Setting new standards - Friends Life

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FINANCIAL STATEMENTS IFRS FINANCIAL STATEMENTS EEV SUPPLEMENTARY INFORMATION Notes to the consolidated accounts continued 1. Accounting policies continued curtailments, and the expected return on pension assets. Past service costs are recognised in the income statement on a straightline basis over the period in which the increase in benefits vest. Actuarial gains and losses are taken to the statement of recognised income and expense for the period. The actuarial gains and losses, which arise from any new valuation and from updating the latest actuarial valuation to reflect conditions at the balance sheet date, are taken to the statement of recognised income and expense for the period. The adjustment is shown net of deferred taxation. (ii) Defined contribution schemes Contributions made to these schemes are charged to the income statement as they become payable in accordance with the rules of the scheme. (iii) Multi-employer defined benefit schemes The Group participates in several multi-employer defined benefit schemes in Europe. These schemes are defined benefit schemes but the Group is unable to identify its share of the underlying assets and liabilities as they are not separately identifiable. The Group accounts for the contributions to the schemes in the same manner as defined contribution schemes. (iv) Other long-term employee benefits Other long-term employee benefits are recognised at the discounted present value of the defined benefit obligation at the balance sheet date. The obligation is calculated using the unit credit method. The discounted rate of the employees’ benefits is the yield at balance sheet date. (v) Termination benefits Termination benefits are recognised as a liability and an expense when the Group terminates the employment of an employee before the normal retirement date. (b) Share based payment schemes The Company and certain subsidiary undertakings offer share based payment schemes to employees of the Group, depending on eligibility. The fair value of equity-settled share based payments is measured at the grant date and expensed on a straight-line basis over the vesting period in the income statement. A corresponding amount is credited to equity. At each balance sheet date, the Group revises its estimate of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, with a corresponding adjustment to equity over the remaining vesting period. The fair value is measured using scenario based modelling techniques that take into account the terms and conditions upon which these options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest, except where forfeiture is only due to share prices not achieving the threshold for vesting. The dilutive effect of outstanding options is reflected in the computation of diluted earnings per share. For cash-settled schemes, the fair value of the share based payment is measured at the grant date and expensed over the vesting period in the income statement with a corresponding credit to liabilities. The estimated fair value of cash-settled awards is remeasured at each reporting date until the payments are ultimately settled. 1.3.25 Share capital and dividends Where either the Company or F&C has a holding in its own equity which has been classified as treasury shares, the consideration paid is deducted from share capital and reserves. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to the Company’s equity holders, net of any directly attributable incremental transaction costs and the related tax effects. Dividends are recognised as an appropriation on the date declared by the Group’s directors or, if subject to approval, by the shareholders. 2. Use of estimates, assumptions and judgements The Group makes estimates, assumptions and judgements that affect the reported amounts of assets and liabilities. Estimates, assumptions and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are considered to be reasonable under the circumstances. (a) Liabilities arising from insurance contracts and investment contracts with DPF As stated in the accounting policies, management has determined that a contract is an insurance contract if there is a significant insurance risk. Policyholder contracts not considered insurance contracts are classified as investment contracts. Investment contracts with DPF are mainly unitised with-profit policies which are valued on the same basis as insurance contracts. The estimation of the ultimate liabilities arising is a critical accounting estimate. There are several sources of uncertainty that need to be considered in the estimation of the liabilities that the Group will ultimately pay for claims. A number of assumptions are used to determine the Group’s liabilities, which contain guarantees and options. The most significant assumptions are: • mortality, morbidity and persistency assumptions; • for with-profits policies within FPLP, the stochastic model used to value liabilities is sensitive to risk-free rates, assumed asset volatilities and the assumed correlation between asset volatilities. Risk-free rates are set in accordance with current market rates; • for other policies, the valuation interest rate is the most significant economic assumption; • for guaranteed annuity options (one of the principal guarantees written by the Group) the cost depends on assumptions such as the level of policy discontinuance and the tax-free cash take-up; 82 Friends Provident Annual Report & Accounts 2006
