Transition to International Financial

Transcription

1 Transition to International Financial Reporting Standards (IFRS)

2 IFRS Transition document Transition to International Financial Reporting Standards (IFRS) Transition document for the Gjensidige Forsikring Group opening balance SHEET AS OF 1 january 2006 Gjensidige s annual accounts for 2006 have been prepared in accordance with the Norwegian Financial Reporting Act, the Norwegian Financial Reporting Regulations for Insurance Companies, and the generally accepted accounting principles in Norway (NGAAP). With effect from the 2007 financial year Gjensidige will implement IFRS in their consolidated financial statements. Insurance companies, however, are currently not allowed to prepare company accounts under IFRS. Since the company accounts will still be prepared in accordance with the Norwegian Financial Reporting Regulations for Insurance Companies, there will be significant differences between the company accounts and consolidated accounts. With effect from 2007 the Norwegian Financial Reporting Regulations have been adapted to IFRS in certain areas, however, there are still many other areas that must be harmonised. The Financial Supervisory Authority of Norway has indicated that they will continue working on additional adaptations in An implementation of IFRS starting in the 2007 financial year requires restatement of the opening balance sheet as of 1 January The material effects of the IFRS implementation based on the applicable regulations and interpretations are described below. Gjensidige has planned a stock exchange listing at the end of the second half of Given that this is carried out, full IFRS accounts must be prepared for 2006, with comparative figures for This means that an opening balance sheet under IFRS as of 1 January 2005 must be set up. The accounting principles under IFRS will form the basis for the preparation of Gjensidige s IFRS accounts. These are described later in this Transition Document. Transitional effects, IFRS 1 The rules for the first-time adoption of IFRS are described in IFRS 1. The main rule states that a company must define new accounting principles under IFRS and then apply these retrospectively to adopt the opening balance sheet under IFRS. The standard permits a number of exceptions to this main rule to make the transition easier for the companies. The application of exceptions to the main rule are described in greater detail below. A. Insurance contracts, IFRS 4 The IFRS for insurance contracts (IFRS 4), which covers the accounting of insurance contracts, is an important standard for Gjensidige. Gjensidige s insurance products are covered by this standard, and international work on this standard has been divided into two phases. In the first phase, the current accounting policies for insurance contracts can essentially be retained. It is permitted, however, to change the accounting policies for insurance contracts if the changes entail that the accounts become more relevant or reliable. However, the standard does require that the reinsurers share (reinsurance) of insurance liabilities no longer be offset but instead be classified as an asset. The reinsurers share amounted to NOK million as of 1 January The offsetting of reinsurance has no impact on equity, and the reclassification has been implemented in the opening balance sheet. The reinsurers share has been reduced by the reinsurance provisions as of 1 January 2006 in the amount of NOK 42.8 million. Under current rules, these reinsurance provisions are to be used to cover the costs incurred if one or more of the company s reinsurers fails to meet their share of the total claims liabilities. The reinsurance provisions serve to reduce the amount receivable from reinsurers in the opening balance sheet. The reinsurance provisions are provisions based on objective evidence, and provisions have been allocated if there have been events that indicated an impairment loss. One exception is the portion of the reinsurance provisions that have been allocated in accordance with the minimum requirements of the Financial Supervisory Authority of Norway. This increases the equity under IFRS by NOK 3.2 million after the deduction of deferred tax. Gjensidige does not discount claims provisions with the exception of contracts in Denmark with annuity payments over a long time horizon. The company chooses to continue this practice under IFRS. Phase 2 of the work on IFRS for insurance contracts continues, and it is expected to give rise to a significant change in the standard. One of the most important aspects is how the insurance companies liabilities can be reported at fair value. The new standard will not be effective earlier than B. Security provisions Security provisions in the broad sense consist of Gjensidige s security provisions, reinsurance provisions, administrative provisions, natural perils fund and guarantee scheme provisions. Under the current financial reporting legislation, security provisions are classified as technical provisions between liabilities and equity. Some of these schemes are unique to Norway, and IFRS provides no concrete guidelines for how these are to be classified in financial statements under IFRS, with the exception of reinsurance provisions (discussed above) and administrative provisions. Under IFRS, claims provisions shall include an element to cover the administrative expenses incurred in settling claims. The administrative provisions are therefore reclassified as claims provisions in the opening balance sheet. The effect of the administrative provisions on profit or loss will be the reclassification to claims provisions in the profit and loss account under IFRS. Natural perils fund and guarantee scheme provisions are provisions to cover future events and therefore these provisions do not satisfy the liability definition under IFRS. The provisions must therefore be reclassified as equity. Due to the fact that a tax deduction has been allowed for allocation to the schemes, deferred tax is deducted prior to reclassification. In connection with the introduction of Solvency II (expected from 2010 at the earliest) it is expected that the company will be required to recognise a risk supplement with respect to its claims provisions. Gjensidige has participated in the Financial Supervisory Authority s consequence calculations for Solvency II (QIS I and II). It is nevertheless still highly uncertain what such a risk supplement will amount to. The consequence calculations performed, how-

