FRS 103 Insurance (Ireland) Limited.

Transcription

1 FRS 103 Insurance (Ireland) Limited. FRS 103 Insurance (Ireland) Limited Illustrative financial statements and selected disclosures for the financial year ended 31 December September Leading business advisers Page 1

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3 FOREWORD The purpose of this document is to illustrate example disclosures typically expected to be found within a set of financial statements for a non life general insurance company reporting under Irish GAAP (FRS 102 & 103). The disclosures are not model disclosures but rather an indication of the type of disclosure required. The aim is not to cover every potential disclosure, but to illustrate the more commonly applicable ones and not purely standards derived formats but those typically adopted by Irish insurance companies. But users must proceed with caution. This document is not, and does not purport to be, a complete set of financial statements rather it aims to illustrate disclosures specific to a non life general insurance company, in particular those relating to insurance contracts and financial instruments. Other general disclosures are illustrated in the FRS 102 Company (Ireland) Limited statements. Companies preparing financial statements under FRS 102/103 also need to be mindful of the impact of the Companies Act which comes into effect on 1 June. The key impacts on preparation of and presentation in financial statements include terminology and citation changes, information in the Directors Report and Directors responsibility statement, comparative disclosures, audit report wording and disclosures of Directors remuneration and transactions with the company. These financial statements do not intend to cover all requirements of the Companies Act. One criticism of current reporting is that companies are providing generic descriptions rather than incisive bespoke commentary in areas such as reporting risks and uncertainties, accounting policies and discussing the future outlook for the business. Preparers should adapt disclosures to their own specific circumstances. Consequently, the following illustrative Irish GAAP disclosures are included by way of example only and do not necessarily represent the only disclosures, nor an exhaustive set, which may be appropriate for particular insurance contracts and financial instruments and do not cover all that may be used in practice. Furthermore, disclosures derived from local laws or regulation are not exhaustively shown. However, for reference, typical accounting policies are shown. Owing to the pervasive nature of the reporting standard for insurance contracts (FRS 103), financial instruments (Sections 11 & 12 of FRS 102) and disclosures thereof, a number of disclosures will be affected throughout a set of financial statements. The amount of disclosure will depend on the underlying business, the extent and complexity of financial instruments and insurance contracts, and how they are managed. to the underlying regulation and reporting standards will be required in most situations. The reader is directed to the relevant paragraph/section within the reporting standards by way of reference. The wording used is derived by reference to financial statements of Irish insurance companies and is purely illustrative. It will need to be modified to reflect the particular circumstances of an entity. The disclosures are based on standards in force as at 1 January which are effective for financial years beginning on or after 1 January. Given the ongoing revision of IFRS standards, in particular IFRS 4, there may be further changes to FRS 102 & 103 which require consideration for December 2016 financial year ends and onwards. In addition, the interpretation of the standards will continue to evolve over time. Glenn Gillard September Page 3

4 Abbreviations Examples of abbreviations are: App BC FRS Appendix Basis for Conclusions Reporting Standard 94 Regs European Communities (Non-Life Insurance) Framework Regulations, (S.I. 359/1994) 15 Regs European Union (Insurance Undertakings: Statement) Regulations, (S.I. 262/) ED IAS NS Exposure Draft International Accounting Standard Not Shown Page 4

5 Points To Note: As noted in the foreword, these draft financial statements do not purport to be a full set of financial statements. Sections of FRS 102/103 dealt with in these financial statements include: Insurance contracts Instruments Related Party Disclosures Investments in Subsidiaries Goodwill Tangible Fixed Assets (excluding Land & Buildings) Leases Sections of FRS 102 excluded from these financial statements include: Share Based Payments Consolidation Discontinued Activities Defined Benefit Pension Schemes Business Combinations Investment Properties External Borrowings Land & Buildings Page 5

6 Getting Started- Required Decisions: Page 6

7 FRS 103 Insurance (Ireland) Limited Contents Technical Profit and Loss Account Non Life Insurance 9 Non Technical Profit and Loss Account 10 Balance Sheet 11 Statement of Cash Flows 13 Statement of Changes in Equity The following list of notes in this publication is included for ease of reference 1. General information Significant Accounting Policies Critical accounting judgments and key sources of estimation uncertainty Segmental Information Net Investment Return Net Operating Expenses Directors Remuneration Tax on profit on ordinary activities Profit for the financial year Employee Information Goodwill and Other Intangible Assets Tangible Fixed Assets Movement in Shareholders Funds Investment in Subsidiaries Instruments Derivative Instruments Debtors arising out of Insurance operations Debtors arising out of Reinsurance operations Other Debtors Technical Provisions Provisions Creditors arising out of Insurance Operations Creditors arising out of Reinsurance Operations Other Creditors Called up share capital and reserves Retirement benefit schemes Notes to the cash flow statement Capital Management Equalisation Provision risk management Insurance risk management Explanation of Transition to FRS102 and Subsequent Events Related Party Transactions Lease commitments 59 Page 7

