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Summary of impact of IFRS

10th Aug 2005 07:00

Amlin PLC10 August 2005 PRESS RELEASE 10 August 2005 For immediate release Summary of the impact of International Financial Reporting Standards ('IFRS') From 2005 Amlin plc (the Company) is required to prepare consolidated financialstatements for the Company and its subsidiaries (the Group) in accordance withIFRS as adopted by the European Union (EU). The first annual report under IFRS will be for 2005 and the first interimresults reported under IFRS will be for the half year ended 30 June 2005. Thisdocument explains how the Group's reported performance and financial positionare affected by this change. This note summarises the key impacts on the Group's previously reported netassets and profits from the adoption of IFRS. The following is a summary of the financial impact of the transition from UKGAAP to IFRS. IFRS adjustments UK GAAP IFRS Year ended 31 December 2004Profit before tax (£m) 121.6 7.3 128.9Profit after tax (£m) 86.0 5.0 91.0 Earnings per share (pence) 22.1p 1.3p 23.4pReturn on equity 22.3% 1.6% 23.9% As at 31 December 2004Net assets (£m) 443.9 15.9 459.8 Net assets per share (pence) 113.6p 4.0p 117.6pNet tangible assets per share (pence) 99.1p 1.7p 100.8p The principal adjustments arising from transition relate to: • Foreign exchange accounting for non-monetary assets;• Accounting for dividends;• Accounting for syndicate capacity; and• Accounting for defined pension schemes. The transition to IFRS will not: • Change the underlying operations of the Group;• Change actual cash flows; and• Change the previously stated dividend policy. A full explanation of the impact of the transition to IFRS, including revisedaccounting policies, is provided below and is available from the Group's website(www.amlin.co.uk). Enquiries: Richard Hextall, Amlin plc 0207 746 1058David Haggie, Haggie Financial Limited 0207 417 8989 Amlin plc Restatement of financial information under International Financial ReportingStandards (IFRS) Introduction From 2005 the Company is required to prepare consolidated financial statementsfor the Group in accordance with IFRS as adopted by the European Union (EU). The first annual report under IFRS will be for 2005 and the first interimresults reported under IFRS will be for the six months ended 30 June 2005. Thisdocument explains how the Group's reported performance and financial positionare affected by this change. The Group's consolidated balance sheets at 1 January 2004 and 31 December 2004have been restated in accordance with IFRS issued by the InternationalAccounting Standards Board (IASB) and endorsed by the European Commission (EC)and effective for accounting periods commencing after 1 January 2005. The IFRSthemselves are subject to possible amendment by interpretative guidance from theIASB, or other external bodies, and are therefore subject to change prior topublication of the Group's first IFRS results in September 2005. The Group's consolidated financial statements under IFRS consolidate theaccounts of the Company, its subsidiary undertakings and the Group'sunderwriting through participation on Lloyd's syndicates. The UK GAAP financial information contained in this document does not constitutestatutory accounts as defined in section 240 of the Companies Act 1985. Theauditors issued unqualified opinions on the Group's UK GAAP financial statementsfor the years ended 31 December 2003 and 31 December 2004. Transitional arrangements upon first time adoption of IFRS A company is required to determine its IFRS accounting policies and apply theseretrospectively to determine its opening balance sheet at 1 January 2004 underIFRS. However, IFRS 1, First time adoption of International Financial ReportingStandards (IFRS 1) allows a number of exemptions to this general principle uponadoption of IFRS. The Group has taken advantage of the following transitionalarrangements: Business combinations The Group has elected not to apply retrospectively the provisions of IFRS 3,Business Combinations, to business combinations that occurred prior to 1 January2004. At the date of transition no adjustment was made between UK GAAP and IFRSshareholders' funds for any historical business combination. Equity compensation plans The Group has elected not to apply the provisions of IFRS 2, Share-basedpayments, to options granted on or before 7 November 2002 which had not vestedby 1 January 2004. Estimates Where estimates had previously been made under UK GAAP, consistent estimates(after adjustments to reflect any difference in accounting policies) have beenmade for the same date on transition to IFRS (i.e. judgements affecting