For the year ended 31 December 2010
96
1. Summary of significant accounting policies and critical accounting judgements and estimates
Amlin plc (the Company) is a public limited company registered in England and Wales. The address of the registered office is St Helen’s, 1 Undershaft, London EC3A 8ND. The basis of preparation, basis of consolidation and significant accounting policies adopted in the preparation of Amlin plc and subsidiaries’ (the Group) consolidated financial statements are set out below.
Basis of preparation
These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted for use in the European Union (EU). The consolidated financial statements comply with Article 4 of the EU IAS regulation and Companies Act 2006.
The consolidated financial statements have been prepared on the historical cost basis except for cash and cash equivalents, financial assets and liabilities, share options, and pension assets which are measured at their fair value. Except where otherwise stated, all figures included in the consolidated financial statements are presented in millions of British Pounds Sterling (sterling) shown as £m rounded to the nearest £100,000.
The accounting policies adopted in preparing these financial statements are consistent with those followed in the preparation of the Group’s annual financial statements for the year ended 31 December 2009, unless otherwise stated. In accordance with IFRS 4, the Group has applied existing accounting practices for insurance contracts, modified as appropriate, to comply with the IFRS framework and applicable standards. Basis of consolidation
The financial statements consolidate the accounts of the Company and subsidiary undertakings, including the Group’s underwriting through participation on Lloyd’s syndicates. Subsidiaries are those entities in which the Group, directly or indirectly, has the power to govern the operating and financial policies in order to gain economic benefits and include the Company’s employee benefit trusts. The financial statements of all subsidiaries are prepared for the same reporting year as the Parent Company. Consolidation adjustments are made to convert subsidiary accounts prepared under different accounting standards into IFRS so as to remove the effects of any different accounting policies that may exist. Subsidiaries are consolidated from the date that control is transferred to the Group and cease to be consolidated from the date that control is transferred out.
All inter-company balances, profits and transactions are eliminated.
Details of material subsidiaries included within the consolidated financial statements can be found in note 35.
As part of our process to improve the presentation of the Group’s Consolidated Financial Statements, certain changes have been made to the presentation of Financial assets and Financial liabilities, Insurance liabilities and reinsurance assets, Other payables, and Loans and receivables in order to better reflect the nature of underlying transactions. In addition, changes have also been made to the presentation of the effects of tax in the Consolidated Statement of Comprehensive Income and in the Consolidated Statement of Changes in Equity. These changes in presentation have no effect on the previously reported net income, shareholders’ equity or net assets. Comparative information has been amended to reflect this change.
Adoption of new and revised standards (a) Standards, amendments to published standards and interpretations effective on or after 1 January 2010
The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS and IFRIC interpretations effective as of 1 January 2010:
• IFRS 3 (revised), ‘Business combinations’; • IAS 27 (amended), ‘Consolidated and
separate financial statements’; • Amendment to IAS 39, ‘Financial
instruments: recognition and measurement – eligible hedged items’;
• Amendment to IFRS 2, ‘Group cash-settled share-based payment transactions’; • IFRIC 18, ‘Transfers of assets from
customers’;
• IFRIC 17, ‘Distribution of non-cash assets to owners’; and
• Annual improvements to IFRSs 2008-2009. Adoption of these revised standards and interpretations did not have any material effect on the financial performance or position of the Group.
The effects of these changes are as follows: IFRS 3 (revised), ‘Business combinations’ and IAS 27 (amended), ‘Consolidated and separate financial statements’
IFRS 3 (revised) introduces significant changes in the accounting for business combinations occurring after 1 January 2010. Changes affect the valuation of non-controlling interests, the accounting for transaction costs, the initial recognition and subsequent measurement of contingent consideration and business
combinations achieved in stages. These changes will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs and future reported results. IAS 27 (amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes by IFRS 3 (revised) and IAS 27 (amended) will affect future acquisitions or loss of control of subsidiaries and transactions with non-controlling interests. The changes were applied prospectively and had no material impact. IAS 39 (amended), ‘Financial instruments: recognition and measurement – eligible hedged items’
The amendment was issued in July 2008. It provides guidance on certain hedged items. On the designation of a one-sided risk in a hedged item, IAS 39 concludes that a purchased option designated in its entirety as the hedging instrument of a one-sided risk will not be perfectly effective. Additionally, the designation of inflation as a hedged risk or portion is not permitted unless in particular situations. There is no material impact on the Group or Company’s financial statements. IFRS 2 (amended), ‘Group cash-settled share- based payment transactions’
The IASB issued an amendment to IFRS 2 that clarified the scope and the accounting for group cash-settled share-based payment transactions. The Group adopted this amendment as of 1 January 2010. There is no material impact on the Group or Company’s financial statements. IFRIC 17, ‘Distribution of non-cash assets to owners’
The interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS 5 ‘Non-current assets held for sale and discontinued operations’ has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. This interpretation does not have a material impact on the Group or Company’s financial statements.