8 Appendix 1 Technical Account General Business For the financial year ended 31 December Presentation of financial statements FRS 102 & 103 are Irish GAAP Standards. As such accounts prepared in accordance with FRS 102/103 must be compliant with Irish Company legislation. The presentation of the balance sheet and profit and loss accounts of Irish insurance companies is guided by SI 262/ European Union (Insurance Undertakings: Statements) Regulations. The format of the profit and loss accounts and balance sheet is set out in Schedule 1, of SI 282/. The regulations require the profit and loss account to be split between a technical and non technical account with separate layouts for general and life assurance technical accounts. Format of accounts 6. (1) Subject to the provisions of this Regulation: (a) every balance sheet of an undertaking shall show the items listed in the balance sheet format set out in Chapter 2 of Part I of the Schedule, and (b) every profit and loss account of an undertaking shall show the items listed in the profit and loss account format so set out, in the order and under the headings and sub-headings given in the format concerned. There are other headings within Chapter 2 of the regulations which are not shown in these accounts due to the nature of the company s business. Reduced Disclosures As set out in Section 1.8 of FRS 102 a qualifying entity which is not a financial institution may take advantage of the disclosure exemptions set out in paragraph A qualifying entity is defined in the Glossary to FRS 102 as A member of a group where the parent of that group prepares publicly available consolidated financial statements which are intended to give a true and fair view (of the assets, liabilities, financial position and profit or loss) and that member is included in the consolidation. A financial institution is defined in the Glossary of FRS 102. As per point (e) of the definition, insurance/reinsurance entities clearly meet the definition of financial institutions and therefore cannot avail of the full exemptions contained in paragraph 1.12 of FRS 102. Paragraph 1.9 of FRS 102 goes on to state, a qualifying entity which is a financial institution may take advantage in its individual financial statements of the disclosure exemptions set out in paragraph 1.12, except for the disclosure exemptions from Section 11 and Section 12 Other Instruments Issues. In effect this means insurance/reinsurance entities, who meet the criteria of a qualifying entity set out above, have to make the disclosures required by sections 11 & 12 of FRS however they may take advantage of the following disclosure exemptions (set out in paragraph 1.12): (a) The requirements of Section 4 Statement of Position paragraph 4.12(a) (iv). (b) The requirements of Section 7 Statement of Cash Flows and Section 3 Statement Presentation paragraph 3.17(d). (c) The requirements of Section 26 Share-based Payment paragraphs 26.18(b), to and 26.23, provided that for a qualifying entity that is: (i) a subsidiary, the share-based payment arrangement concerns equity instruments of another group entity; (ii) an ultimate parent, the share-based payment arrangement concerns its own equity instruments and its separate financial statements are presented alongside the consolidated financial statements of the group; and, in both cases, provided that the equivalent disclosures required by this FRS are included in the consolidated financial statements of the group in which the entity is consolidated. (d) The requirement of Section 33 Related Party Disclosures paragraph Page 8

9 Technical Profit and Loss Account Non Life Insurance For the financial year ended 31 December SI 262/ Chapter 2 Earned Premiums, net of reinsurance Notes Year ended Gross written premiums 4 27,800 FRS 102 Outwards reinsurance premiums 4 (21,871) S.5.1 Net premiums written 5,929 Year ended Change in the gross provision for unearned premiums 20 (1,840) Change in the provision for unearned premiums, reinsurers share 20 1,412 Change in the net provision for unearned premiums (428) Earned premiums, net of reinsurance 5,501 Allocated investment return transferred from the non-technical account 702 Other technical income, net of reinsurance 27 Total technical income 6,230 Claims incurred, net of reinsurance Claims paid 4 - Gross amount (9,456) - Reinsurers share 7,541 (1,915) Change in the provision for claims 20 - Gross amount (3,832) - Reinsurers share 3,012 (820) Claims incurred, net of reinsurance (2,735) Net operating expenses 6 (1,599) Other technical charges net of reinsurance (200) Change in equalisation provision 20,29 (423) Balance on the technical account for non-life insurance business 1,273 Page 9