theGroup's opening balance sheet have not been revisited with the benefit ofhindsight). Notes to the analysis of adjustments to the balance sheet at 1 January and 31December 2004 as a result of the transition to IFRS The UK GAAP balance sheets as at 1 January 2004 and 31 December 2004 have beenrepresented in a format consistent with IFRS. The material adjustments betweenUK GAAP and IFRS are as summarised below. All adjustments apply to the Group'sown assets and liabilities and the Group's share of the assets and liabilitiesof the syndicates on which it participates. Summarised reconciliation of the consolidated balance sheet from UK GAAP to IFRS As at 1 January 2004 As at 31 December 2004 UK GAAP Adjustments IFRS UK Adjustments IFRS on GAAP on transition transition to IFRS to IFRS £m £m £m £m £m £m Property, plant and equipment 6.4 - 6.4 6.2 - 6.2Intangible assets 57.0 6.2 63.2 56.7 9.3 66.0Financial investments - 50.6 (0.2) 50.4 90.5 (0.4) 90.1equitiesFinancial investments - debt 997.7 2.5 1,000.2 1,210.9 1.5 1,212.4securitiesLoans and receivables, 294.6 (12.9) 281.7 361.1 (74.1) 287.0including insurance receivablesDeferred income tax - 25.1 25.1 - 22.0 22.0Reinsurance contracts 518.6 1.5 520.1 603.9 0.9 604.8Cash and cash equivalents 26.5 4.2 30.7 42.8 4.9 47.7 Total assets 1,951.4 26.4 1,977.8 2,372.1 (35.9) 2,336.2 Share capital 97.7 - 97.7 98.8 - 98.8Treasury shares (2.4) - (2.4) (1.6) - (1.6)Other reserves 194.7 0.2 194.9 198.8 0.5 199.3Retained earnings 93.3 (3.0) 90.3 147.9 15.4 163.3 Total shareholders' equity 383.3 (2.8) 380.5 443.9 15.9 459.8 Insurance contracts 1,484.4 9.6 1,494.1 1,722.0 (60.0) 1,662.0Borrowings 11.4 - 11.4 58.7 - 58.7Provisions for other 3.0 - 3.0 4.6 - 4.6liabilities and chargesTrade and other payables 39.2 (2.5) 36.7 85.0 (13.4) 71.6Deferred tax liabilities 16.9 20.9 37.8 52.4 20.1 72.5Retirement benefit obligations - 1.2 1.2 - 1.5 1.5Current income tax liabilities 13.1 - 13.1 5.5 - 5.5 Total liabilities 1,568.1 29.2 1,597.3 1,928.2 (51.8) 1,876.4 Total equity and liabilities 1,951.4 26.4 1,977.8 2,372.1 (35.9) 2,336.2 Foreign exchange accounting for non-monetary assets and liabilities IAS 21, The effects of changes in foreign exchange rates, requires foreigncurrency denominated non-monetary assets, liabilities and transactions (i.e.those without a corresponding cash flow, being principally the unearned premiumreserve, the reinsurers' share of the unearned premium reserve and deferredacquisition costs) to be converted to the functional currency using the exchangerate prevailing at the date of the original transaction (or an average rate forthe period of the transaction) even when accounted for in subsequent periods. Prior to the adoption of IFRS the Group converted non-monetary assets andliabilities at the rate of exchange at the balance sheet date at which they werereported, regardless of the period in which the asset or liability first arose.Furthermore, any movement in a non-monetary asset or liability that wasrecognised through the profit and loss account was converted using the averageexchange rate for the period in which it was recognised in the profit and lossaccount. The impact of this change is to reduce net assets by £12.3million and£7.5million at 1 January and 31 December 2004 respectively. Accounting for reinsurance to close (RITC) The RITC is a contract between the Lloyd's names on one syndicate year ofaccount and the names on another syndicate year of account (normally thefollowing year of the same syndicate), whereby the names on the earlier yearreinsure all their outstanding liabilities with the names on the later year. Tothe extent that names maintain their interest from one year to the next there isno economic effect arising from this transaction. However, where namesinterests' change from one year to the next, and Amlin's share of the syndicatechanges as a consequence, there is an economic transfer arising from the RITC. Prior to the adoption of IFRS the RITC contract was accrued for at the year end,even though it was normally not finalised until after the year end. To theextent that Amlin's share of capacity increases from one year to the next thisgave rise to a debtor and an equal increase in liabilities. Following the transfer to IFRS the RITC is accounted for in the period in whichthe contract is finalised. The debtor and the increase in liabilities thatpreviously existed is therefore now eliminated. In addition, the Group is nowdisclosing as premium income the amount of the RITC received relating to theincrease in capacity for one year of account to the next. An equivalent increasein claims is also recorded. These adjustments have no net effect on reported profits