Financial Statements

Significant accounting policies

The principal accounting policies applied in the preparation of the consolidated financial statements are set out below.

Consolidated financial statements

The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The consolidated financial statements are prepared under the historical cost convention as modified by the revaluation of available for sale financial assets, investment property, Group occupied property and financial assets and financial liabilities held for trading (which include all derivative contracts).

Except where otherwise stated, all figures included in the consolidated financial statements are presented in millions of British pounds sterling (£m), rounded to the nearest million.

Adoption of International Financial Reporting Standards

The Group adopted IFRS for the year ended 31 December 2005. Previously the Group’s consolidated financial statements were prepared in accordance with applicable UK accounting standards and the Statement of Recommended Practice issued by the Association of British Insurers in November 2003. The previously reported 2004 consolidated financial statements have been restated to comply with IFRS. The impact of the adoption of IFRS, which materially affected the consolidated financial statements, has been reflected within note 1 ‘First time adoption of IFRS’.

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Consolidation

Subsidiaries

Subsidiaries are entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group.

The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, including costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recognised as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Income Statement.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Associates

Associates are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost.

The Group’s shares of its associates’ post acquisition profits or losses are recognised in the Income Statement, and its share of post acquisition movements in reserves are recognised in reserves. The cumulative post acquisition movements are adjusted in the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

Adjustments are made, where necessary, to conform the accounting policies of associates to ensure consistency with the policies adopted by the Group.

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Selection of accounting policies

The Group exercises judgement in selecting each Group accounting policy. The accounting policies of the Group are selected by the directors to present financial statements that they consider provides the most relevant information. For certain accounting policies there are different accounting treatments that could be adopted, each of which would be in compliance with IFRS and would have a significant influence upon the basis on which the financial statements are presented. The bases of selection of the accounting policies for the accounting for financial assets and for the recognition of actuarial gains and losses related to pension obligations are set out below:

The Group accounting policy is to designate all financial assets that meet the necessary conditions as available for sale financial assets. This designation enables the Group to recognise the investment return earned on such assets in a consistent manner with the internal measures applied to measure the performance of the individual operations,
The Group accounting policy is to recognise actuarial gains and losses arising from the recognition and funding of the Group’s pension obligations in the period in which they arise. This policy has been adopted as it provides the most relevant basis of recognition of such gains and losses.

Translation of foreign currencies

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency).

The results and financial position of those Group entities whose functional currency is not British pounds sterling are translated into British pounds sterling as follows:

Assets and liabilities for each Balance Sheet presented are translated at the closing exchange rate at the date of that Balance Sheet,
Income and expenses for each Income Statement are translated at average exchange rates during each period,
All resulting exchange differences are recognised as a component of equity.

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 equity. When a foreign entity is sold, the cumulative exchange differences relating to that foreign entity are recognised in the Income Statement as part of the gain or loss on sale.

Goodwill arising on the acquisition of a foreign entity is treated as an asset of the foreign entity and the carrying value translated at the closing exchange rate.

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement.

Translation differences on non monetary items, such as equities classified as available for sale financial assets, are included in the fair value reserve in equity.

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Goodwill and other intangible assets

Goodwill, being the difference between the cost of a business acquisition and the Group’s interest in the net fair value of the identifiable assets and liabilities acquired, is initially capitalised in the Balance Sheet at cost and is subsequently recognised at cost less accumulated impairment losses. The cost of the acquisition is the amount of cash paid and the fair value of other purchase consideration given together with associated expenses. Goodwill is subject to an impairment review at least annually. If there are indications of impairment, the recoverable amount is determined. Where the carrying amount is more than the recoverable amount, an impairment is recognised.

When calculating the goodwill arising on an acquisition, claims provisions are discounted to present value. Immediately following the acquisition, the claims provisions are valued at full nominal value. This increase in liabilities is matched by the recognition of an intangible asset arising from acquired claims provisions, representing the present value of future investment income implicit in the claims discount. The intangible asset is amortised over the expected run off period and is tested in the context of the liability adequacy test of insurance liabilities where the balances of intangible assets associated with insurance contracts is deducted from the carrying amount of the insurance liabilities.