10 Non Technical Profit and Loss Account For the financial year ended 31 December Notes Year ended FRS 102 S.5 Balance on the technical account- non life insurance business 1,273 Year ended Investment income 5 - Income from other investments Gains on the realisation of investments 98 Unrealised gains on investments Investment charges 5 - Investment management expenses (103) Allocated investment return transferred to the insurance technical account (702) Foreign Exchange Loss (116) Profit or loss on ordinary activities before tax 1,391 Taxation on profit on ordinary activities 8 (184) Profit or Loss for the financial year 1,207 All amounts arise from continuing activities. There were no recognised gains or losses other than those included in the profit and loss account. The accompanying notes form an integral part of the financial statements. The financial statements were approved by the Board of Directors and authorised for issue on [date]. Statement of Comprehensive Income ( SOCI ) FRS 102 S 5.2 In this Company, the financial instruments follow Section 11 Basic Instruments and Section 12 Other Instruments of FRS 102. As a result of the accounting policies elected, this company has no items that go through Other Comprehensive Income. However, if a company elected to adopt IAS 39 Instruments: Recognition and Measurement and had available-for-sale investments, then it would need to consider the impact on Other Comprehensive Income and the presentation would need to reflect the requirements of Section 5.2 of FRS 102 and Section 52.1 Fair Value Reserve of Statutory Instrument No.262/ European Union (Insurance Undertakings: Statements) Regulations. Page 10

11 Balance Sheet as at 31 December : Year Year FRS 102 ASSETS Notes ended ended S.4.1 Intangible assets Goodwill and other intangible assets 11 12,043 Investments Investment in Subsidiaries 14 5,000 Other financial investments Shares and other variable yield securities and units in unit trusts 15 9,854 Debt securities and other fixed income securities 15 8,623 Derivative assets 16 1,232 Loans and receivables 15 4,927 24,636 Reinsurer s share of technical provisions Provision for unearned premiums 20 13,561 Claims outstanding 20 30,834 Equalisation provision 20,29-44,395 Debtors Debtors arising out of insurance operations 17 3,045 Debtors arising out of reinsurance operations 18 5,421 Other debtors 19 1,546 10,012 Other assets Tangible fixed assets Cash at bank and in hand 3,986 Deferred Tax Asset 35 5,004 Prepayments and accrued income Accrued interest 58 Deferred Acquisition costs 2,238 Other prepayments and accrued income 345 2,641 Total Assets 103,731 Page 11

12 Balance Sheet as at 31 December EQUITY AND LIABILITIES Notes Year ended Year ended Capital and reserves Called up share capital presented as equity 25 10,000 Share premium account 3,000 Profit and loss account brought forward 5,672 Profit and loss account for the financial year 707 Shareholder s funds 19,379 Technical provisions Provision for unearned premiums 20 17,859 Claims outstanding 20 39,281 Equalisation provision 20,29 2,300 59,440 Provisions for other risks and charges Provisions for taxation 200 Other provisions 21 1,834 2,034 Deposits received from reinsurers 5,436 Creditors Creditors arising out of direct insurance operations 22 5,400 Creditors arising out of reinsurance operations 23 7,118 Other creditors including taxation and social welfare 24 1,248 Derivative liabilities 16 1,023 14,789 Accruals and deferred income 2,653 Total liabilities and Shareholders equity 103,731 The accompanying notes form an integral part of the financial statements. The financial statements were approved by the Board of Directors and authorised for issue on [date]. They were signed on its behalf by: [Signature] [Signature] Director Director Page 12

13 Statement of Cash Flows as at 31 December Year Year Notes ended ended FRS 102 Net cash from operating activities 27 S 7.4 FRS 102 Cash flows from investing activities S 7.5 Proceeds from sale of equipment Purchase of equipment Dividend received Interest received Disposal of subsidiary Purchase of investments Acquisition of subsidiary Net cash flows from investing activities FRS 102 Cash flows from financing activities S 7.6 Dividends paid Interest paid Repayments of obligations under finance lease New bank loans raised Net cash flows from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of financial year FRS 102 Effect of foreign exchange rate changes S 7.13 Cash and cash equivalents at end of financial year Reconciliation to cash at bank and in hand Cash at bank and in hand at end of financial year Cash equivalents Cash and cash equivalents at end of financial year Page 13