IFRIC 18, ‘Transfers of assets from customers’ This interpretation was issued in January 2009. It clarifies how to account for transfers of items of property, plant and equipment by entities that receive such transfers from their customers. The interpretation also applies to agreements in which an entity receives
Financial statements Notes to the accounts Over view Strateg y Per formance Governance Financial statements 97
cash from a customer when that amount of cash must be used only to construct or acquire an item of property, plant and equipment and the entity must then use that item to provide the customer with ongoing access to supply of goods and/or services. The Group is not impacted by the adoption of IFRIC 18. Annual improvements to IFRSs 2008-2009 In April 2008 and 2009, the IASB issued its annual amendments to International Financial Reporting Standards (IFRSs) and the related Bases for Conclusions and guidance made. The IASB uses the annual improvements process to make necessary, but non-urgent, amendments to IFRSs that will not be included as part of a major project. The amendments primarily remove inconsistencies and clarify wording. The Group has adopted the amendments to standards as they come into effect for the reporting period beginning on 1 January 2010. However, these amendments have no material impact on the Group or Company’s financial statements. (b) Standards, amendments to published standards and interpretations early adopted by the Group In 2010, the Group did not early adopt any new, revised or amended standards.
(c) Standards, amendments to published standards and interpretations that are not yet effective and have not been early adopted by the Group Standards issued but not yet effective up to the date of issuance of the Group’s financial statements are listed below. The Group intends to adopt these standards when they become effective.
IAS 24 (amended), ‘Related party disclosures’ The amended standard is effective for annual periods beginning on or after 1 January 2011. It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduced a partial exemption of disclosure requirements for government-related entities. The Group does not expect any impact on its financial position or performance.
IAS 32 (amended), ‘Financial instruments: Presentation – classification of rights issues’ The amendment to IAS 32 is effective for annual periods beginning on or after 1 February 2010 and amended the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency.
This amendment will have no impact on the Group after initial application.
IFRS 9, ‘Financial instruments: Classification and measurement’
IFRS 9 as issued reflects the first phase of the Board’s work on the replacement of IAS 39 and applies to the classification and measurement of financial assets as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January 2013. In subsequent phases, the Board will address hedge accounting and derecognition. The completion of this project is expected in early 2011. The adoption of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets. However, the Group determined that the effect shall be quantified in conjunction with the other phases when issued to present a comprehensive picture.
IFRS 9 amendments to incorporate financial liabilities
The amendments to IFRS 9 issued in October 2010 incorporate the classification and measurement of financial liabilities and are mandatory for annual periods beginning on or after 1 January 2013. The amendments only affect the measurement of financial liabilities designated at fair value through profit or loss using the Fair Value Option (FVO). All other requirements in IAS 39 in respect of liabilities are carried forward into IFRS 9.
For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in other comprehensive income (OCI). The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. The amendments are deemed to have no impact on the financial statements of the Group. IFRIC 14 (amended), ‘Prepayments of a minimum funding requirement’
The amendment to IFRIC 14 is effective for annual periods beginning on or after 1 January 2011 with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset. The amendment is deemed to have no impact on the financial statements of the Group. IFRIC 19, ‘Extinguishing financial liabilities with equity instruments’
IFRIC 19 is effective for annual periods beginning on or after 1 July 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid.
The equity instruments issued are measured at their fair value. In case this cannot be reliably measured, they are measured at the fair value of the liability extinguished. Any gain or loss is recognised immediately in profit or loss. The adoption of this interpretation will have no effect on the financial statements of the Group. Annual improvements to IFRSs 2009-2010 The IASB issued Improvements to IFRSs, an omnibus of amendments to its IFRS standards. The amendments have not been adopted as they become effective for annual periods on or after either 1 July 2010 or 1 January 2011. The Group however, expects no significant impact from the adoption of the amendments on its financial position or performance. IFRS 7 (amended), ‘Financial instruments: Disclosures – Transfers of financial assets’ The amendment to IFRS 7 is effective for annual periods beginning on or after 1 July 2011 and comparative disclosures are not required for early adoption. The amendment will introduce more extensive quantitative and qualitative disclosures about the transfer of financial assets to assist users in understanding the implications of transfers of financial assets and the potential risks that may remain with the transferor. The amendment is deemed to have no material impact on the Group or Company’s financial statements.
Critical accounting judgements and key sources of estimation uncertainty
The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities. Although these estimates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from those estimates. Insurance contract liabilities
The most significant estimate made in the financial statements relates to unpaid insurance claim reserves and related loss adjustment expenses of the Group.
The estimated provision for the total level of claims incurred changes as more information becomes known about the actual losses for which the initial provisions were set up. The change in claims costs for prior period insurance claims represents the claims development of earlier reported years incurred in the current accounting period. In 2010, there has been a net positive development of £156.5 million (2009: £174.1 million) for the Group, reflecting favourable experience in the 2009 and prior reported years. Note 3 provides further details of the method the Group applies in estimating insurance contract liabilities.