholders with DPF contracts, are
retained as a policyholders’ liability.
1.3.20 Fund for future appropriations (FFA)
The FFA comprises all funds available for allocation, either to
policyholders or to shareholders, the allocation of which has not
been determined at the balance sheet date.
Within FPLP, the insurance and investment contracts liabilities allow
for discretionary benefit allocations to the extent that they are
allowed within current bonus practices. The FFA represents working
capital and the value of future transfers to shareholders from the
With-Profits Fund in respect of discretionary bonuses for
conventional with-profits business.
Within FPLA, the FFA represents the value of future final bonus
payments to policyholders.
1.3.21 Interest-bearing loans and borrowings
Borrowings are recognised initially at fair value, which is generally
the cash consideration received, net of transaction costs incurred,
and subsequently stated at amortised cost. Any difference
between the proceeds, net of transaction costs, and the
redemption value is recognised in the income statement over the
period of the borrowings, using the effective interest rate method.
Convertible bonds that can be converted to share capital at the option
of the holder, where the number of shares issued does not vary with
changes in their fair value, are accounted for as compound financial
instruments. Compound financial instruments are split and the equity
and liability components recorded separately. The equity component
of the convertible bonds is calculated on issue as the excess of the
issue proceeds over the present value of the future interest and
principal payments, discounted at the market rate of interest
applicable to similar liabilities that do not have a conversion option.
The equity component is recognised and included in shareholders’
equity, net of tax effects. The fair value of the liability component is
recorded on an amortised cost basis until extinguished on conversion
or maturity of the bonds.
The interest expense recognised in the income statement under
finance costs, is calculated using the effective interest rate
method. Interest accrued on variable rate interest bearing loans
and borrowings is recognised under insurance payables, other
payables and deferred income and not in the carrying value of
interest bearing loans and borrowings.
1.3.22 Provisions
A provision is recognised when the Group has a present legal or
constructive obligation, as a result of a past event, which is likely to
result in an outflow of resources and where a reliable estimate of the
amount of the obligation can be made. If the effect is material, the
provision is determined by discounting the expected future cash
flows at a pre-tax rate that reflects a current market assessment for
the time value of money and, where appropriate, the risks specific to
the liability.
The Group recognises a provision for onerous contracts when the
expected benefits to be derived from the contracts are less than the
related unavoidable costs.
1.3.23 Insurance payables, other payables and
deferred income
Insurance and other payables are recognised when due and
measured on initial recognition at the fair value of the consideration
paid. Subsequent to initial recognition, payables are measured at
amortised cost using the effective interest rate method.
Fees charged for services to be provided in future periods are deferred
and recognised in the income statement on a straight-line basis as the
services are provided over the expected term of the contract.
1.3.24 Employee benefits
(a) Pension obligations
(i) Defined benefit schemes
Pension schemes are in operation for employees of certain
subsidiary undertakings. The principal schemes, to which the
majority of employees belong, are of the funded defined benefit
type with assets managed by F&C Asset Management plc (F&C), a
subsidiary undertaking. The schemes provide benefits based on final
pensionable salary. The assets of the schemes are held in separate
trustee administered funds.
The pension liability recognised in the balance sheet is the present
obligation of the employer, which is the estimated present value of
future benefits that employees have earned in return for their
services in the current and prior years, less the value of the plan
assets in the schemes. The discount rate applied to the employees’
benefits is the appropriate AA rated corporate bond yield at the
balance sheet date. A qualified actuary performs the calculation
annually using the projected unit credit method.
The pension costs for the schemes are charged to the income
statement and consist of current service cost, past service cost,
interest cost on scheme liabilities, the effect of any settlements and
Friends Provident Annual Report & Accounts 2006 81