3 Transition document IFRS 3 ever, indicate that the risk supplement will be much lower than the current security provisions. The company believes therefore that classifying the security provision as equity provides the reader with the most accurate view. C. Pension liabilities, IAS 19 The accounting of pensions under NGAAP differs mainly from IFRS in connection with the treatment of actuarial gains/losses in the opening balance sheet. In accordance with IFRS 1 on the first-time adoption of IFRS there is a transitional rule that allows the recognition of actuarial gains/losses in equity in the opening balance sheet rather than retrospective calculation of what the assets and liabilities would have been had IFRS been applied since the start of the pension scheme. Gjensidige has opted to apply this transitional rule. IFRS also requires that the discount be based on the yield on the balance sheet date on a very high-quality corporate bond with approximately the same maturity as the group s liabilities. As there are no such bonds in Norway, the discount rate corresponds to the ten-year government bond yield with a supplement to reflect the average time remaining until the payment of benefits. The discount rate as of 1 January 2006 under IFRS has been calculated at 4.0 per cent. The impact on equity amounts to NOK 1.3 billion. NOK million of this amount is attributable to historical actuarial gains/losses, while the impact of the change in the discount rate is NOK million. Pension funds are reclassified to pension liabilities since all the schemes are underfunded under IFRS. Differences between the estimated pension liabilities/estimated value of pension funds at the end of the previous financial year and actuarially calculated pension liabilities/fair value of pension funds at the beginning of the following year have been amortised over the average remaining contribution period under NGAAP. In Gjensidige s IFRS accounts, this principle is changed and actuarial gains/losses will be recognised directly against equity. In accordance with Norwegian Accounting Standard 6a relating to pensions, the transitional effect can also be taken into account in the company accounts, if the company reports its consolidated accounts under IFRS. The transitional effect will therefore be recognised in Gjensidige s company accounts from 1 January 2007 and entails that there will no longer be any differences between the company accounts and consolidated accounts in the periods to come. D. Real estate, IAS 40 and IAS 16 Gjensidige carries its real estate at historical cost in line with NGAAP. IAS 40 allows investment properties to be carried at fair value, and Gjensidige will value its investment properties on the basis of this standard. Fair value is determined internally or externally, and changes will be recognised in the profit and loss account. This valuation is based on a long-term assessment of the properties standard, location, cash flows, development potential and potential realisable value. Gjensidige considers this to be in accordance with the definition of fair value in IFRS. At the time of the transition, the value of all investment properties under IFRS 1 will be adjusted to fair value, and this will have a positive effect of NOK million on the equity in the consolidated accounts. In subsequent periods changes in fair value will be recognised in the profit and loss account. Deferred tax is calculated and allocated as provisions for the excess value associated with real estate. In March 2007 the regulations pursuant to the Norwegian Financial Reporting Regulations for Insurance Companies were amended to permit carrying investment property at fair value in the company accounts as well. This will entail that the treatment of the investment properties will be the same in the company and consolidated accounts effective from 1 January Property for own use must be valued in accordance with IAS 16. Property for own use is defined as property that is used by Gjensidige itself, and valuation at cost will be maintained for these properties. The opportunity to use fair value as the assumed historical cost at the time of the transition in accordance with IFRS 1 will not be applied. Depreciation will be based on the decomposition of the individual buildings. If the buildings are used both for the company s own use and as investment property, the distribution will be based on the actual use of the areas. E. Goodwill, IFRS 3 The standard on business combinations, IFRS 3, prohibits the amortisation of goodwill. Instead there will be an annual impairment test to ensure that any diminution in value is recognised. After the performance of impairment tests, the assessment is that there is no need to write down goodwill on the opening balance sheet. F. Intangible assets, IAS 38 Gjensidige has acquired insurance portfolios in previous years, and this has resulted in excess values in the financial statements that are classified as intangible assets. The assessment is that these assets follow IAS 38 concerning intangible assets. The excess values are regarded