14 Statement of cash flows FRS 102 S7.1 The basic requirement of section 7 of FRS 102 is that a statement of cash flows should be presented providing information about the changes in cash and cash equivalents of an entity for a reporting period, showing separately changes from operating, investing and financing activities. The sub-headings under which operating, investing and financing activities should be broken out into is set out in Sections 7.4, 7.5 and 7.6 respectively. The above example statement of cash flows has been prepared in accordance with the Indirect method set out in S7.8. Guidance around the direct method is included in S7.9 As noted at the start of these financial statements, an insurance entity which meets the definition of a Qualifying Entity may avail of the exemption from having to prepare a statement of cash flows as set out in para 1.12(b) of FRS 102. Page 14

15 Statement of Changes in Equity as at 31 December : FRS 102 S 6.23 Called-up share capital Share Premium Account Profit and loss account Total At 31 December 2013 as previously stated Changes on transition to FRS 102/103 (Note 32) At 1 January as restated Profit for the financial year Issue of share capital Dividends paid on equity shares At 31 December 10,000 3,000 5,672 18,672 Profit for the financial year - - 1,207 1,207 Issue of share capital Dividends paid on equity shares - - (500) (500) At 31 December 10,000 3,000 6,379 19,379 Reconciliation of changes in Equity FRS 102 S35 As set out in section 35.13(b) of FRS 102 a reconciliation of equity determined in accordance with its previous financial reporting framework to its equity determined in accordance with FRS 102 is required as of the date of transition to FRS 102 and the end of the latest period presented in the entity s most recent annual financial statements determined in accordance with its previous financial reporting framework. This reconciliation is included in note 32 to the financial statements. Page 15

16 Notes to the consolidated financial statements At 31 December 1. General information FRS 103 Insurance (Ireland) Limited is a company incorporated in Ireland authorised by the Central Bank of Ireland to carry out non life insurance business. The address of the registered office is given on page ns. The nature of the Company s operations and its principal activities are set out in the operating and financial review on pages ns to ns. 2. Significant accounting policies (: FRS 102, S(10)) The following are examples of the types of accounting policies that might be disclosed in this entity s financial statements. Section 10 of FRS 102 sets out the principles to be applied when companies are setting their accounting policies and also the disclosures required. (: FRS ) If an FRS or FRC Abstract specifically addresses a transaction, other event or condition, an entity shall apply that FRS or FRC Abstract. However, the entity need not follow a requirement in an FRS or FRC Abstract if the effect of doing so would not be material. (: FRS ) If an FRS or FRC Abstract does not specifically address a transaction, other event or condition, an entity s management shall use its judgment in developing and applying an accounting policy that results in information that is: a) relevant to the economic decision-making needs of users; and b) reliable, in that the financial statements: i) represent faithfully the financial position, financial performance and cash flows of the entity; ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form; iii) are neutral, i.e. free from bias; iv) are prudent; and v) are complete in all material respects. (: FRS ) In making the judgment described in paragraph 10.4, management shall refer to and consider the applicability of the following sources in descending order: a) the requirements and guidance in an FRS or FRC Abstract dealing with similar and related issues; b) where an entity s financial statements are within the scope of a Statement of Recommended Practice (SORP) the requirements and guidance in that SORP dealing with similar and related issues; and c) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 Concepts and Pervasive Principles. In making the judgment described in paragraph 10.4, management may also consider the requirements and guidance in EU-adopted IFRS dealing with similar and related issues. Paragraphs 1.4 to 1.7 require certain entities to apply IAS 33 Earnings per Share (as adopted in the EU), IFRS 8 Operating Segments (as adopted in the EU) or IFRS 6 Exploration for and Evaluation of Mineral Resources. (: FRS ) Entities are required to disclose in the summary of significant accounting policies (a) the measurement basis (or bases) used in preparing the financial statements; and (b) the other accounting policies used that are relevant to an understanding of the financial statements. An accounting policy may be significant because of the nature of the entity s operations even if amounts for the current and prior periods are not material. Paragraph 2.3 of FRS103 permits entities to change their accounting policies, either on adoption of this FRS or subsequently, providing the new accounting policies meet certain criteria. Entities that are setting accounting policies in relation to insurance contracts, or other financial instruments with discretionary participation features, for the first time, shall first consider the requirements of Section 3 of FRS 103, the Regulations and any relevant parts of FRS 102, as a means of establishing current practice as a benchmark before assessing whether to set accounting policies that differ from those benchmark policies in accordance with paragraph 2.3. The Implementation Guidance accompanying FRS 103 also provides guidance. 2.1 Basis of accounting The financial statements have been prepared under the historical cost convention, modified to include certain items at fair value, and in accordance with Reporting Standards 102 & 103 (FRS 102 & 103) issued by the Reporting Council, and promulgated for use in Ireland by Chartered Accountants Ireland. The company is also subject to the requirements of the Companies Acts and the European Union (Insurance Undertakings: Statements) Regulations,. The prior financial year financial statements were restated for material adjustments on adoption of FRS 102 & 103 in the current financial year. For more information see note XX. In accordance with FRS 103, the Company has applied existing accounting policies for insurance contracts. Page 16