and net assets. Dividend accrual Under UK GAAP the Group accrued for the final dividend in the period in whichthe profits to which it related were recognised. Under IAS 10, Events after thebalance sheet date, a dividend should only be recognised in the period in whichit is declared and becomes a present obligation of the Group. The impact of this change on the balance sheet as at 1 January and 31 December2004 is to increase shareholders' funds by £6.4million and £19.6millionrespectively, being the final dividend for 2003 and 2004 which is now recognisedin 2004 and 2005. Syndicate capacity Under UK GAAP, syndicate capacity purchased by the Group is capitalised at costin the balance sheet and amortised over its useful economic life, which thedirectors considered to be 20 years. An impairment review is performed annuallyto ensure that the carrying value is appropriate. Accounting for syndicate capacity changes under IFRS. IAS 38, Intangible assets,permits syndicate capacity to be classified as an indefinite life intangibleasset. As such it is recognised at cost and is not amortised but is subject toan annual review to ensure that its value is not impaired and to determinewhether events and circumstances continue to support an indefinite useful lifeassessment. In adopting IAS 38 the Group has reinstated all syndicate capacity amortised upto 1 January 2004 to original cost. The impact of this is to increase net assetsby £6.2million and £9.3million at 1 January and 31 December 2004 respectively. Employee benefits - pensions Within the Group there are a number of different pension schemes, including twodefined benefit schemes, one of which is a multi-employer scheme. Under UK GAAPthe Group accounts for its defined benefit pension schemes in accordance withSSAP 24, Accounting for pension costs. Both SSAP 24 and IAS 19, Employeebenefits, permit the multi-employer scheme to be accounted for as a definedcontribution scheme subject to satisfying certain conditions. The Groupbelieves these conditions are satisfied. Accounting for defined contributionschemes does not change under IFRS. Under SSAP 24 the assets and projected liabilities of the remaining definedbenefit scheme are not recognised on the Group's balance sheet. Instead thecosts of the schemes are charged to operating profit so as to spread the expenseof providing future pensions to employees over the remaining average servicelives of current employees in the scheme. Adjustments are made for surpluses ordeficits that arise under the SSAP 24 basis of valuation. An accrual orprepayment will arise to the extent that the charge in the profit and lossaccount does not equate to the cash contributions made into the scheme. Under IAS 19 the projected liabilities of the defined benefit pension schemesare matched against the fair value of the underlying assets and otherunrecognised actuarial gains and losses in determining the pension liabilitiesfor the year. Any pension asset or liability must be recorded on the balancesheet. IAS 19 does permit cumulative gains or losses that lie within a defined 'corridor' to not be recognised. However, Amlin plc does not currently intend toapply this 'corridor approach' to valuing pension deficits. The change in accounting has resulted in the removal of the Group's SSAP 24balances, a liability of £0.3million, and the recognition of a deficit of£1.2million, valued in accordance with IAS 19. The overall impact is a reductionin shareholders' funds of £0.9million. An amendment was issued to IAS 19 in December 2004 which, subject to endorsementby the EC, requires that if there is a contractual agreement between employersin a multi-employer defined benefit scheme, that is accounted for as a definedcontribution scheme, as to how a surplus should be distributed or a deficitfunded, then that surplus or deficit shall be recognised as an asset or aliability. This requirement will be mandatory for accounting periods commencingon or after 1 January 2006, if endorsed by the EC. The Group has decided that itwill not early adopt any of the amendments to IAS 19. Employee benefits - other long-term employee benefits IAS 19, Employee benefits, requires recognition of the costs of providing forlong-term compensated absences. In accordance with this requirement the Grouphas provided £0.3million at 1 January 2004 for the estimated past service costof its sabbatical leave scheme. Reclassifications between financial investments and cash and cash equivalents As at the 1 January 2004 and 31 December 2004, £2.6million and £2.1millionrespectively of the Group's investments meet the definition of cash equivalentsincluded in IAS 7, Cash flow statements, and have therefore been