as having a timelimited life and are depreciated according to the straight-line method. The recoverable amount is calculated at the end of the period. If the recoverable amount is lower than the carrying value, the asset will be written down. Such a calculation of the recoverable amount has been performed for all the portfolios for the opening balance sheet. The performance of the portfolio referred to as Foreningsgruppeliv has been below expectations, and the excess value linked to this portfolio has therefore been written down in its entirety. This represents a negative effect of NOK 55 million. G. Financial instruments, IAS 39 For the transition to IFRS, Gjensidige has performed an initial recognition of all financial instruments at fair value and classification in accordance with the categories available under IAS 39. Most of the instruments are classified under the category financial assets that upon initial recognition is designated as at fair value through profit or loss ( fair value option ). This entails assessment at fair value and adjustments over the profit and loss account. transition to IFRS

4 4 IFRS Transition document The reason for this is the fact that a group of financial assets and liabilities is managed and valuated based on their fair value in accordance with a documented investment strategy. Under NGAAP all financial instruments in the insurance business asset management are assessed at fair value with the exception of strategic investments that are assessed at cost. The company s strategic shareholdings in DnB NOR are classified as Available for Sale. They are carried at cost under NGAAP, while valuation in this category under IFRS shall be made at fair value and adjustments shall be recognised directly to equity. This will entail a positive increase in the equity of NOK 1,186 million. A significant or longstanding impairment loss must be recognised over the profit and loss account. Impairment loss is regarded as significant when the fall in value is over 20 per cent or long-term when it has existed for over nine months. The bond portfolio, which is classified as hold to maturity under NGAAP, will continue to be classified as hold-to-maturity bonds under IAS 39. Under IFRS loans shall be measured at their amortised cost and accrued by means of the effective interest method. Write-downs shall be performed when there is objective evidence of a fall in value. On initial recognition the loans are measured at fair value. Loans granted for fire alarm systems in agriculture are zero interest loans, where the discounted value of the loans is lower than the cost value when the loan was granted. This means that the loans must be written down by NOK million in the opening balance sheet. This effect will be recognised as income in subsequent years in accordance with the remaining period for the loans. The Norwegian Financial Reporting Regulations states that financial current assets shall be assessed at fair value by means of the average prices that these assets have been traded for on the last trading day. The bid and ask rates shall be used under IFRS. Differences are calculated between the average bid and ask rates, and this entails an increase in the value of financial instruments of NOK 1.9 million on the opening balance sheet. H. Accounting provisions Accounting provisions made under NGAAP need to be reviewed against the definition of liabilities under IFRS. Items that do not meet this definition must be reversed and resulting in an increase in equity. Provisions of NOK 55 million have been reversed on the opening balance sheet as a result of them not being deemed to meet the definition of a liability under IFRS. K. Deferred tax All circumstances that have entailed an entry against equity also entail an entry against deferred tax assets/liabilities corresponding to 28 per cent of the original entry. The implementation of IFRS has impacted the deferred tax assets/liabilities in the following areas: security provisions, natural perils fund, guarantee scheme provisions, minimum required reinsurance provisions, write-down of loans, pensions, accounting provisions and excess value of investment properties. In addition, deferred tax has been recognised as a result of the gross entry of goodwill in connection with the acquisition of the new companies, Fair and Parekss. IFRS BALANCE SHEET AS OF 31 DECEMBER 2006 The IFRS balance sheet at the end of 2006 contains the same adjustments made on the opening balance sheet. In addition, there are certain new conditions, and these conditions will be commented on below. J. Gjensidige Fund The Gjensidige Fund is an endowment fund, and the purpose of the fund is to promote Security and Health. Funds that have been allocated are part of the company s equity until a decision has been made to grant funds to a specific party. G. Financial instruments Gjensidige purchased shares in Storebrand in 2006, which are carried at cost in the NGAAP accounts. These shares are classified in the category available for sale and the unrealised gain as of 31 December increases the equity. IFRS PROFIT AND LOSS ACCOUNT FOR 2006 The IFRS profit and loss account for 2006 has been adjusted by the effects of the above adjustments on profit or loss. Any differences that may only be found in the profit and loss account are described below. I. Direct and indirect claims processing costs Under IFRS it is possible to classify direct and indirect claims processing costs as claims expenses, as opposed to NGAAP where only certain direct claims processing costs can be classified in this way. It appears to be the practice in other IFRS reporting countries to classify both direct and indirect claims processing costs as claims expenses. This will also be implemented at Gjensidige so that we can report comparable figures.