17 At 31 December The Company s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business Review which forms part of the directors report. The directors report also describes the financial position of the Company; its cash flows, liquidity position and borrowing facilities; the Company s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk. The directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. The company has availed of the exemption under section 299 (300) of the Companies Act from the obligation to prepare group financial statements. These financial statements represent the results of the company only and do not contain consolidated information as a parent of a group. The company is consolidated into the Group Accounts of its ultimate parent company, XYZ Holdings Limited, incorporated in Ireland. 2.2 Foreign currencies The presentation currency of the Company is Euro. The financial statements of the company are presented in the currency of the primary economic environment in which it operates (its functional currency). (: FRS 102, section 30.2) In preparing the financial statements, transactions in currencies other than the entity s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognised in profit or loss in the period in which they arise except when they relate to items for which gains and losses are recognised in equity. (: FRS 102, section 30) The following additional factors are considered in determining the functional currency of a foreign operation, and whether its functional currency is the same as that of the reporting entity (the reporting entity, in this context, being the entity that has the foreign operation as its subsidiary, branch, associate or joint venture): a) Whether the activities of the foreign operation are carried out as an extension of the reporting entity, rather than being carried out with a significant degree of autonomy. An example of the former is when the foreign operation only sells goods imported from the reporting entity and remits the proceeds to it. An example of the latter is when the operation accumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings, all substantially in its local currency. b) Whether transactions with the reporting entity are a high or a low proportion of the foreign operation s activities. c) Whether cash flows from the activities of the foreign operation directly affect the cash flows of the reporting entity and are readily available for remittance to it. d) Whether cash flows from the activities of the foreign operation are sufficient to service existing and normally expected debt obligations without funds being made available by the reporting entity. The results of overseas operations are translated at the average rates of exchange during a period and their balance sheets at the rates ruling at the balance sheet date. At each balance sheet date, monetary assets (e.g. investments) and liabilities (e.g. outstanding claims) that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items (e.g. unearned premium reserves and reinsurers share of unearned premium reserves and deferred expenses) that are measured in terms of historical cost in a foreign currency are not retranslated. Hence, a mismatch occurs and results and loss ratios of foreign currency denominated portfolios of business may be distorted by movements in exchange rates. (: FRS 102, section 30.5) For the purposes of applying the requirements of Section 30 Foreign Currency Translation of FRS 102 an entity shall treat all assets and liabilities arising from an insurance contract as monetary items. (: FRS ) 2.3 Insurance classification The Company s contracts are classified at inception, for accounting purposes, as insurance contracts. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. Insurance contracts are those contracts that transfer significant insurance risk, if and only if, an insured event could cause an insurer to make significant additional benefits in any scenario, excluding scenarios that lack commercial substance. Such contracts may also transfer financial risk. (: FRS , 4.5) Page 17