reclassifiedto 'cash and cash equivalents'. Valuation of financial investments Under UK GAAP, the Group's financial investments have been carried at themid-price quoted on the balance sheet date. IAS 39, Financial investments:recognition and measurement, requires the Group's financial investments to bevalued at fair value which is deemed to be the bid-price. This change reduces the valuation of the Group's financial investments by£0.3million and £1.0million at 1 January and 31 December 2004 respectively Under IFRS the Group's financial investments are categorised as fair valuethrough profit and loss. Accordingly, all gains (realised and unrealised) willbe passed through the income statement. Share-based payments Under UK GAAP the Group is not required to expense the costs of share-basedpayments made to directors and employees in the profit and loss account. IFRS 2,Share-based payments, requires the cost of all share-based payments to becharged against profits over their respective vesting periods. The impact of this change as at 1 January and 31 December 2004 is to reduceretained earnings by £0.2million and £0.5million respectively. Discounting of debtors and creditors due after more than one year Under IFRS debtors and creditors that fall due outside of one year from thebalance sheet date (excluding deferred tax assets and liabilities) must bediscounted to their net present value at the balance sheet date using anappropriate discount rate. Discounting of such items is not required under UKGAAP. The overall impact at 1 January 2004 of complying with this requirement of IFRSis to increase net assets by £1.0million. Service companies Prior to the adoption of IFRS the Group did not consolidate all of its servicecompanies. Instead net transactions were processed through the syndicate profitand loss account. IAS27, Consolidated and separate financial statements,requires that the service companies are consolidated on the basis that they arecontrolled by the Group. The impact of consolidating all service companies as at 1 January 2004 is toreduce net assets by £1.3million. Detailed reconciliations from UK GAAP to IFRS The following tables show in detail the adjustments made to the Group's UK GAAPbalance sheets as at 1 January and 31 December 2004 and the profit and lossaccount for the year ended 31 December 2004 in order to change to IFRS. Detailed reconciliation of the consolidated balance sheet as at 1 January 2004 from UK GAAP to IFRS UK GAAP Consolidation Re-class Employee Investment Dividend Share of service between cash benefits valuation accrual based companies and (IAS19) (IAS39) (IAS10) payments (IAS18) investments (IFRS2) £m £m £m £m £m £m £m Property, plant and equipment 6.4Intangible assets 57.0Financial investments -equities 50.6 (0.2)Financial investments -debt securities 997.7 2.6 (0.1)Loans and receivables,including insurancereceivables 294.6 (2.8) (0.5)Deferred income tax - 0.1Reinsurance contracts 518.6Cash and cash equivalents 26.5 6.8 (2.6) Total assets 1,951.4 4.1 - (0.5) (0.3) - - Share capital 97.7Treasury shares (2.4)Other reserves 194.7 0.2Retained earnings 93.3 (1.3) (1.4) (0.3) 6.4 (0.2) Total shareholders' equity 383.3 (1.3) - (1.4) (0.3) 6.4 - Insurance contracts 1,484.4Borrowings 11.4Provisions for other liabilities and charges 3.0Trade and other payables 39.3 5.4 (0.3) (6.4)Deferred tax liabilities 16.9Retirement benefitobligations - 1.2Current income tax liabilities 13.1 Total liabilities 1,568.1 5.4 - 0.9 - (6.4) - Total equity and liabilities 1,951.4 4.1 - (0.5) (0.3) - - Discounting Syndicate RITC Foreign Deferred IFRS capacity adjustment exchange on tax non-monetary (IAS12) assets (IAS21) £m £m £m £m £m £m Property, plant andequipment 6.4Intangible assets 6.2 63.2Financial investments -equities 50.4Financial investments -debt securities 1,000.2Loans and receivables,including insurancereceivables (0.3) (14.4) 5.1 281.7Deferred income tax 25.0 25.1Reinsurance contracts 1.5 520.1Cash and cash equivalents 30.7 Total assets (0.3) 6.2 (14.4) 6.6 25.0 1,977.8 Share capital 97.7 Treasury shares (2.4)Other reserves 194.9 Retained earnings 1.0 6.2 (12.3) (1.1) 90.3 Total shareholders' equity 1.0 6.2 - (12.3) (1.1) 380.5 Insurance contracts (14.4) 24.1 1,494.1Borrowings 11.4Provisions for otherliabilities and charges 3.0Trade and other payables (1.3) 36.7Deferred tax liabilities (5.2) 26.1 37.8Retirement benefitobligations 1.2Current income tax 13.1liabilities Total liabilities (1.3) - (14.4) 18.9 26.1 1,597.3 Total equity andliabilities (0.3) 6.2 (14.4) 6.6 25.0 1,977.8 Detailed reconciliation of the consolidated balance sheet as at 31 December 2004 from UK GAAP to IFRS UK GAAP Consolidation Re-class Employee