19 DEFERRED ACQUISITION COSTS.


The Group incurs costs to obtain and process new business. These are accounted for in line with the appropriate accounting standards as follows:

Long term insurance business

Acquisition costs comprise direct costs, such as initial commission, and the indirect costs of obtaining and processing new business. Acquisition costs relating to non-participating insurance contracts written outside the with-profits part of the UK Long Term Funds (LTFs) which are incurred during a financial year are deferred by use of an asset which is amortised over the period during which the costs are expected to be recoverable, and in accordance with the expected incidence of future related margins. For participating contracts, acquisition costs are charged to the income statement when incurred.

General insurance

A proportion of commission and other acquisition costs relating to unearned premiums is carried forward as deferred acquisition costs or, in respect of reinsurance outwards, as deferred income.

Investment contracts

For participating investment contracts, acquisition costs comprise direct costs such as initial commission and the indirect costs of obtaining and processing new business. These costs are charged to the income statement when incurred. For non-participating investment contracts, only directly attributable costs relating to investment management services which vary with, and are related to, securing new contracts and renewing existing contracts, are capitalised and amortised over the period during which the costs are expected to be recoverable from future revenue. All other costs are recognised as expenses when incurred.

Future developments

In October 2010, the FASB issued ASU 2010-26 regarding accounting for Deferred Acquisition Costs (DAC) under US [GAAP], effective for financial periods beginning after 15 December 2011. This specifies that only costs directly relating to successful acquisition of new or renewal contracts can be capitalised as DAC. All other acquisition-related costs must be expensed as incurred.

Legal & General applies US GAAP to report the insurance contract business of its US subsidiaries. As permitted under [IFRS] 4, ‘Insurance Contracts’, the Group will adopt the new guidance as an improvement in accounting policy from 1 January 2012, applying it retrospectively.

It is estimated that retrospective adoption will reduce DAC reported within the US business by approximately $340m (£220m) and reduce equity by approximately $220m (£140m). There is no impact to DAC held outside of the US business.

(i) Analysis of deferred acquisition costs

(Download XLS:) Download Excel

 

Notes

Gross
2011
£m

Reinsurance
2011
£m

Gross
2010
£m

Reinsurance
2010
£m

Insurance contract deferred acquisition costs

(ii)

1,095

(78)

1,032

(81)

Investment contract deferred acquisition costs

(iii)

958

968

Deferred acquisition costs

 

2,053

(78)

2,000

(81)

(ii) Insurance contract deferred acquisition costs

(Download XLS:) Download Excel

 

Gross
2011
£m

Reinsurance
2011
£m

Gross
2010
£m

Reinsurance
2010
£m

As at 1 January

1,032

(81)

983

(80)

Acquisition costs deferred

177

150

(1)

Amortisation charged to income

(158)

7

(164)

8

Increase/(decrease) due to currency translation

14

(1)

27

(3)

Other

30

(3)

36

(5)

As at 31 December

1,095

(78)

1,032

(81)

To be amortised within 12 months

86

(4)

106

(4)

To be amortised after 12 months

1,009

(74)

926

(77)

Of the total gross deferred acquisition costs £1,028m (2010: £965m) relates to the LGA insurance business.

(iii) Investment contract deferred acquisition costs

(Download XLS:) Download Excel

 

Gross
2011
£m

Reinsurance
2011
£m

Gross
2010
£m

Reinsurance
2010
£m

As at 1 January

968

974

Acquisition costs deferred

123

109

Amortisation charged to income

(122)

(108)

Decrease due to currency translation

(1)

(1)

Other

(10)

(6)

As at 31 December

958

968

To be amortised within 12 months

198

193

To be amortised after 12 months

760

775

top


Share this page.