Expenditure that increases the future economic benefits arising from computer software in excess of its standard of performance assessed immediately before the expenditure was made, is recognised as an intangible asset and amortised using the straight line method over a period of three to five years.

Property and equipment

Property and equipment comprise Group occupied land and buildings, fixtures, fittings and equipment (including computer hardware and motor vehicles). These assets are depreciated over periods not exceeding their estimated useful life after taking into account residual values.

Group occupied property is stated at fair value, less subsequent depreciation for buildings. All other assets are stated at depreciated cost. Fair value movements are recorded in equity.

Fair value is based on current prices in an active market for similar property in the same location and condition and subject to similar contractual terms of ownership. Valuations are performed by external professionally qualified valuation surveyors on at least an annual basis, with reference to current market conditions.

All other classes are stated at cost less accumulated depreciation. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset only when it is probable that future economic benefits associated to the item will flow to the Group and the cost can be measured reliably.

Land is not depreciated. Depreciation on all other items is calculated on the straight line method to write down the cost of such assets to their residual value over their estimated useful lives as follows:

Group occupied buildings	normally 30 years
Fixtures and fittings	10 years
Motor vehicles	4 years
Equipment	3-5 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the Balance Sheet date.

An asset’s carrying amount is written down to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Increases in the carrying amount arising on the revaluation of Group occupied property are credited to revaluation surplus in equity. Decreases that offset the previous increases of the same asset are charged against revaluation surplus directly in equity, other decreases are charged to the Income Statement. Each year the difference between depreciation based on the fair value of the asset charged to the Income Statement and depreciation based on the assets original cost is transferred from revaluation surplus to retained earnings.

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Investment property

Investment property, comprising freehold and leasehold land and buildings, is held for long term rental yields and is not occupied by the Group.

Investment property is recorded at fair value, measured by independent professionally qualified valuers, who hold a recognised and relevant professional qualification and have recent experience in the location and category of the investment property being valued, on an annual basis or more frequently and by internal valuers for interim periods, with reference to current market conditions. Related unrealised gains and unrealised losses or changes thereof are recognised in investment income.

Financial assets

A financial asset is initially recognised, on the date the Group commits to purchase the asset, at fair value plus, in the case of all financial assets not classified as at fair value through the Income Statement, transaction costs that are directly attributable to its acquisition. A financial asset is derecognised when the rights to receive cashflows from the investment have expired or have been transferred and the Group has also transferred substantially the risks and rewards of ownership of the asset.

On initial recognition, the financial assets are categorised into the following categories: financial assets at fair value through the Income Statement, loans and receivables, held to maturity financial assets and available for sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition.

The Group designates its financial assets as available for sale financial assets on initial recognition of a financial asset. On subsequent measurement, investments are measured at fair value with changes in fair value recognised in equity. Where the cumulative changes recognised in equity represent an unrealised loss the individual asset or group of assets is reviewed to test whether an indication of impairment exists.

For securities whose fair values are readily determined and where there is objective evidence that such an asset is impaired, including a significant or prolonged decline in the fair value below cost, the unrealised loss charged to equity is reclassified to the Income Statement.

If the fair value of a previously impaired debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed and the reversal recognised in the Income Statement. Impairment losses on equity investments are not reversed.

Investment income is recognised in the Income Statement. Dividends on equity investments are recognised on the date at which the investment is priced ‘ex dividend’. Interest income is recognised using the effective interest method. Unrealised gains and losses on available for sale investments are recognised directly in equity, except for impairment losses and foreign exchange gains and losses on monetary items (which are recognised in the Income Statement). On derecognition of an investment, the cumulative gain or loss previously recognised in equity is recognised in the Income Statement.

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Derivative financial instruments

Derivatives are recognised in the Balance Sheet on a trade date basis and are carried at fair value. Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the item being hedged.