Investment Dividend Share of service between cash benefits valuation accrual based companies and (IAS19) (IAS39) (IAS10) payments (IAS18) investments (IFRS2) £m £m £m £m £m £m £m Property, plant andequipment 6.2Intangible assets 56.7Financial investments -equities 90.5 (0.4)Financial investments -debt securities 1,210.9 2.1 (0.6)Loans and receivables,including insurancereceivables 361.1 (0.1) (0.5)Deferred income tax - 0.1Reinsurance contracts 603.9Cash and cash equivalents 42.8 7.0 (2.1) Total assets 2,372.1 7.0 - (0.5) (1.0) - - Share capital 98.8Treasury shares (1.6)Other reserves 198.8 0.5Retained earnings 147.9 (2.2) (1.7) (1.0) 19.6 (0.5) Total shareholders' equity 443.9 (2.2) - (1.7) (1.0) 19.6 - Insurance contracts 1,722.0 1.6Borrowings 58.7Provisions for otherliabilities and charges 4.6Trade and other payables 85.0 7.6 (0.3) (19.6)Deferred tax liabilities 52.4Retirement benefitobligations - 1.5Current income tax 5.5liabilities Total liabilities 1,928.2 9.2 - 1.2 - (19.6) - Total equity andliabilities 2,372.1 7.0 - (0.5) (1.0) - - Discounting Syndicate RITC Foreign Deferred IFRS capacity adjustment exchange on tax non-monetary (IAS12) assets (IAS21) £m £m £m £m £m £m Property, plant andequipment 6.2Intangible assets 9.3 66.0Financial investments -equities 90.1Financial investments -debt securities 1,212.4Loans and receivables,including insurancereceivables (76.6) 3.1 287.0Deferred income tax 21.9 22.0Reinsurance contracts 0.9 604.8Cash and cash equivalents 47.7 Total assets - 9.3 (76.6) 4.0 21.9 2,336.2 Share capital 98.8Treasury shares (1.6)Other reserves 199.3Retained earnings 1.1 9.3 (7.5) (1.7) 163.3 Total shareholders' equity 1.1 9.3 - (7.5) (1.7) 459.8 Insurance contracts (76.6) 15.0 1,662.0Borrowings 58.7Provisions for otherliabilities and charges 4.6Trade and other payables (1.1) 71.6 Deferred tax liabilities (3.5) 23.6 72.5Retirement benefitobligations 1.5Current income tax liabilities 5.5 Total liabilities (1.1) - (76.6) 11.5 23.6 1,876.4 Total equity andliabilities - 9.3 (76.6) 4.0 21.9 2,336.2 Detailed reconciliation of the consolidated income statement for the year ended 31 December 2004 from UK GAAP to IFRS UK GAAP Consolidation Employee Investment Share RITC Foreign Syndicate IFRS of service benefits valuation based adjustment exchange capacity companies (IAS39) payments on (IAS18) (IAS19) (IFRS2) non- monetary assets (IAS21) £m £m £m £m £m £m £m £m £m Insurance premium 855.9 15.3 27.8 899.0revenueInsurance premium (159.6) (1.7) (161.3)ceded to reinsurers Net insurance 696.3 - - - - 15.3 26.1 - 737.7premium revenue Fee income - - 3.7 3.7insurance contractsInvestment income 52.2 0.3 (0.7) 51.8Net realised gain on (4.3) (4.3)financial assetsNet fair value gains 4.6 4.6on assets at fairvalue through incomeOther operating 5.9 (2.5) 0.3 3.7income Net income 754.7 1.5 0.3 (0.7) - 15.3 26.0 - 797.2Insurance claims and 542.2 15.3 557.5loss adjustmentexpensesInsurance claims and (163.0) (163.0)loss adjustmentexpenses recoveredfrom reinsurers Net insurance 379.2 - - - - 15.3 - - 394.5benefits and claims Expenses for the 158.4 (2.5) 5.8 161.7acquisition ofinsurance andinvestment contractsExpenses for 52.3 4.9 0.2 (3.1) 54.3marketing andadministrationExpenses for asset 4.2 4.2management servicesrenderedOther operating 37.1 0.3 0.4 13.9 51.7expenses Expenses 631.2 2.4 0.5 - 0.4 15.3 19.7 (3.1) 666.4 Results of operating 123.5 (0.9) (0.2) (0.7) (0.4) - 6.4 3.1 130.8activitiesFinance costs (1.9) (1.9) Profit before tax 121.6 (0.9) (0.2) (0.7) (0.4) - 6.4 3.1 128.9Income tax (35.6) 0.1 0.2 - 0.1 - (1.8) (0.9) (37.9) Profit for the 86.0 (0.8) - (0.7) (0.3) - 4.6 2.2 91.0period ACCOUNTING POLICIES Summary of significant accounting policies The significant accounting policies adopted in the preparation of the Group'sIFRS financial statements are set out below: Basis of preparation and consolidation principles For the year ended 31 December 2005 the Company is required to prepareconsolidated financial statements under International Accounting Standards (IAS)as adopted by the European Commission (EC). These will be those IAS,International Financial Reporting Standards (IFRS) and related interpretations,subsequent amendments to those standards and related interpretations, futurestandards and related interpretations issued and adopted by the InternationalAccounting Standards Board (IASB) that have been endorsed by the EC. Thisprocess is ongoing and the EC has yet to endorse certain standards issued by theIASB. Of particular relevance to Amlin plc is IFSR 2, Share based payments,which the EC have indicated they will adopt, although they have not yet formallydone so. The preliminary opening balance sheet, IFRS comparatives