1. Accounting policies
1.1 Basis of preparation
The financial statements of the Company as at and for the year ended 31 December 2011 comprise the consolidated financial statements of the Company and its subsidiaries (together referred to as “the Group”) and the Group’s interests in associates and jointly controlled entities.
On 31 January 2011, the Group, through its subsidiary FLL, acquired all of the share capital of BHA. The consolidated income statement therefore includes the results of BHA from that date.
On 7 November 2011, the Group, through its subsidiary FLG, acquired control of WLUK. The consolidated income statement therefore includes the results of WLUK from that date.
The acquisition of WLUK was agreed with AXA UK in 2010 at the same time as the acquisition of FASLH was negotiated. However, the share capital of WLUK was not legally acquired by the Group until 2011 as the purchase was contingent upon a transfer under Part VII of FSMA of AXA UK’s retained business out of WLUK and approval for the change of control in WLUK being received. These substantive conditions for the acquisition were fulfilled in November 2011 enabling the Group to acquire WLUK’s share capital.
Under the terms of the FASLH acquisition in 2010, certain portfolios of business legally owned by the Group as a result of the acquisition were transferred back to AXA UK under Part VII of FSMA. These portfolios were therefore classified as held for sale for the year ended 31 December 2010. In October 2011 the Part VII transfers were successfully completed. The 2010 comparatives include the results of the acquired AXA UK Life Business from 3 September 2010.
During November 2011 all of the business of FPLAL and BHA and certain portfolios of the business of FLPL were transferred into FLL, their immediate parent company, under Part VII of FSMA. The purpose of this internal group reorganisation was to realise capital and operating synergies for the Friends Life group. Prior to the Part VII transfers the with-profit liabilities of FPLAL, which were less than £500 million, were reported in the consolidated financial statements of the Group on a non-realistic basis. Subsequent to the transfer, these with-profit liabilities have become liabilities of FLL and are required to be reported on a realistic basis. This change does not impact equity attributable to equity holders of the parent in the consolidated financial statements of the Group but does impact the split of the with-profit liabilities between insurance contracts, investment contracts and unallocated surplus. Aside from this change, the Part VII transfers have not generated any other significant impacts on the consolidated financial statements.
The consolidated financial statements as at and for the year ended 31 December 2011 have been prepared in accordance with IFRS as adopted by the European Union (“IFRS”). The presentation currency of the Group is Sterling. Unless otherwise stated the amounts shown in the consolidated financial statements are in millions of pounds Sterling (£ million). The preparation of the financial statements under IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Further information on the use of judgement, estimates, and assumptions is set out in note 2.
The International Accounting Standards Board (“IASB”) issued the following interpretation which is effective for annual periods beginning on or after 1 July 2010:
•IFRIC 19: Extinguishing financial liabilities with equity instruments. This interpretation does not have a material impact on the Group.
The IASB issued the following changes to standards and interpretations which are effective for accounting periods beginning on or after 1 January 2011:
•IAS 24 (revised): Related party disclosures. The revised standard clarifies and simplifies the definition of a related party and does not have a material impact on the Group; and
•Annual improvements to IFRSs (May 2010). In accordance with the improvement to IFRS 7: Financial Instruments: Disclosures, the Group has disclosed details of collateral held by the Group to mitigate credit risk.
The IASB issued the following change to IFRS 7 which is effective for accounting periods beginning on or after 1 July 2011 and has been early adopted by the Group:
•IFRS 7: Financial Instruments: Disclosures. The amendment enhances the disclosure requirements in relation to transferred financial assets to require information as to any residual risks that remain from an entity’s continuing involvement with such assets. Adoption of this amendment has not had a material impact on the Group.
