Financial assets
17.5 Specific balance sheet principles 1 Intangible fixed assets
17.5.1.1 Goodwill
Acquisitions are accounted for according to the purchase method, with the cost of the acquisitions being allocated to the fair value of the acquired identifiable assets, liabilities and contingent liabilities. Goodwill, being the difference between the cost of the acquisition and REAAL’s interest in the fair value of the acquired identifiable assets, liabilities and contingent liabilities on the acquisition date, is capitalised as an intangible fixed asset. Any negative goodwill is recognised directly in the income statement.
If the provisionally determined fair value of acquired assets or liabilities is adjusted within a year of the acquisition date, the adjustment is recognised as an adjustment charged to goodwill. Adjustments that occur after a period of one year are recognised in the income statement. Adjustments to the purchase price that are contingent on future events and insofar these are not already included in the purchase price, are included in the purchase price of the acquisition at the time when the adjustment is likely and can be measured reliably.
Goodwill is not amortised. Instead, an impairment test is performed annually or more frequently if there are indications of impairment (see ‘Impairment of intangible fixed assets and financial instruments’).
17.5.1.2 Software
Costs that are directly related to the development of identifiable software products that REAAL controls, and that are likely to generate economic benefits that exceed these costs, are capitalised as intangible fixed assets. The direct costs comprise external costs and staff costs directly attributable to software development. All the other costs associated with the development or maintenance of computer software are included as an expense in the period during which they are incurred.
The capitalised development costs for computer software are amortised on a straight-line basis over the useful life, with a maximum of three years. Every reporting date an assessment is carried out for possible impairments.
17.5.1.3 Capitalised acquisition costs from Insurance activities
Acquisition costs are the direct or indirect costs related to activities necessary for the production of new life insurance business and disability insurance business and modification of existing contracts. Acquisition costs comprise
non-commission (internal) and commission (external) expenses.
Non-commission acquisition expenses are capitalised to the extent that they can be recovered from the projected gross profits of the underlying new business in a given year. Non-commission acquisition expenses are amortised based on the expected average term over which premiums will be received.
Commission acquisition expenses (capitalised commissions) are amortised over the period over which they are earned i.e. either 5 or 10 years, and this varies by product. These terms are re-assessed on a regular basis.
An impairment test is performed at each reporting date. Capitalised acquisition costs are included as part of the technical provision in the IFRS liability adequacy test. For a more detailed explanation and recognition of any deficits
demonstrated by this test, please refer to ’Provision for insurance contracts’.
17.5.1.4 Value of Business Acquired (VOBA)
VOBA is the net present value of estimated future cash flows from current insurance contracts of a business or insurance portfolio acquired as at the acquisition date and represents the difference between the fair value and the book value on REAAL principles of the insurance portfolios acquired.
REAAL amortises the VOBA on the basis of the established release pattern of the value of the actuarial calculated surplus value at the date of purchase of the underlying portfolios at the acquisition date. The amortisation charge is thus in line with the results from the underlying portfolios.
As part of the IFRS liability adequacy test, an impairment test is performed at each balance sheet date, For a more detailed explanation on this please refer to ‘Provision for insurance contracts and Impairment of intangible fixed assets and financial instruments’.
17.5.1.5 Other intangible fixed assets
The other intangible fixed assets include assets with a definite and an indefinite useful life, such as distribution channels, trademarks, client portfolios stemming from acquisitions. The assets with a definite useful life are either amortised in accordance with the straight-line method over their useful life or on the basis of the profit flows from the underlying portfolios, in general between five and fifteen years. If objective indications so require, an impairment test will be performed. The assets with an indefinite useful life are not amortised. These intangible fixed assets are assessed for impairment at each balance sheet date.
17.5.2 Property and equipment
17.5.2.1 Land and buildings in own use
Property in own use primarily comprises offices (land and buildings) and is measured at fair value (revaluation model) based on appraisals, less depreciation of buildings and any accumulated impairment losses. Once a year, at least one-third of the properties in own use are appraised by external appraisers. If there are indications that the buildings’ fair value is considerably different from their book value, additional appraisals may be performed.
Property in own use is valued at market value on an unlet or let basis. If arm’s length lease agreements have been concluded between REAAL group companies, the building is recognised at its value as a let property. If there is no lease agreement, the property is recognised as vacant property. In determining the market value, use is made of observable prices of recent transactions.
Increase in the fair value exceeding the cost price is added to the revaluation reserve in shareholders’ equity, less deferred taxes. Positive revaluations, insofar as these result in the reversal of earlier write-downs on the same asset, are credited to the income statement. Decreases in the fair value, insofar as these result in the reversal of prior positive revaluations of the same asset, are charged to the revaluation reserve. All other decreases in the fair value are accounted for in the income statement.
Buildings are depreciated over their economic life using the straight-line method, with a maximum of 50 years, taking into account the possible residual value. Land is not depreciated. Regular impairment tests are carried out on land and buildings.
Repairs and maintenance expenses are recognised under ‘other operating expenses’ the moment the expense is incurred. Expenses incurred after the acquisition of an asset that increase or extend the future economic benefits of land and buildings in own use in relation to their original use are capitalised and then amortised.
Upon the sale of a property, the part of the revaluation reserve related to the sold property is transferred to ‘other reserves’.
17.5.2.2 IT equipment and other tangible fixed assets
All other tangible fixed assets included in this item are measured at cost net of accumulated depreciation and, if applicable, accumulated impairment losses.
The cost price comprises the expenses directly attributable to the acquisition of the asset and is depreciated on a straight-line basis over the useful life, taking into account any residual value. The estimated useful life can vary three to ten years.
Regular impairment tests are performed on the other tangible fixed assets. If the book value of the tangible asset exceeds the realisable value, it is written down to the realisable value.
Repairs and maintenance expenses are recognised under ‘other operating expenses’ the moment the expense is incurred. Expenses incurred after the acquisition of an asset that increase or extend the future economic benefits of the other tangible fixed assets in relation to their original use are capitalised and then amortised.
Results on the sale of tangible fixed assets are defined as the balance of the realisable value less transaction costs and the book value. These results are recognised as part of ‘other operating income’.
17.5.3 Investment properties
Investment properties, comprising retail and office properties and land, are held to generate long-term rental income. If property is held partly as investment property and partly for own use, the property is included under tangible fixed assets, unless the part in own use is less than 20% of the total number of square metres.
Investment properties are measured at fair value, including the transaction costs, upon initial recognition. Property investments are treated as long-term investments and measured at fair value, being the value of the property in a let state. The fair value is based on the appraisals performed every year by independent external appraisers with sufficient expertise and experience in property locations and categories. These appraisals are based on recent market
transactions. The valuation of the fair value of investment properties depends on the location, quality, age and marketability of the relevant property. Changes in the fair value of investment property are recognised in the income statement under ‘investment income’.
17.5.4 Financial assets
REAAL classifies its financial instruments in one of the following categories: (1) loans and receivables, (2) available for sale and (3) at fair value through profit or loss. The category depends on the purpose for which the financial assets were acquired. The management decides in which category they will be placed.
Upon initial recognition, financial instruments are measured at fair value including transaction costs, with the exception of the category ‘at fair value through profit or loss’, where transaction costs are taken directly to the income statement. The fair value of financial assets is based on listed bid prices or derived from cash flow models.
The categories are explained in more detail in the following section.