5 Transition document IFRS 5 IFRS ACCOUNTING POLICIES GENERAL The Gjensidige Forsikring Group consists of Gjensidige Forsikring and its subsidiaries. Gjensidige Forsikring is a mutually-owned company domiciled in Norway. The company s head office is located at Drammensveien 288, Oslo, Norway. The activities of the group consist of general insurance, pensions and savings, banking and health-related services. The accounting policies that are used in the consolidated accounts are described below. The policies are used consistently throughout the entire group with the exception of one difference that is permitted in accordance with IFRS 4. See the description below under the section on claims provisions. The consolidated accounts have been prepared in accordance with the Norwegian Accounting Act and International Financial Reporting Standard (IFRS). This is the group s first interim accounts under IFRS, and IFRS 1 has been used for the preparation of the transition to IFRS as of 1 January The transition from NGAAP to IFRS is stated in this transition document, which has been published at the same time as the interim report for the first quarter. The interim report for the first quarter of 2007 has been prepared in accordance with IAS 34, Interim Financial Reporting. Since the Gjensidige Forsikring Group has not previously reported full annual accounts under IFRS, the interim report must be seen in context with the annual accounts for 2006 and the transition document. The interim report and transition document were presented to the Board at its meeting of 9 May The consolidated accounts have been prepared in accordance with the Norwegian Accounting Act and the IFRS standards and interpretations that shall apply as of 31 December It is assumed that the IFRS standards and interpretations that have been published prior to 7 March 2007, but which are not mandatory to use as of 31 December 2006, based on the assessments made so far, will not have any significant effect. The consolidated accounts have been prepared based on the historical cost principle with the following exceptions: Financial instruments that are assessed at fair value Investment properties that are assessed at fair value Segments The group is organised into general insurance, pensions and savings and banking segments. General insurance is the dominating segment in relation to the other segments, and is divided therefore geographically into Norway, the Baltic States and other Nordic countries, in addition to the division between the household and business markets. This division reflects best how the business is followed up by the group s management. Financial information concerning segments is presented in a separate note. CONSOLIDATION POLICIES Consolidation of subsidiaries The consolidated financial statements include Gjensidige Forsikring and subsidiaries in which Gjensidige Forsikring has a controlling influence. Normally these will be companies where Gjensidige Forsikring owns more than 50 per cent of the voting shares, either directly or indirectly through subsidiaries. Subsidiaries are consolidated from the point in time when control is established. The consolidated financial statements have been prepared using the purchase method, and they present the group as a single economic entity. Balances and transactions between companies within the group are eliminated in the consolidated financial statements. In addition, gains and losses arising from transactions between companies in the group are also eliminated. Associated companies Holdings in companies in which the group has a significant, but not a controlling, influence are reported using the equity method. Normally these will be companies where the group has a stake of between 20 and 50 per cent and a significant influence. This means that the group s share of the earnings for the year, amortisation and write-down of goodwill, and capital gains and losses, is reported on a separate line of the profit and loss account. In the consolidated balance sheet, investments in associated companies are reported as the group s share of the companies equity adjusted for goodwill. Business combinations The acquisition of subsidiaries and businesses is accounted for based on the purchase method of accounting. The historical cost of business combinations is measured at the fair value (on the date of the takeover) of ceded assets, incurred liabilities and equity instruments issued by the group in exchange for control of acquired companies and any costs directly attributable to the business combination. The acquired company s identifiable assets, liabilities and contingent liabilities that meet the requirements for integration under IFRS 3 Business Combinations are integrated at the fair value at the time of the acquisition. If, after a reassessment of the group s share in the net fair value of identifiable assets, liabilities and contingent liabilities exceeds the historical cost of the business combination, the excess amount will be integrated immediately in the profit and loss account. Goodwill Goodwill that arises from the acquisition of subsidiaries represents the cost price of the acquisition beyond the group s share of the net fair value of identifiable assets, liabilities and contingent liabilities in the subsidiary at the time of the acquisition. Goodwill is integrated initially at cost and subsequently assessed at historical cost less accumulated losses as a result of an impairment loss. For the purpose of impairment testing, goodwill is allocated to each of the group s cash-generating units expected to benefit from the combination. Cash-generating units to which goodwill has been allocated will be tested for impairment loss annually or more often in the event of indications that a unit may have been impaired. If the recoverable amount for the cash-generating units is less than the carrying amount of the unit, the impairment loss will be allocated first to the goodwill allocated to the unit and then propor- transition to IFRS

