1 Basis of preparation.

1 Basis of preparation.

Significant accounting policies

The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) as adopted by the European Union, and with those parts of the UK Companies Act 2006 applicable to companies reporting under IFRS. Except for the provisions of IFRS 10 ‘Consolidated Financial Statements’, IFRS 11 ‘Joint Arrangements’ and IFRS 12 ‘Disclosures of Interests in Other Entities’ which have been endorsed for compulsory application in the EU for financial periods beginning on or after 1 January 2014, the Group financial statements also comply with IFRS and interpretations by the IFRS Interpretations Committee as issued by the IASB. The Group financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss.

The Group has selected accounting policies which state fairly its financial position, financial performance and cash flows for a reporting period. The accounting policies have been consistently applied to all years presented, unless otherwise stated. Accounting policies that relate specifically to a balance or transaction are presented above the relevant numerical disclosure.

The Group presents its balance sheet in order of liquidity. This is considered to be more relevant than a before and after 12 months presentation, given the long term nature of the Group’s core business. However, for each asset and liability line item which combines amounts expected to be recovered or settled before and after 12 months from the balance sheet date, disclosure of the split is made by way of a note. The presentation of the order of the notes to the financial statements has been amended to enable greater understanding of the Group’s financial position and performance, details of which are outlined in the contents page to this report.

Financial assets and financial liabilities are disclosed gross in the balance sheet unless a legally enforceable right of offset exists and there is an intention to settle recognised amounts on a net basis. Income and expenses are not offset in the income statement unless required or permitted by any accounting standard or IFRIC interpretation, as detailed in the applicable accounting policies of the Group.

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. The functional currency of the Group’s foreign operations is the currency of the primary economic environment in which the entity operates. The assets and liabilities of all of the Group’s foreign operations are translated into sterling, the Group’s presentation currency, at the closing rate at the date of the balance sheet. The income and expenses for each income statement are translated at average exchange rates. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to a separate component of shareholders’ equity.

Standards, interpretations and amendments to published standards that are not yet effective

Certain standards, amendments and interpretations to existing standards have been published which are mandatory for the Group’s accounting periods beginning on or after 1 January 2014 or later periods but which the Group has not adopted early. Details of these are contained within Note 12 (Financial investments and investment property at fair value) and Note 44 (Subsidiaries).

Use of estimates

The preparation of the financial statements includes the use of estimates and assumptions which affect items reported in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management’s best knowledge of current circumstances and future events and actions, actual results may differ from those estimates, possibly significantly. This is particularly relevant for the determination of fair values of investment property (Note 12) and unquoted and illiquid financial investments Note 12 (v); the estimation of deferred acquisition costs (Note 11); tax balances (Note 34); and the estimation of insurance and investment contract liabilities (Notes 21 and 22). The basis of accounting for these areas, and the significant judgements used in determining them, are outlined in the respective notes to the financial statements.

Reportable segments

During the year, the Group has changed the presentation of the reportable segments to reflect changes in our organisational structure. Details of the Group’s reportable segments are included in Note 31. In accordance with the requirements of IFRS 8, ‘Operating segments’, the prior period segmental information has been restated to reflect these changes.

Consolidation principles

Subsidiary undertakings

The consolidated financial statements incorporate the assets, liabilities, equity, revenues, expenses and cash flows of the Company and of its subsidiary undertakings drawn up to 31 December each year. All intra-group balances, transactions, income and expenses are eliminated in full. Subsidiaries are those entities (including special purpose entities, mutual funds and unit trusts) over which the Group directly or indirectly has the power to govern the operating and financial policies in order to gain economic benefits (Note 44). Profits or losses of subsidiary undertakings sold or acquired during the period are included in the consolidated results up to the date of disposal or from the date of gaining control. The interests of parties, other than the Group, in investment vehicles, such as unit trusts, are classified as liabilities and appear as ‘Net asset value attributable to unit holders’ (Note 12(v)) in the consolidated balance sheet. The assets and liabilities of all of the Group’s foreign operations are translated into sterling, the Group’s presentation currency, at the closing exchange rate at the date of the balance sheet. The income and expenses for each income statement are translated at average exchange rates.

Associates and joint ventures

The Group has interests in associates and joint ventures (Note 45) which form part of an investment portfolio held through private equity partnerships, mutual funds, unit trusts and similar entities. In accordance with the choices permitted by IAS 28, ‘Investments in associates’, and IAS 31, ‘Interests in joint ventures’, these interests have been classified as fair value through profit or loss and measured at fair value within financial investments, with changes in fair value recognised in the income statement.

Associates which do not form part of an investment portfolio are initially recognised in the balance sheet at cost. The carrying amount of the associate is increased or decreased to reflect the Group’s share of the profit or loss after the date of the acquisition.

Product classification

The Group’s products are classified for accounting purposes as either insurance contracts (participating and non-participating) or investment contracts (participating and non-participating). The basis of accounting for these products is outlined in Notes 21 and 22 respectively.

Fiduciary activities

Assets associated with fiduciary activities and the income arising from those assets, together with associated commitments to return such assets to customers, are not included in these financial statements. Where the Group acts in a fiduciary capacity, for instance as a trustee or agent, it has no contractual rights over the assets concerned.

Foreign exchange and exchange rates

Foreign exchange gains and losses are recognised in the income statement, except when recognised in equity as qualifying cash flow or net investment hedges.

The year end exchange rates at 31 December 2013 are 1.66 United States Dollar, 1.20 Euro (at 31 December 2012: 1.63 United States Dollar, 1.23 Euro).

The average exchange rates for year ended 31 December 2013 are 1.57 United States Dollar, 1.18 Euro (year ended 31 December 2012: 1.58 United States Dollar, 1.23 Euro).

Changes to accounting policy – IAS 19 ‘Employee Benefits’

During 2013 the Group has changed its accounting policy on the recognition and measurement of defined benefit pension expense and termination benefits following the publication by the IASB in June 2011 of an amendment to IAS 19 ‘Employee Benefits’. This is compulsory for periods beginning on or after 1 January 2013. The impact of the amendment is to reduce profit for the year by £4m, following the allocation of the with-profit element to the unallocated divisible surplus, with an equivalent increase in other comprehensive income. The Consolidated Statement of Comprehensive Income therefore remains unchanged.

The impact of this change upon the 2012 Consolidated Income Statement, Consolidated Statement of Comprehensive Income, and Consolidated Cash Flow Statement is shown below. As the impact of the change is shown within investment variances there is no impact upon group operating profit.

(XLS:) Changes in Consolidated Income Statement, Consolidated Statement of Comprehensive Income, and Consolidated Cash Flow Statement 2012

 

2012
£m

Profit for the year as previously reported

801

Investment return

 

IAS 19 ‘Employee Benefits’ amendment

(6)

Expenses

 

Transfers to unallocated divisible surplus

3

Revised profit for the year (after tax)

798

 

 

Actuarial gain on defined benefit pension schemes

6

Actuarial gain on defined benefit pension schemes transferred to unallocated divisible surplus

(3)

Other items in other comprehensive income

(47)

Total comprehensive income for the year

754

The Consolidated Cash Flow Statement has been restated in line with these changes.

Changes to accounting policy – IFRS 13 ‘Fair Value Measurement’

On 1 January 2013 the Group adopted IFRS 13 ‘Fair Value Measurement’. This Standard defines fair value, sets out in a single IFRS framework for measuring fair value, and requires disclosure about fair value measurements. The main impact on the Group for the full year lies in the expansion of the fair value disclosure requirements, reflected in Notes 12, 22, 25 and 27.

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