Hedging

Transactions are classified as hedging transactions when the following conditions for hedge accounting are met:

There is a formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge,
The hedge is expected to be highly effective in achieving offsetting changes in fair value or cashflows attributable to the hedged risk, consistently with the originally documented risk management strategy for that particular hedging relationship,
The effectiveness of the hedge can be reliably measured,
For cashflow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cashflows that could ultimately affect profit or loss,
The hedge is assessed on an ongoing basis and determined to have been highly effective.

Where loan capital is designated as the hedging instrument against the net investment in foreign entities, the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the Income Statement. Gains and losses accumulated in equity are included in the Income Statement when the underlying hedged item is derecognised.

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Estimation of the fair value of financial assets and liabilities

The methods and assumptions used by the Group in estimating the fair value of financial assets and liabilities are:

For fixed maturity securities, fair values are generally based upon quoted market prices. Where market prices are not readily available, fair values are estimated using either values obtained from quoted market prices of comparable securities or estimated by discounting expected future cashflows using a current market rate applicable to the yield, credit quality and maturity of the investment,
For equity securities fair values are based upon quoted market prices,
If the market for a financial asset is not active, the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cashflow analysis and option pricing models,
For mortgage loans on real estate and collateral loans, fair values are estimated using discounted cashflow calculations based upon prevailing market rates,
For cash, short term investments, commercial paper, other assets, liabilities and accruals carrying amounts approximate to fair values,
For notes, bonds and loans payable, fair values are determined by reference to quoted market prices or estimated using discounted cashflow calculations based upon prevailing market rates. Loan capital is carried at amortised cost and when this is different from fair value this is shown in the relevant note. Fair value in this case is based on discounted future cashflows. For borrowings that carry a variable rate of interest (other than loan capital), carrying values approximate to fair values,
For derivatives, fair values are generally based upon quoted market prices.

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Insurance contracts

Product classification

Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Insurance risk is transferred when the Group agrees to compensate a policyholder if a specified uncertain future event (other than a change in a financial variable) adversely affects the policyholder. Any contracts not meeting the definition of an insurance contract under IFRS are classified as investment contracts or derivative contracts, as appropriate.

Recognition of income

Premiums written are accounted for in the period in which the contract is entered into and include estimates where the amounts are not determined at the Balance Sheet date. Premiums written exclude taxes and duties levied on premiums and directly related expenses eg commissions. Premiums are earned as revenue over the period of the contract and are calculated principally on a daily pro rata basis.

Acquisition costs

Acquisition costs comprise the direct and indirect costs of obtaining and processing new insurance business. These costs are recognised as a deferred acquisition cost asset and amortised on the same basis as the related premiums are earned.

Insurance liabilities

The provision for unearned premium represents the portion of the premiums written relating to periods of insurance coverage subsequent to the Balance Sheet date.

The provisions for claims outstanding, whether reported or not, comprises the estimated cost of claims incurred but not settled at the Balance Sheet date. It includes related expenses and a deduction for the expected value of salvage and other recoveries. The provision is determined using the best information available of claims settlement patterns, forecast inflation and settlement of claims.

The provisions for claims outstanding, and related reinsurance recoveries, are discounted where there is a particularly long period from incident to claims settlement and where there exists a suitable claims payment pattern from which to calculate the discount. In defining those claims with a long period from incident to claims settlement, those categories of claims where the average period of settlement is six years or more from the Balance Sheet date, has been used as a guide. The discount rate used is based upon an investment return expected to be earned by assets, which are appropriate in magnitude and nature to cover the provisions for claims outstanding being discounted, during the period necessary for the payment of such claims.

The provisions for claims outstanding relating to long term permanent disability claims in the US, Canada and Scandinavia are determined using recognised actuarial methods.

Differences between the estimated cost and subsequent settlement of claims are recognised in the Income Statement in the year in which they are settled or in which the provisions for claims outstanding are re-estimated.

At each Balance Sheet date an assessment is made of whether the provisions for unearned premiums are adequate. A separate provision is made, based on information available at the Balance Sheet date, for any estimated future underwriting losses relating to unexpired risks.

The provision is calculated after taking into account future investment income that is expected to be earned from the assets backing the provisions for unearned premiums (net of deferred acquisition costs). The unexpired risk provision is assessed in aggregate for business classes which, in the opinion of the directors, are managed together.