6 6 IFRS Transition document tionately to the carrying amount of each asset in the unit. An impairment loss recognised for goodwill will not be reversed in a subsequent period. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the gain or loss on disposal. RECOGNITION OF REVENUE AND EXPENSES Insurance premiums for general insurance Insurance premiums are recognised over the term of the policy. Gross premiums written include all the amounts the company has received or is owed for insurance contracts where the insurance period starts before the end of the period. At the end of the period accruals are made, and the premiums written that concern the next year will be accrued under change in provisions for gross premiums written. Reinsurance Premiums for ceded reinsurance reduce the gross premiums written and are accrued according to the insurance period. Premiums for inward reinsurance are classified as gross premiums written and are earned according to the insurance period. Insurance premiums for life insurance Premium income consists of premiums written for the year linked to defined contribution pension schemes The accrual of premiums earned is carried out by allocations to the premium reserve. Interest income and expenses from financial instruments For all financial instruments measured at amortised cost, interest income and expenses are recognised in accordance with the effective interest method. The calculation takes into account all the fee income and directly attributable costs that are an integral part of the effective interest rate. Allocated return on investments The allocated return on investments is calculated based on the average technical provisions throughout the year. The average yield on government bonds with three years remaining until maturity is used for the calculation. The Financial Supervisory Authority of Norway has calculated the average technical yield for 2006 and the first quarter of 2007 to be 3.70 and 4.49 per cent, respectively. The allocated return on investments is transferred from the non-technical to the technical accounts. Claims incurred The claims incurred consist of the gross claims paid less reinsurers share, in addition to a change in the gross claims provisions, also reduced by the reinsurers share. Direct and indirect claims processing costs are included in claims incurred. The claims incurred contain settlement gains/losses based on prior-year provisions. Total operating expenses The total operating expenses consist of administrative expenses and selling expenses less commissions received for ceded reinsurance. The administrative expenses are accrued and charged as an expense during the accounting period. Costs related to the sale and renewal of the insurance portfolio are recognised as insurance is taken out. FOREIGN CURRENCY The group s reporting currency and the parent company s functional currency is Norwegian kroner (NOK). Any translation differences are recognised directly against equity, and they are taken into account in the calculation of gains/losses on a subsequent sale. Foreign companies that are included in the group and have another functional currency are translated into NOK by translating the profit and loss account according to an average rate for the year and the balance sheet by a rate at the end of the financial year. Any translation differences are recognised against equity. Transactions in foreign currencies are accounted for on the initial integration at the unit s functional currency by translation at the current rate of exchange. Receivables and liabilities denominated in foreign currencies are translated into NOK at the rate of exchange on the balance sheet date. Holdings of foreign securities and financial instruments are translated into NOK at the rate of exchange on the balance sheet date. Liquid assets are also translated into NOK at the rate of exchange on the balance sheet date. The exchange rate risk associated with foreign securities is largely eliminated through hedging transactions. TANGIBLE FIXED ASSETS The group s tangible fixed assets consist of machinery, fixtures, vehicles, computer systems and buildings that are used by the group for its own activities. Tangible fixed assets are assessed at historical cost less accumulated depreciation and any write-downs. They are depreciated according to the straight-line method over their expected useful life. In cases where fixed assets or significant components of a fixed asset have a different useful life, they are carried and depreciated separately. The expected useful life and residual value are reassessed annually unless they are immaterial. An asset s carrying amount is written down if the recoverable amount is lower than the carrying amount. INTANGIBLE ASSETS Intangible assets that are acquired separately or as a group are recognised at fair value at the time of acquisition. If a business is acquired the identifiable intangible assets are carried. The group also has custom proprietary software. These assets are assessed at historical cost less accumulated depreciation and any write-downs. The depreciation period and method are assessed annually. If new intangible assets are recognised it must be possible to prove that it is likely that future economic benefits that can be attributed to the asset will pass to the group. In addition, it must be possible to estimate the cost price of the asset reliably. The write-down needs will be assessed if there are indications of an impairment loss, and the write-down of intangible assets and reversal of write-downs will otherwise be handled in the same manner as described for tangible fixed assets.