18 At 31 December 2.4 Revenue recognition Premiums Written premiums for non-life (general) insurance business comprise the premiums on contracts incepting in the financial year. Estimates are included for premiums not yet notified by the financial year end. Written premiums are stated gross of commissions payable to intermediaries and exclusive of taxes and duties levied on premiums. (: FRS , 4.5) Unearned premiums are those proportions of the premium which relate to periods of risk after the balance sheet date. Unearned premiums are calculated on the basis of the estimated risk profile of the business written. (: FRS ) Investment return Investment return consists of dividends, interest, movements in amortised cost on debt securities and other loans and receivables, realised gains and losses, and unrealised gains and losses on fair value assets. (: FRS 102 S23.28) Unrealised gains and losses Unrealised gains or losses represent the difference between the carrying value at the financial year end and the carrying value at the previous financial year end or purchase value during the financial year, less the reversal of previously recognised unrealised gains and losses in respect of disposals during the financial year. 2.5 Taxation Deferred tax shall be recognised when income or expenses from a subsidiary, associate, branch, or interest in joint venture have been recognised in the financial statements, and will be assessed to or allowed for tax in a future period, except where: a) the reporting entity is able to control the reversal of the timing difference; and b) it is probable that the timing difference will not reverse in the foreseeable future. Such timing differences may arise, for example, where there are undistributed profits in a subsidiary, associate, branch or interest in a joint venture. (: FRS ) Allocated investment return transferred from the nontechnical account A transfer of investment return is made from the nontechnical account to the technical account of the estimated share of investment income arising from investments and cash supporting the insurance technical provisions. This calculation is based on the ratio of net technical provisions to shareholder's equity. Interest income Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. (: FRS (c)) Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset s net carrying amount. (: FRS 102 S23.29(a)) Current tax including Irish Corporation tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the financial year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other financial years and it further excludes items that are never taxable or deductible. The Company s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. (: FRS ) Deferred tax is recognized in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Dividend income Dividend income from investments is recognised when the shareholders rights to receive payment have been established. (: FRS ) Realised gains and losses The realised gain or loss on disposal of an investment is the difference between the proceeds received, net of transaction costs, and its original cost or amortised cost as appropriate. (: FRS (b)) Unrelieved tax losses and other deferred tax assets are recognized only to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. The carrying amount of deferred taxation assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Page 18

19 At 31 December Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. (: FRS ) Deferred tax relating to property, plant and equipment is measured using the revaluation model and investment property is measured using the tax rates and allowances that apply to sale of the asset. Current tax assets and liabilities are offset only when there is a legally enforceable right to set off the amounts and the Company intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Deferred tax assets and liabilities are offset only if: a) the Company has a legally enforceable right to set off current tax assets against current tax liabilities; and b) the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. (: FRS ) 2.6 Goodwill and other intangible assets Goodwill Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing any excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised and written off on a straight line basis over its useful economic life, which is x financial years. Provision is made for any impairment. If the company is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed five financial years. Negative goodwill is similarly included in the balance sheet and is credited to the profit and loss account in the periods in which the acquired non-monetary assets are recovered through depreciation or sale. Negative goodwill in excess of the fair values of the non-monetary assets acquired is credited to the profit and loss account in the periods expected to benefit. (: FRS ) In accordance with Section 35 of FRS 102, Section 19 of FRS 102 has not been applied in these financial statements in respect of business combinations affected prior to the date of transition. Software expenditure An internally-generated intangible asset arising from the Company s software development is recognised only if all of the following conditions are met: an asset is created that can be identified (such as software and new processes); it is probable that the asset created will generate future economic benefits; and the development cost of the asset can be measured reliably. (: FRS H) It is amortised on a straight-line basis over its estimated useful life which typically varies between 3 and 5 financial years. (: FRS ) Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Impairment policy is set out in note 3.15 below. (: FRS K) 2.7 Tangible Fixed Assets Tangible fixed assets are stated at cost or valuation, net of depreciation and any provision for impairment. Depreciation is provided on all tangible fixed assets, other than investment properties and freehold land, at rates calculated to write off the cost or valuation, less estimated residual value, of each asset on a [straight line/reducing balance] basis over its expected useful life, as follows: Company occupied buildings 4% Vehicles 20% - 25% Fixtures and equipment 10% - 30% (: FRS ) Revaluation of properties [(Where the company adopts a policy of revaluation) Individual freehold and leasehold properties [other than investment properties] are revalued to fair value ever financial year with the surplus or deficit on book value being transferred to the revaluation reserve, except that a deficit which is in excess of any previously recognized surplus over depreciated cost relating to the same property, or the reversal of deficit, is charged (or credited) to the profit of loss account.] (: FRS ) Depreciation on revalued buildings is charged as an expense to income. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the properties revaluation reserve is transferred directly to retained earnings. (: FRS ) Page 19