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IFRS financial statements
MCEV financial statements
1. Accounting policies continued
Below is a list of new standards and changes to existing standards that have been issued by the IASB with effective dates for accounting periods beginning on or after 1 January 2012, but where earlier adoption is permitted. They have not been early adopted by the Group in 2011 as they are yet to be endorsed by the European Union (“EU”). The impact of these new requirements is currently being assessed by the Group. New standards:
•IFRS 9: Financial instruments: classification and
measurement. This IFRS reflects the first phase of the IASB’s work on the replacement of IAS 39: Financial Instruments: Recognition and Measurement, and relates to the
classification and measurement of financial assets as defined in IAS 39. The adoption of IFRS 9 will have a material impact on the classification and measurement of the Group’s financial assets;
•IFRS 10: Consolidated Financial Statements. This IFRS provides a single consolidation model that identifies control as the basis for consolidation for all types of entities. It replaces the requirements in IAS 27: Consolidated and Separate Financial Statements and SIC 12: Consolidation – Special Purpose Entities. IFRS 10 is effective for annual periods beginning on or after 1 January 2013;
•IFRS 11: Joint Arrangements. This IFRS establishes principles for the financial reporting by parties to a joint arrangement. It supersedes the requirements in IAS 31: Interests in Joint Ventures and SIC 13: Jointly Controlled Entities – Non-Monetary Contributions by Venturers. IFRS 11 is effective for annual periods beginning on or after 1 January 2013;
•IFRS 12: Disclosure of Interests in Other Entities. This IFRS combines, enhances and replaces disclosure requirements for subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after 1 January 2013; and
•IFRS 13: Fair Value Measurement. This IFRS defines fair value and sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. IFRS 13 is effective for annual periods beginning on or after 1 January 2013. Amendments to existing standards:
•IAS 1: Presentation of Financial Statements.
The amendments require companies to group together items within other comprehensive income (“OCI”) that may be reclassified to the profit or loss section of the income statement and reaffirm existing requirements that items in OCI and profit or loss should be presented as either a single statement or two consecutive statements.
These amendments are effective for annual periods beginning on or after 1 July 2012;
•IAS 12: Income Taxes. This amendment introduces a rebuttable assumption that where certain assets (including investment property and intangible assets) are measured at either fair value or under a revaluation model, deferred tax should be calculated on the assumption that the asset will be sold at its carrying amount. This amendment is effective for annual periods beginning on or after 1 January 2012; and
•IAS 19: Employee Benefits. The amendment eliminates the option to defer the recognition of gains and losses, known as the “corridor method”. This amendment is effective for accounting periods beginning on or after 1 January 2013. The financial statements comply with the Statement of Recommended Practice issued by the Association of British Insurers in December 2005 (as amended in December 2006) insofar as these requirements do not contradict the
requirements of IFRS.
The Group presents its balance sheet in order of liquidity. Where applicable, for each asset and liability line item that combines amounts expected to be recovered or settled both within and beyond 12 months after the balance sheet date, disclosure of the amount due beyond 12 months is made in the respective note.
Financial assets and financial liabilities are not offset, unless there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expenses are not offset in the income statement unless required or permitted by an accounting standard or
interpretation, as specifically disclosed in the accounting policies of the Group.
1.2 Accounting policies
The principal accounting policies set out below have been consistently applied in these consolidated financial statements.
1.2.1 Business combinations
Business combinations are accounted for under IFRS 3:
Business combinations, as revised in 2008 and amended in 2010, using the purchase method. The cost of a business combination is measured as the fair value of the consideration transferred. Identifiable assets acquired, including intangible assets arising on acquisition, and liabilities assumed in a business combination are measured initially at their fair value at the business combination date. Any excess of the cost of the business combination over the fair value of the net assets acquired is recognised in the balance sheet as goodwill. To the extent that the fair value of the acquired entity’s net assets is greater than the cost of the acquisition, a gain is recognised immediately in the income statement. Acquisition related costs are expensed as incurred except insofar as they relate to the raising of debt or equity when such expenses are capitalised.
Notes to the consolidated accounts continued