7 Transition document IFRS 7 Impairment loss OF fixed assets OTHER THAN GOODWILL The group assesses the carrying value of tangible and identifiable intangible assets annually or more often if there are events or changes in assumptions indicating that the carrying value is not recoverable. Indicators that are assessed as significant by the group and can trigger testing for an impairment loss: - Significant reduction in earnings in relation to historical or expected future earnings - Significant changes in the group s use of assets or overall strategy for the business - Significant negative trends for the industry or economy The recoverable amount for an asset or a cash-generating unit is the higher of the fair value less the selling costs or value in use. When it has been established that the carrying value for assets and intangible assets is not recoverable based on one or more of the above indicators of an impairment loss being present, the impairment loss will be calculated based on the discounted future cash flows by means of the pre-tax discount rate. The impairment loss will be integrated into the accounts if the carrying value of an asset or cash-generating units exceeds the recoverable amount. Impairments in value recognised earlier will be reversed, with the exception of goodwill, if the prerequisites for an impairment loss are no longer present. The impairment loss will only be reversed if the carrying amount does not exceed what would have been the carrying amount after depreciation at the time of the reversal if the impairment loss had not been integrated. Investment property Property that is leased to tenants outside the group is classified as investment property. With regard to property where parts of the property are used by the group for its own use and other parts are leased, the rental portions that are sectionable are classified as investment property. TECHNICAL PROVISIONS Provisions for unearned premiums The provisions for unearned premiums are the accrual of premiums written. The provisions correspond to the unearned portions of the premiums written. No deduction is made for any expenses before the premiums written are accrued. In the case of group life insurance for the commercial market, the premium provisions also include provisions for fully paid whole-life cover (after the payment of disability capital) and an option fund (provisions for the right to renew without supplying a new health certificate). Claims provisions for general insurance Claims provisions comprise provisions for anticipated future claims payments in respect of losses or injuries incurred, but not fully settled at the end of the year. These include both losses or injuries that have been reported to the company (RBNS reported but not settled) and those that have not yet been reported (IBNR incurred but not reported). The provisions related to reported claims are assessed individually by the claims settlement system, while IBNR provisions are based on empirical data, where the point of departure is the time it takes from a loss or injury occurring (date of loss or injury) until it is reported (date reported). Based on experience and the development of the portfolio a statistical model is prepared to calculate the scope of post-reported losses or injuries. The appropriateness of the model is measured by looking at the deviation between earlier post-reported losses or injuries and those estimated by the model. Claims provisions are not normally discounted. For contracts in Denmark with annuity payments over a long time horizon discounting is performed. IFRS 4 permits the use of different policies within the group in this area. Claims provisions contain an element that is to cover administrative expenses incurred in settling claims. transition to IFRS Investment property is assessed at fair value. The value is measured at every reporting date. Changes in the value are recognised through the profit and loss account. Fair value is based on market prices, adjusted possibly by differences in the type, location or condition of the individual property. If market prices are not available, the property will be assessed individually by discounting the assumed future net income flow by the required rate of return for the individual investment. The net income flow takes into account the existing and future loss of income as a result of vacancy, necessary investments or an assessment of the future development of the market rent. The required rate of return is determined based on the expected future risk-free interest rate and individually assessed risk premium based on the rental situation and the location and standard of the building. An assessment is also made based on the market prices observed. Investment properties are measured initially at its cost, i.e. the purchase price including any directly attributable costs associated with the purchase. Liability adequacy test At each reporting date a liability adequacy test is performed to check whether the level of the provisions is adequate. The current estimate for future claims payments for the company s insurance liability on the date of the balance sheet, as well as related cash flows, is used to perform the test. This includes both losses or injuries that have incurred on the date of the balance sheet (claims provisions) and losses or damages that will be incurred from the date of the balance sheet until the next annual renewal (premium provisions). Any negative discrepancy between the original provisions and the liability adequacy test will entail provisions for unexpired risk. Provisions for life insurance The technical provisions related to the insurance contracts are determined by the market value of the financial assets. The defined contribution products are not exposed to an investment risk related to the customer assets since no return on the assets is guaranteed to the customers. In

8 8 IFRS Transition document addition, provisions are allocated to a statutory security reserve to ensure that unexpected losses in the insurance business can be sustained. Reinsurance assets Reinsurance assets are classified as assets on the balance sheet. The assets are reduced by the expected losses on claims based on objective evidence of an impairment loss. FINANCIAL INSTRUMENTS Recognition and derecognition Financial assets and liabilities are recognised in the balance sheet when Gjensidige becomes a party to the instrument s contractual terms. Purchases and sales of financial instruments are recognised in the accounts on the date of the transaction. When a financial asset or liability is recognised initially (asset/liability not recognised at fair value through the profit and loss account) it is measured at fair value plus transaction expenses that are directly attributable to the acquisition or issuance of the financial asset or liability. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the business transfers the financial asset in a transaction where all or practically all the risk and earnings opportunities related to ownership of the asset are transferred. Financial assets are classified in one of the following categories: - at fair value through profit and loss - available for sale - investments held to maturity - loans and receivables - derivatives At fair value through the profit and loss When IFRS is implemented and upon initial recognition in subsequent periods, all financial assets and liabilities can be designated at fair value through the profit and loss account if: - the classification eliminates or significantly reduces a mismatch in the measurement that would have arisen otherwise as a result of different rules for the measurement of assets and liabilities - the financial assets are included in a portfolio that is managed and evaluated regularly at fair value Financial assets at fair value through the profit and loss account are measured at fair value at the time of the balance sheet. Changes in the fair value are recognised through the profit and loss account. Available for sale Securities available for sale are non-derivative financial assets that have been placed in this category by choice or are not classified in any other category. Securities in this category are measured at fair value, while the change in value is recognised against the equity. Each quarter an assessment is made as to whether an impairment loss has occurred. If this impairment loss is significant or has lasted longer than nine months, the combined loss measured as the difference between the historical cost and fair value, less any reduction in value of the financial asset that has been recognised earlier in the profit and loss account - will be removed from the equity and recognised in the profit and loss account. An impairment loss for shares and corresponding instruments that has been recognised in the profit and loss account is not reversed. Investments held to maturity Investments that are held to maturity are non-derivative financial assets with payments that are fixed or can be determined, as well as a fixed maturity, which a business has a positive intention and ability to hold until maturity with the exception of: those that the business upon initial recognition designate as at fair value through the profit and loss account those that meet the definition of loans and receivables Held-to-maturity assets are accounted for at amortised cost based on the effective interest method. Loans and receivables Loans and receivables are non-derivative financial assets with payments that are fixed or determinable. Loans and receivables are accounted for at fair value on the initial recognition and at amortised cost based on the effective interest method in subsequent periods. Interest-free loans are issued to finance fire alarm systems in agriculture for loss prevention purposes. These loans are repaid using the discount granted on the main policy when the alarm system is installed. Derivatives Financial derivatives are used in the management of exposure to equities, bonds and foreign exchange in order to achieve the desired level of risk and return. These instruments are used both for trading purposes and for hedging balance sheet items. All trading of financial derivatives is subject to strict limits. All derivatives are recognised at fair value on the contract date. The subsequent measurement is at fair value with ongoing recognition of value fluctuations. The fair value for derivatives is based on quoted prices when such prices are available. When quoted prices are not available, the group estimates the fair value based on valuation models that use observable market data. The group has not yet implemented hedge accounting. As a result of convergent principles for the measurement of hedged items and hedging instruments in asset management the economic hedging that occurs is reflected by the ordinary valuation rules.

9 Transition document IFRS 9 Fair value Fair value is the amount an asset can be sold for or a liability can be settled by a transaction at arm s length between well-informed and voluntary parties. For financial assets that are listed on a stock exchange or other regulated marketplace, the fair value will be set at the bid price on the last trading day prior to the balance sheet date, and for an asset that is to be acquired or a liability held it will be set at the offer price. If the market for a financial instrument is not active, the fair value will be set by means of valuation methods. The valuation methods include the use of market transactions recently carried at arm s length between well-informed and voluntary parties, if such are available; reference to the current fair value of another instrument, which is practically the same; discounted cash flow calculations and option pricing models. If there is a valuation method for pricing the instrument that is in normal use by the participants in the market, and this method has proven to give reliable estimates of the prices achieved in actual market transactions, then this method will be used. Amortised cost After the initial recognition, held-to-maturity investments, loans and receivables and financial liabilities that are not measured at fair value will be measured at amortised cost based on the effective interest method. When calculating the effective interest rate cash flows are estimated and all the contractual terms of the financial instrument are taken into account. All fees or points paid or received between the parties in the contract, transaction expenses and all other additional payments or discounts are included as an integral component of the effective interest rate. Impairment of financial assets For financial assets that are not accounted for at fair value, an assessment of whether there is objective evidence that there has been a reduction in the value of a financial asset or group is made on each balance sheet date. Objective evidence means the existence of incidents indicating diminution of the value of the loan. This may be information on credit report alerts, defaults, an issuer or borrower suffering significant financial difficulties, bankruptcy or observable data indicating that there is a measurable reduction in future cash flows from a group of financial assets, even though the reduction cannot yet be linked to an individual asset in the group. An assessment will be made first as to whether there is any objective evidence of an impairment loss for financial assets that are individually significant. Financial assets that are not individually significant or are assessed individually, but not written down, will be assessed in groups with respect to impairment loss. Assets with similar credit risk characteristics will be grouped together. If there is objective evidence of an impairment loss, the loss will be calculated as the difference between the asset s carrying value and the present value of estimated future cash flows. DIVIDENDS Dividends from investments are recognised when the group has an unconditional right to receive dividends. Dividends are recognised as liabilities at the point in time when the general meeting adopts the payment of dividends. Accounting provisions Provisions are recognised when the group has a legal or implied liability as the result of a prior incident and it is probable that this will entail the payment or transfer of other assets