Reinsurance ceded

Premiums payable in respect of reinsurance ceded, are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not determined at the Balance Sheet date. Premiums are expensed over the period of the reinsurance contract, calculated principally on a daily pro rata basis.

A reinsurance asset, (reinsurers’ share of insurance liabilities) is recognised to reflect the amount estimated to be recoverable under the reinsurance contracts in respect of the outstanding claims reported under insurance liabilities. The amount recoverable from reinsurers is initially valued on the same basis as the underlying claims provision. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Group may not receive all amounts due under the contract and the event has a reliably measurable impact on the expected amount that will be recovered from the reinsurer.

The reinsurers’ shares of each unexpired risk provision is recognised on the same basis.

Annuities purchased by the Group to make payments under structured settlement arrangements are accounted for as reinsurance ceded if the Group remains liable for the settlement in the event of default by the annuity provider. Any gain or loss arising on the purchase of an annuity is recognised in the Income Statement at the date of purchase.

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Cash and cash equivalents

Cash and cash equivalents are short term, highly liquid investments that are subject to insignificant changes in value and are readily convertible into known amounts of cash. Cash equivalents comprise financial assets with less than three months maturity from the date of acquisition.

Treasury shares

Treasury shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the treasury shares. Any consideration paid or received is recognised directly in equity.

Loan capital

Loan capital comprises subordinated bonds which are stated at the consideration received less transaction costs. Subsequently, it is measured at amortised cost using the effective interest rate method.

Taxation

Taxation in the Income Statement is based on profits and income for the year as determined in accordance with the relevant tax legislation, together with adjustments to provisions for prior years. UK tax in respect of overseas subsidiaries and principal associated undertakings is recognised as an expense in the year in which the profits arise, except where the remittance of earnings can be controlled and it is probable that remittance will not take place in the foreseeable future, in which case UK tax is based on dividends received.

Deferred tax is provided in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and the carrying amounts in the financial statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the Balance Sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised.

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Employee benefits

Pension obligations

Group companies operate various pension schemes. The schemes are generally funded through payments to trustee administered funds, determined by periodic actuarial calculations. The Group has both defined contribution and defined benefit schemes. A defined contribution scheme is a pension scheme under which the Group pays fixed contributions into a separate entity. A defined benefit scheme is a pension scheme that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary.

Post retirement benefits (including pension schemes and post retirement health schemes)

Contributions to defined contribution pension schemes are charged in the period in which the employment services qualifying for the benefit are provided. The Group has no further payment obligations once the contributions have been paid.

The amounts charged (or credited where relevant) in the Income Statement relating to post retirement benefits in respect of defined benefit schemes are as follows:

The current service cost,
The past service costs for additional benefits granted in the current or earlier periods,
The interest cost for the period,
The impact of any curtailments or settlements during the period,
The expected return on scheme assets (where relevant).

The current service cost in respect of defined benefit schemes comprises the present value of the additional benefits attributable to employees’ services provided during the period.

The present value of defined benefit obligations and the present values of additional benefits accruing during the period are calculated using the Projected Unit Credit Method.

Past service costs arise where additional benefits are granted. The cost of providing additional benefits is recognised on a straight line basis over the remaining period of service until such benefits vest. The cost of providing additional benefits that vest on their introduction are recognised immediately.

The calculation of the present value of accrued benefits includes an actuarial assumption of future interest rates, which is used to discount the expected ultimate cost of providing the benefits. The discount rate is determined at each Balance Sheet date by reference to current market yields on high quality corporate bonds identified to match the currency and estimated term of the obligations. The interest cost for the period is calculated by multiplying the discount rate determined at the start of the period by the defined benefit obligations during the period.

The change in the present value of the defined benefit obligation and the changes in the fair value of scheme assets resulting from any curtailments and settlements of scheme liabilities during the period are recognised in the Income Statement. Additionally, any previously unrecognised past service costs related to these liabilities are recognised in the gains or losses on settlement and curtailment.

The expected return on scheme assets is calculated using market expectations, at the beginning of the period, of the investment returns on scheme assets over the entire life of the related obligations.

