Significant accounting issues.

Significant accounting issues.

The Committee considered the following significant issues in relation to the 2013 financial statements:

AREA OF JUDGEMENT

HOW THE COMMITTEE ADDRESSED THE ISSUE

The key judgements in relation to annuities are:

  • valuation interest rate – the discount rate at which annuity payments are discounted to their present value; and longevity – how long policyholders receiving annuity payments will live.

The financial results can be sensitive to changes in the valuation interest rate and the assumed credit default allowance.

Annuity liabilities are sensitive to the choice of, and changes in, the longevity assumptions.

The Committee is concerned to ensure that the investment data used for modelling insurance liabilities is correct, that credit default assumptions are appropriate and that the assumptions made in setting the credit default allowance appropriately represent the Group’s exposures and current market conditions.

The Committee considered how investment data is used to model insurance liabilities and reviewed in detail the assumptions used in calculating the credit default allowance. Assurances were received from the external auditor in relation to the controls in place for the accuracy and completeness of the data used.

The Committee studied the results of the default provision methodology by individual asset type and concluded that the total provision was appropriate.

The Committee also reviewed how the longevity assumptions are calculated, including the use of internal experience analyses and judgement, and the impact of new data set releases from the Continuous Mortality Improvement Bureau.

The Group’s investment portfolio includes Over The Counter (‘OTC’) derivatives and structured solution products such as commercial mortgages. These products are more complex than traditional investments.

The Committee is concerned to ensure that the complex process for valuation of instruments does not increase the risk that the valuation is performed inaccurately.

The Group’s investment portfolio includes Over The Counter (‘OTC’) derivatives and structured solution products such as commercial mortgages. These products are more complex than traditional investments. The Committee challenged management on the robustness of the valuation process and received assurance on the controls in place to mitigate the risk that the valuation is not performed correctly.

The Committee also considered the processes in place to identify and manage counterparty risk through the investment portfolio.

The Group made four significant acquisitions during the year. The acquisitions of Lucida Limited and Cofunds Limited during 2013 were reported as business combinations. The treatment of these acquisitions as business combinations required a number of estimates and adjustments to be made.

The Committee reviewed and considered the appropriateness of:

  • adjustments to the fair value of assets and liabilities acquired as part of each acquisition; and
  • the fair valuation of previously unrecognised identifiable intangible assets (brand name, customer relationships) and subsequent consideration.

The Committee further considered the impact of each acquisition on the Group’s key performance metrics. The Committee also considered the adequacy of the presentation of the acquisitions during the year.

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