for 2004 and thereconciliations between UK GAAP and IFRS have been prepared by management usingthe best knowledge of the expected standards and interpretations of the IASB,facts and circumstances and accounting policies that will be applied when theCompany prepares its first complete set of IFRS financial statements as at 31December 2005. Therefore until such time, the possibility cannot be excludedthat the accompanying preliminary opening balance sheet may require adjustmentbefore constituting the final opening balance sheet. Moreover, under IFRS, onlya complete set of financial statements comprising a balance sheet, incomestatement, statement of changes in equity and cash flow statement, together withcomparative financial information and explanatory notes, can provide a fairpresentation of the Company's financial position, results of operations and cashflow. The financial statements consolidate the accounts of the Company, its subsidiaryundertakings, and the Group's underwriting through participation on Lloyd'ssyndicates. The financial statements have been prepared on the historical cost basis exceptfor financial investments and pension assets and liabilities which are measuredat their fair value. In accordance with the standard for Phase 1 of insurance contracts (IFRS 4), theGroup has applied existing accounting practices for insurance contracts,modified, as appropriate, to comply with the IFRS framework and applicablestandards. The consolidated financial statements are stated in sterling, which is theGroup's functional and presentational currency. Use of estimates The preparation of financial statements requires the use of estimates andassumptions that affect the reported amounts of assets and liabilities, and thedisclosure of contingent assets and liabilities. Although these estimates arebased on management's best knowledge of current events and actions, actualresults may ultimately differ from those estimates. Foreign currency translation The Group is subject to regulation in the United Kingdom and presents itsfinancial statements in sterling. All group entities are incorporated in theUnited Kingdom and conduct business in a range of economic environments,primarily the United Kingdom, United States of America and Europe. Due to theregulatory environment and the fact that the group trades through the Lloyd'smarket, all group companies have adopted sterling as their functional currency. Income and expenditure in US dollars, Euros and Canadian dollars is translatedat average rates of exchange for the period. Underwriting transactionsdenominated in other foreign currencies are translated using the exchange ratesprevailing at the dates of the transactions. Monetary assets and liabilities,expressed in US dollars, Euros and Canadian dollars are translated into sterlingat the rates of exchange at the balance sheet date. Non-monetary assets andliabilities are translated at the average rate prevailing in the period in whichthe asset or liability first arose. Differences arising on translation offoreign currency amounts in the syndicate are included in operating expenses. Assets, liabilities, income and expenditure expressed in other foreigncurrencies have been translated at the rates of exchange at the balance sheetdate. Where contracts to sell currency for sterling have been entered into priorto the year end, the contracted rates have been used. Differences arising ontranslation of foreign currency amounts on such items are included in othercharges. Premiums Written premiums comprise premiums on contracts incepting during the financialyear. Premiums are disclosed before the deduction of brokerage and taxes orduties levied on them. Estimates are included for premiums receivable after theperiod end but not yet notified, as well as adjustments made in the year topremiums written in prior accounting periods. Premiums are earned over the policy contract period. Where the incidence of riskis the same throughout the contract, the earned element is calculated separatelyfor each contract on a 24ths or 365ths basis. Where the incidence of risk variesduring the contract, the earned element is calculated based on the estimatedrisk profile of the individual contracts involved. The proportion of written premiums, gross of commission payable, attributable toperiods after the balance sheet date is deferred as a provision for unearnedpremiums. The change in this provision is taken to the income statement in orderthat revenue is recognised over the period of the risk. Acquisition costs are costs that are directly attributable to the acquisition ofnew business for insurance contracts. They are incurred on the same basis as theearned proportions