Actuarial gains and losses arise from changes to actuarial assumptions when revaluing future benefits and from actual experience in respect of scheme liabilities and investment performance of scheme assets being different from previous assumptions. Actuarial gains and losses are recognised as a component of equity.

The value recognised in the Balance Sheet for each individual post retirement scheme is calculated as follows:

The present value of defined benefit obligation of the scheme at the Balance Sheet date,
Minus any past service cost not yet recognised,
Minus the fair value at the Balance Sheet date of the scheme assets out of which the obligations are to be settled directly.

Termination benefits

Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the Balance Sheet date are discounted to present value.

Share based payment

The value of the employee share options and other equity settled share based payments is calculated at fair value at the grant date using appropriate and recognised option pricing models. The value of liabilities in respect of cash settled share based payment transactions are based upon the fair value of the awards at the Balance Sheet date.

Vesting conditions, other than those based upon market conditions, are not taken into account when estimating the fair value of such awards but are taken into account by adjusting the number of equity instruments included in the ultimate measurement of the transaction amount. The value of the awards are recognised as an expense on a systematic basis over the period during which the employment services are provided. The proceeds received net of any transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

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Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Dividends to equity holders

The final dividend is recognised as a liability when approved at the Annual General Meeting. The interim dividend is recognised as a liability when announced.

Leases

Rental income from operating leases is recognised on a straight line basis over the term of the lease. Payments made under operating leases are charged on a straight line basis over the term of the lease.

Non current assets and operations held for sale and discontinued operations

Non current assets and operations are classified as held for sale if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use. Such assets are measured at the lower of carrying amount and fair value less costs to sell and are classified separately from other assets in the Balance Sheet. Assets and liabilities are not netted. Discontinued operations are presented on the face of the Income Statement as a single amount comprising the total of the net profit or loss of discontinued operations and the after tax gain or loss recognised on the sale or the measurement to fair value less costs to sell of the net assets constituting the discontinued operations. In the period where an operation is presented for the first time as discontinued, the Income Statement for the comparative prior period presented is restated to present that operation as discontinued.

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Accounting policies of discontinued life operations

The Group disposed of its life insurance businesses during 2004. The accounting policies specific to these life insurance businesses and applied in addition to the policies stated above in the measurement of assets and liabilities of the life insurance business and its results to the date of disposal are set out below:

Recognition of income

Premiums and annuity considerations arising from insurance contracts are accounted for when due. Premiums are shown before deduction of commission and are gross of any taxes or duties levied with premiums.

For single premium contracts, premiums are recorded as income when due with any excess profit deferred and recognised in income in a constant relationship to the insurance in force or, for annuities, the amount of expected benefit payments.

Investment contracts

Amounts collected for investment contracts, which principally involve the transfer of financial risk such as long term savings contracts are accounted for using deposit accounting, under which the amounts collected are credited directly to the Balance Sheet as an adjustment to the liability to the policyholder. Where a contract contains both financial and insurance risk, the proportion of any premium relating to the insurance risk element of the contract is accounted for through income and the remaining financial risk element is accounted for using deposit accounting.

Revenues from investment contracts consist of charges assessed for mortality, fees for contract administration, surrenders and withdrawals and investment income earned on contract balances. Contract charges and fees revenues are recognised in the year they are assessed unless they relate to services to be provided in future years. Such deferred revenue is recognised as the service is provided.

Insurance contracts and investment contracts with Discretionary Participation Features

The Group sold certain contracts where the contract holders have a contingent interest in the excess of the value of specific Group assets over the value of specific Group liabilities. This interest derives from contractual rights to receive from this excess, additional benefits, the timing and the amount of which are at the discretion of the Group. The allocation of the excess between shareholders and contract holders is not determined at the Balance Sheet. This excess at the Balance Sheet date is recognised as an additional liability. Changes in the fair value of this liability is recognised in the Income Statement.

Deferred acquisition costs (DAC)

For long term insurance business, principally life insurance and annuity contracts, DAC is amortised over the year in which the costs are expected to be recovered out of estimated margins in matching revenues from the related policies. The rate of amortisation is consistent with the pattern of estimated margins.