20 At 31 December 2.8 Retirement benefit costs Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution schemes where the Company s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme. (: FRS 102 S.25.2) 2.9 Impairment of assets Assets, other than those measured at fair value, are assessed for indicators of impairment at each balance sheet date. If there is objective evidence of impairment, an impairment loss is recognised in profit or loss as described below. Non-financial assets An asset is impaired where there is objective evidence that, as a result of one or more events that occurred after initial recognition, the estimated recoverable value of the asset has been reduced. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. The recoverable amount of goodwill is derived from measurement of the present value of the future cash flows of the cash-generating units ( CGU ) of which the goodwill is a part. Any impairment loss in respect of a CGU is allocated first to the goodwill attached to that CGU, and then to other assets within that CGU on a pro-rata basis. Where indicators exist for a decrease in impairment loss, the prior impairment loss is tested to determine reversal. An impairment loss is reversed on an individual impaired asset to the extent that the revised recoverable value does not lead to a revised carrying amount higher than the carrying value had no impairment been recognised. Where a reversal of impairment occurs in respect of a CGU, the reversal is applied first to the assets (other than goodwill) of the CGU on a pro-rata basis and then to any goodwill allocated to that CGU. (: FRS ) assets For financial assets carried at amortised cost, the amount of an impairment is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the financial asset s original effective interest rate. For financial assets carried at cost less impairment, the impairment loss is the difference between the asset s carrying amount and the best estimate of the amount that would be received for the asset if it were to be sold at the reporting date. (: FRS ) Where indicators exist for a decrease in impairment loss, and the decrease can be related objectively to an event occurring after the impairment was recognised, the prior impairment loss is tested to determine reversal. An impairment loss is reversed on an individual impaired financial asset to the extent that the revised recoverable value does not lead to a revised carrying amount higher than the carrying value had no impairment been recognised. (: FRS ) 2.10 assets and liabilities An entity shall choose to apply either: a) the provisions of both Section 11 and Section 12 in full; or b) the recognition and measurement provisions of IAS 39 Instruments: Recognition and Measurement (as adopted for use in the EU), the disclosure requirements of Sections 11 and 12 and the presentation requirements of paragraphs 11.38A or 12.25B; or c) the recognition and measurement provisions of IFRS 9 Instruments and/or IAS 39 (as amended following the publication of IFRS 9) the disclosure requirements of Sections 11 and 12 and the presentation requirements of paragraphs 11.38A or 12.25B; to account for all of its financial instruments. Where an entity chooses (b) or (c) it applies the scope of the relevant standard to its financial instruments. An entity s choice of (a), (b) or (c) is an accounting policy choice. Paragraphs 10.8 to contain requirements for determining when a change in accounting policy is appropriate, how such a change should be accounted for and what information should be disclosed about the change. (: FRS ) For the purposes of these financial statements, option a) has been selected. Please refer to IFRS model financial statements at for guidance on measurement options b) and c). The Company s investments comprise of debt and equity investments, derivatives, cash and cash equivalents, loans and receivables and investment in subsidiaries. Recognition assets and liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument. liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. (: FRS ) Initial measurement All financial assets and liabilities are initially measured at transaction price (including transaction costs), except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value (which is normally the transaction price excluding transaction costs), unless the arrangement constitutes a financing transaction. If an arrangement constitutes a finance transaction, the Page 20