of the premiums they relate to. Where these costs areconsidered to be recoverable out of future margins in revenues they aredeferred. Deferred acquisition costs are amortised over the period in which therelated revenues are earned. Deferred acquisition costs are reviewed at the endof each reporting period and are written off when they are considered to be nolonger recoverable. Insurance contract liabilities i. Claims Claims incurred comprise claims paid during the financial year together with themovement in the provision for claims outstanding. Claims paid are defined as those claims transactions settled up to the balancesheet date including the internal and external claims settlement expensesallocated to those transactions. The reinsurers' share represents recoveriesreceived from our reinsurance protections in the period plus recoveriesreceivable against claims paid that have not been received at the balance sheetdate. The claims provision also includes, where necessary, a reserve for unexpiredrisks where, at the balance sheet date, the estimated costs of future claims andrelated deferred acquisition costs are expected to exceed the unearned premiumprovision. In determining the need for an unexpired risk provision theunderwriting divisions within the Group have been regarded as groups of businessthat are managed together. The reinsurers' share represents recoveries receivable on all these futureclaims provisions net of any provision for bad debt. Technical provisions are estimated on an undiscounted basis. Provisions on prioryears are subject to a liability adequacy test where future cash flows andexisting amounts provided are reviewed and reassessed. Any changes to theamounts held are adjusted through the income statement. Provisions areestablished so that there is a better than even chance of release from oneunderwriting year to the next. Although the claims provision is considered to be reasonable, having regard toprevious claims experience (including the use in certain statistically basedprojections) and case by case reviews of notified losses, on the basis ofinformation available at the date of determining the provision, the ultimateliabilities will vary as a result of subsequent information and events. ii. Loss provisions on open years Provision is made for the estimated future deterioration of any year of accountof any non-aligned syndicate that has gone into run-off. While the directorsmake every effort to ensure that adequate provision is made for losses on openyears of account, their view of the ultimate loss may vary in later periods as aresult of subsequent information and events. This in turn may require adjustmentof the original provisions. These adjustments are reflected in the financialstatements for the period in which the related adjustments are made. Reinsurance ceded Reinsurance premiums comprise the cost of reinsurance arrangements placed andare accounted for in the same financial year as the related direct insurance orinwards reinsurance business. Outward reinsurance premiums are accounted for in the same accounting period asthe related direct insurance or inwards reinsurance business. The provision forreinsurers' share of unearned premiums represents that part of reinsurancepremiums written which is estimated to be earned in following financial years. Net investment income Dividends and any related tax credits are recognised as income on the date therelated listed investments are marked ex-dividend. Other investment income,interest receivable, expenses and interest payable are recognised on an accrualsbasis. Intangible assets i. Syndicate capacity The cost of syndicate participations which have been purchased in the Lloyd'scapacity auctions is capitalised at cost. Syndicate capacity is considered tohave an indefinite life and is not subject to an annual amortisation charge. Thecontinuing value of the capacity is reviewed for impairment annually byreference to the expected future profit streams to be earned from Syndicate2001, with any permanent diminution in value being charged to the incomestatement. ii. Goodwill Goodwill recognised under UK GAAP prior to the date of transition to IFRS isstated at net book value as at this date. Goodwill recognised subsequent to 1January 2003, representing the excess of purchase consideration over fair valueof net assets acquired, is capitalised. Goodwill arising on acquisition istested for impairment annually or when events or changes in circumstanceindicate that it might be impaired. Property and equipment Property, plant and equipment is stated at historical cost less accumulateddepreciation and provision for impairment where appropriate. Depreciation iscalculated