to settle the liability. Restructuring Provisions for restructuring are recognised when the group has approved a detailed and formal restructuring plan, and the restructuring has either started or been made public. Provisions are not made for future expenses attributed to the operations. PENSIONS Gjensidige has both defined contribution and defined benefit pension schemes for its employees. The defined benefit scheme has been placed in a separate pension fund and is closed to new employees. Liabilities to make contributions to defined contribution pension schemes are recognised as expenses in the profit and loss account when they are incurred. The defined benefit scheme entitles the employees to agreed future pension benefits. Pension liabilities are calculated on the basis of linear accrual and assumptions for length of service, discount rate, future return on pension funds, and future growth in wages, pensions and social security benefits, as well as actuarial assumptions for mortality, staff turnover, etc. Pension funds are carried at fair value, and are deducted from liabilities in the net pension liabilities figure on the balance sheet. Any overfunding is capitalised if it is likely that it can be put to use. Actuarial gains or losses are recognised directly against equity. TAX The tax charge represents the sum total of the tax payable and change in deferred tax. Periodic tax Periodic tax is tax payable on the taxable profit for the year. Deferred tax Deferred tax is integrated based on differences between the carrying value for assets and liabilities in the accounts and the corresponding tax basis used to calculate taxable income, and it is accounted for based on the balance sheet oriented liability method. Deferred tax liabilities are integrated in general for all taxable temporary differences and deferred tax assets are integrated in general for all deductible temporary differences to the extent transition to IFRS

10 10 IFRS Transition document that it is probable that the taxable income that the deductible temporary differences can be offset against will be available. If deferred tax arises in connection with the initial integration of a liability or asset in a transaction that is not a business combination, and it does not affect the financial or taxable profit/loss at the time of the transaction, then it will not be recognised on the balance sheet. Deferred tax liabilities are integrated for temporary differences resulting from investments in subsidiaries, associated companies and joint ventures, except in cases where the group is able to control the reversal of temporary differences and it is probable that the temporary difference will not be reversed in the foreseeable future. The deferred tax assets that arise from deductible temporary differences for such investments are only integrated to the extent that it is probable that there will be adequate taxable income to utilise the asset from the temporary difference and they are expected to reverse in the foreseeable future. Periodic tax and deferred tax Periodic tax and deferred tax are integrated as an expense or income in the profit and loss account, with the exception of deferred tax on items that are recognised directly against equity, when the tax is integrated directly in equity or in cases where deferred tax arises as a result of a business combination. For business combinations, the tax effect is taken into account by calculating goodwill or to determine Gjensidige s net fair value of the acquired company s identifiable assets, liabilities and contingent liabilities beyond the historical cost. INTERnAL purchases and sales Internal purchases and sales between companies are carried out in accordance with the arm s length principle. Intercompany balances are settled based on their nominal value. Gjensidige Fund The Gjensidige Fund is an endowment fund, and the purpose of the fund is to promote Security and Health. Funds that have been allocated are part of the company s equity until a decision has been made to grant funds to a specific party. transactions with affiliated companies Commissions The mutual fire insurers perform a number of functions on behalf of Gjensidige Forsikring. For these services commissions are paid. Refunds are received for those services that Gjensidige Forsikring provides for the mutual fire insurers. Due to the fire policy reinsurance scheme, Gjensidige Forsikring also manages assets on behalf of the mutual fire insurers. The mutual fire insurers are credited interest for the assets. Use of estimates General The preparation of the consolidated accounts under IFRS and the application of the adopted accounting policies imply that the management must make assessments, prepare estimates and apply assumptions that affect the accounting value of assets, liabilities, income and expenses. The estimates and the associated assumptions are based on historical experience and other factors that are assessed as being justifiable based on the underlying conditions. The actual figures may deviate from these estimates. The estimates and the associated prerequisites will be reviewed regularly. Changes in accounting estimates are integrated in the period the estimates change if the change only affects this period, or in the period the estimates change and future periods if the changes affect both the existing and future periods. The accounting policies that are used by Gjensidige in which the assessments, estimates and prerequisites may deviate significantly from the actual results are discussed below. Investment property Fair value is based on market prices and generally accepted valuation models where there are no market prices. A key parameter of the valuation is the long-term required rate of return for the individual property. The combined return consists of the sum of the direct return and the appreciation. A small change in the required rate of return has a relatively large impact on the values. The required rate of return is derived from market transactions and statistics. Tangible fixed assets Tangible and intangible fixed assets are assessed annually to ensure that the depreciation method and period used are in accordance with the financial realities. This applies correspondingly to the residual value. Write-downs will be made when there is indication of an impairment loss. An ongoing assessment of these assets is made in the same manner as investment property. Goodwill is tested annually for an impairment loss, or more often if there are indications that the amounts may be subject to an impairment loss. Testing an impairment loss entails determining the recoverable amount for the cash-generating unit. Normally the recoverable amount will be determined by means of budgeted cash flows that are based on business plans. The plans are based on prior experience and the expected market development. Fair value of financial instruments The fair value of financial instruments that are not traded in an active market (such as unlisted shares) is determined by means of generally accepted valuation methods. These valuation methods are based primarily on the market conditions on the date of the balance sheet.