21 At 31 December financial asset or financial liability is measured at the present value of the future payments discounted at a market rate of interest for a similar debt instrument. (: FRS ) Subsequent measurement Non-current debt instruments which meet the following conditions are subsequently measured at amortised cost using the effective interest method: (: FRS (a)) a) Returns to the holder are (i) a fixed amount; or (ii) a fixed rate of return over the life of the instrument; or (iii) a variable return that, throughout the life of the instrument, is equal to a single referenced quoted or observable interest rate; or (iv) some combination of such fixed rate and variable rates, providing that both rates are positive. b) There is no contractual provision that could, by its terms, result in the holder losing the principal amount or any interest attributable to the current period or prior periods. c) Contractual provisions that permit the issuer to prepay a debt instrument or permit the holder to put it back to the issuer before maturity are not contingent on future events, other than to protect the holder against the credit deterioration of the issuer or a change in control of the issuer, or to protect the holder or issuer against changes in relevant taxation or law. d) There are no conditional returns or repayment provisions except for the variable rate return described in (a) and prepayment provisions described in (c). (: FRS ) Debt instruments that are classified as payable or receivable within one financial year and which meet the above conditions are measured at the undiscounted amount of the cash or other consideration expected to be paid or received, i.e. net of impairment. (: FRS (a)) Other debt instruments not meeting these conditions are measured at fair value through profit or loss. Commitments to make and receive loans which meet the conditions mentioned above are measured at cost (which may be nil) less impairment. (: FRS (c)) Investments in non-convertible preference shares and nonputtable ordinary shares or preference shares shall be measured at fair value with changes in fair value recognised in profit or loss, if the shares are publicly traded or their fair value can otherwise be measured reliably; and all other such investments shall be measured at cost less impairment. (: FRS (d)) Realised and unrealised gains and losses arising from changes in the fair value of investments are presented in the non-technical profit and loss account in the period in which they arise. Dividend and interest income is recognised when earned. Investment management and other related expenses are recognised when incurred. (: FRS (a)) Derecognition of financial assets and liabilities assets are derecognised when and only when a) the contractual rights to the cash flows from the financial asset expire or are settled, b) the Company transfers to another party substantially all of the risks and rewards of ownership of the financial asset, or c) the Company, despite having retained some significant risks and rewards of ownership, has transferred control of the asset to another party and the other party has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer. (: FRS ) liabilities are derecognised only when the obligation specified in the contract is discharged, cancelled or expires. (: FRS ) Fair value measurement The best evidence of fair value is a quoted price for an identical asset in an active market. When quoted prices are unavailable, the price of a recent transaction for an identical asset provides evidence of fair value as long as there has not been a significant change in economic circumstances or a significant lapse of time since the transaction took place. If the market is not active and recent transactions of an identical asset on their own are not a good estimate of fair value, the company estimates the fair value by using a valuation technique. See note 3 for further information on the Company s valuation techniques. (: FRS ) An entity shall apply the guidance on fair value in FRS 102 section to to fair value measurements, and if applicable the guidance in FRS 102 section to Impairment of financial instruments measured at amortised cost or cost For financial assets carried at amortised cost, the amount of an impairment is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the financial asset s original effective interest rate, i.e. using the effective interest method. (: FRS (a)) For financial assets carried at cost less impairment, the impairment loss is the difference between the asset s carrying amount and the best estimate of the amount that would be Page 21

22 At 31 December received for the asset if it were to be sold at the reporting date. (: FRS (b)) Where indicators exist for a decrease in impairment loss, and the decrease can be related objectively to an event occurring after the impairment was recognised, the prior impairment loss is tested to determine reversal. An impairment loss is reversed on an individual impaired financial asset to the extent that the revised recoverable value does not lead to a revised carrying amount higher than the carrying value had no impairment been recognised. The amount of the reversal is recognised in profit and loss immediately. (: FRS ) Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Investments in subsidiaries In the Company balance sheet, investments in subsidiaries are measured at cost less impairment. (: FRS ) 2.11 Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards incidental to ownership to the lessee. All other leases are classified as operating leases. (: FRS ) Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the net sales proceeds and the carrying amount of the asset and is recognised in income. (: FRS ) Assets held under finance leases, hire purchase contracts and other similar arrangements, which confer the rights and obligations similar to those attached to owned assets are capitalised as tangible fixed assets at the fair value of the leased asset (of, if lower, the present value of the minimum lease payments as determined at the inception of the lease) and are depreciated over the shorter of the lease terms and their useful lives. (: FRS ) A parent shall select and adopt a policy of accounting for its investments in subsidiaries, associates and jointly controlled entities either: (a) at cost less impairment; (b) at fair value with changes in fair value recognised in other comprehensive income in accordance with FRS 102 sections 17.15E and 17.15F; or (c) at fair value with changes in fair value recognised in profit or loss (s to provide guidance on fair value). The capital elements are recorded of future lease obligations are recorded as liabilities, while the interest elements are charged to the profit and loss account over the period of the lease to produce a constant periodic rate of interest on the remaining balance of the liability. (: FRS ) Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. (: FRS ) For the purposes of these model financial statements, option a) has been selected. Derivative financial instruments The Company uses derivative financial instruments to reduce exposure to foreign exchange risk and interest rate movements. The Company does not hold or issue derivative financial instruments for speculative purposes. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. (: FRS ) In accordance with the transitional provisions of FRS 102, lease incentives on leases which were in existence prior to the date of transition have been spread over the shorter of the lease term and the period to the first review date on which the rent is first expected to be adjusted to the prevailing market rate. (: FRS ) 2.12 Provisions Provisions for restructuring costs, legal claims and levies are recognised when the Company has a present obligation as a result of a past event, and it is probable that the Company will be required to settle that obligation. Provisions are measured at the directors best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material. Provisions are not recognised for future operating losses. (: FRS ) Page 22