Insurance and financial liabilities in respect of Unit Linked contracts

The liabilities arising under Unit Linked contracts are measured at a value determined by the value of the underlying assets in the investment fund established by the Group. Changes in the fair value of these liabilities are recognised in the Income Statement.

Financial assets

The Group holds financial assets in specific funds backing the liabilities arising from insurance and investment contracts where the contract holders are entitled to participate in the investment performance of the fund. On initial recognition, the Group designates such investments as financial assets at fair value through the Income Statement and measures each financial asset at fair value. After initial recognition, the financial assets are remeasured at fair value with changes in the fair value recognised in the Income Statement.

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Current and non current distinction

Assets are classified as current when expected to be realised within the Group’s normal operating cycle of one year. Liabilities are classified as current when expected to be settled within the Group’s normal operating cycle of one year. All other assets and liabilities are classified as non current.

The Group’s consolidated Balance Sheet is not presented using a current/non current classification. However, the following balances are generally classified as current: cash and cash equivalents; deferred acquisition costs; and insurance and reinsurance debtors.

The following balances are generally classified as non current: goodwill and other intangible assets; property and equipment; investment property; investment in associates; financial assets; deferred tax assets; loan capital; and deferred tax liabilities.

The remaining balances are of a mixed nature. The current and non current portions of such balances have been set out in the respective notes.

Recently issued accounting pronouncements adopted early by the Group

On 16 December 2004, the International Accounting Standards Board (IASB) issued an amendment to International Accounting Standard (IAS) 19 ‘Employee Benefits Actuarial Gains and Losses, Group Plan and Disclosures’. Before this amendment, IAS 19 required actuarial gains and losses to be recognised in the Income Statement. For the Group, the other significant changes introduced by the amendment relate to additional disclosures. The amendment has been adopted by the EU and is effective for periods beginning 1 January 2006. The Group believes that the amendment provides a more relevant basis of recognition of actuarial gains and losses and has adopted the amendment from the date of transition to IFRS.

Recently issued accounting pronouncements not yet adopted by the Group

Below are listed the developments that are relevant in the future to the Group’s future financial reporting. The Group does not anticipate that any of these developments will have a material impact on the Group’s financial condition or results of its operations.

On 14 April 2005, the IASB issued an Amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement – Cashflow Hedge Accounting of Forecast Intragroup Transactions’. The Amendment allows the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in consolidated financial statements. The Amendment has been adopted by the EU and is effective for periods beginning 1 January 2006.

On 16 June 2005, the IASB issued an Amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement – The Fair Value Option’. The Amendment addresses concerns that the fair value option might be used inappropriately. The Amendment has been adopted by the EU and is effective for periods beginning 1 January 2006.

On 18 August 2005, the IASB issued an Amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement – Financial Guarantee Contracts’. The Amendment is intended to ensure that the issuer of financial guarantee contracts includes the resulting liabilities in its Balance Sheet. The Amendment defines a financial guarantee contract as a ‘contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.’ The Amendment has been adopted by the EU and is effective for periods beginning 1 January 2006.

On 18 August 2005, the IASB issued IFRS 7 ‘Financial Instruments: Disclosures’ and a complementary Amendment to IAS 1 ‘Presentation of Financial Statements – Capital Disclosures’. IFRS 7 requires disclosures about the significance of financial instruments for an entity’s financial position and performance. These disclosures incorporate many of the requirements previously in IAS 32. IFRS 7 also requires information about the extent to which the Group is exposed to risks arising from financial instruments, and a description of management’s objectives, policies and processes for managing those risks. The Amendment to IAS 1 introduces requirements for disclosures about an entity’s capital. IFRS 7 and the Amendment to IAS 1 have been adopted by the EU and are effective for periods beginning 1 January 2007.

On 15 December 2005, the IASB issued a limited Amendment to IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’. The Amendment clarifies the requirements of IAS 21 regarding an entity’s investment in foreign operations. The limited Amendment to IAS 21 has not yet been adopted by the EU.

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