PARENT COMPANY ACCOUNTS ABBREVIATIONS AND DEFINITIONS Notes to the consolidated accounts continued 2. Use of estimates, assumptions and judgements continued • changes in assumptions behind the valuation techniques for assets that are not quoted in active markets could have a significant impact on assets that are backing insurance and investment contract liabilities. The sensitivity of liability valuations to key risks and assumptions is set out in note 27. The carrying value of insurance contracts liabilities is £13,762m (2005: £14,637m) and investment contracts liabilities with DPF is £5,700m (2005: £6,394m). (b) Impairment testing The Group is required to perform an annual impairment test of goodwill. Other assets, excluding those assets held at fair value through the income statement, are reviewed where there is an indication of impairment. For most assets this requires the Group to estimate future cash flows and discount these amounts using a suitable rate which reflects the risk of those cash flows. In projecting cash flows, the Group makes a number of assumptions on matters which include, but are not restricted to: • Investment market conditions • Sales and margins • Expenses • Policy/client lapses • Discount rates • Terminal values These assumptions are established using management’s best estimate of the likely outcome but with all assumptions there remains a degree of uncertainty as to the final results. Management have determined that there are four segments for impairment testing: UK Life & Pensions, Lombard, FPI and Asset Management. The carrying value of goodwill is £662m (2005: £677m) and of other intangible assets is £743m (2005: £913m). Details of the testing of impairment performed during the year are contained in note 16. (c) Provision for review of mortgage endowment and other sales The Group has made provision for the estimated cost and compensation associated with the review of mortgage endowment and other sales. These provisions are subject to considerable uncertainty and are influenced by external factors beyond the control of management. Although the provisions are regularly reviewed, the final outcome could be different from the provision established. The total carrying value (including actuarial provisions) for the review of mortgage endowment and other sales is £63m (2005: £142m). (d) Fair value determination of financial assets at fair value through the income statement Fair values are based on quoted market prices for a specific instrument, or comparisons with other highly similar financial instruments, or the use of valuation models. Establishing valuations where there are no quoted market prices inherently involves the use of judgement in establishing reserves against indicated valuations for aged positions, deteriorating economic conditions (including country-specific risks), concentrations in specific industries, types of instruments or currencies, market liquidity, model risk itself and other factors. Market risk sensitivities are disclosed in note 30. The carrying amount of financial assets at fair value through the income statement (excluding units in unit trusts and shares in openended investment companies) that are not based on quoted market prices is £1,835m (2005: £1,391m). (e) Staff pension schemes assumptions In assessing the pension benefit obligation, assumptions are made as to the life expectancy of all current, deferred and retired members, rates of increases of salaries and pensions, and interest and inflation rates. Material assumptions used and sensitivities are explained in detail in note 10. The carrying value of the net pension liability is £77m (2005: £107m). (f) Share options and share based payments In assessing the cost of share options expected to vest, estimates are made of future staff leaver numbers on the basis of past experience, and of the fair value of the options using assumptions including expected future levels of share price volatility and dividend yield. The amount charged to the income statement in respect of share based payments is £22m (2005: £28m). (g) Deferred tax assets In assessing deferred tax assets, an estimate of probable future taxable profits is made, against which the temporary differences, being the carry forward of excess tax expenses, and tax losses are utilised. These involve management’s best estimate based on past profit experience, adjusted for possible future deviations that management consider might occur. The carrying value of deferred tax assets is £97m (2005: £91m). (h) Changes in accounting estimates (i) Investment management contracts Following a full impairment review of investment management contracts, in accordance with IAS36 Impairment of Assets, impairment losses have been recognised in 2005 and 2006. This review has led the Group to reconsider the average expected lives of these assets. With effect from 1 July 2006, the estimated remaining useful lives of the assets were assessed as follows: Investment trusts Institutional (non-fixed term) 10 years 6 years The original estimate of their useful lives on acquisition of the assets in October 2004 was 20 years for investment trusts and 10 years for non-fixed term institutional contracts. The estimated useful lives of all other categories of investment management contracts are unchanged. Friends Provident Annual Report & Accounts 2006 83
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Setting new standards Friends Provi
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Friends Provident plc Pixham End Do
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