on the straight line method to write down the cost of such assets totheir residual values over their estimated useful lives as follows: Leasehold land and buildings Over period of leaseMotor vehicles 33% per annumComputer hardware and software 33% per annumFurniture and office equipment 20% per annumInternal property improvements 20% per annum The carrying values of property, plant and equipment are reviewed for impairmentwhen events or changes in circumstance indicate the carrying value may beimpaired. If any such condition exists, the recoverable amount of the asset isestimated in order to determine the extent of impairment. Gains and losses on disposal of property and equipment are determined byreference to their carrying amount and are taken to the income statement.Repairs and renewals are charged to the income statement when the expenditure isincurred. Financial investments The Group has classified its financial investments as "fair value through profitor loss" (FV) to the extent that they are not reported as cash and cashequivalents. This classification has been determined by management based on thedecision at the time of acquisition. Within the FV category, fixed maturitiesand equity securities are classified as trading assets as the Group buys themwith an intention to resell. All other securities are classified as other thantrading within the FV category. Purchases and sales of investments are recognised on the trade date, which isthe date the Group commits to purchase or sell the assets. These are initiallyrecognised at cost, including transaction costs, and subsequently re-measured atfair value based on quoted bid prices. Where quoted bid prices are unavailable,financial investments are valued by the directors on a prudent basis with regardto their likely realisable value. Changes in the fair value of investments areincluded in the income statement in the period in which they arise. All dividends and any related tax credits are recognised as income at the datethe related listed investments are marked ex-dividend. Other investment income,interest receivable, expenses and interest payable are recognised on an accrualsbasis. In the Company's accounts, other financial investments in Group undertakings arestated at cost less provisions for impairment. Syndicate investments and cash are held on a pooled basis, the return from whichis allocated to underwriting years of account proportionately to the fundscontributed by the underwriting year. Borrowings Borrowings are recognised initially at fair value, net of transaction costsincurred. Borrowings are subsequently stated at amortised cost; any differencebetween the proceeds (net of transaction costs) and the redemption value isrecognised in the income statement over the period of the borrowings using theeffective interest rate method. Borrowing costs Borrowing costs constitute interest payable on loans, bank overdraft and feescharged for the provision of letters of credit. These costs are charged to theincome statement as financing costs, as incurred. Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at fair value. Forthe purposes of the cash flow statement, cash and cash equivalents comprise cashon hand, deposits held on call with banks and other short-term, highly liquidinvestments with original maturities of three months or less. Leases Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards to the Group. All other leases areclassified as operating leases. Assets held under finance leases and hire purchase transactions are capitalisedin the balance sheet and depreciated over their useful lives. The initialcapital value is the lower of the fair value of the leased property and thepresent value of the minimum lease payments. The capital element of futurelease payments is included in creditors and the interest element is charged toprofit before taxation over the term of the lease. Rentals payable under operating leases are charged to income in the period inwhich they become payable in accordance with the terms of the lease. Outstanding Employee benefits i. Pension obligations The Group participates in a number of pension schemes, including two definedbenefit schemes, defined contribution schemes and personal pension schemes. One of the defined benefit schemes is a multi-employer scheme. However, thereis insufficient information available to the Company to account for this as adefined benefit scheme, and therefore in accordance with IAS 19 it is accountedfor as a defined contribution scheme. The liability in respect of the other defined benefit scheme is calculated asthe present value of the defined benefit obligation at the balance sheet dateminus the fair value of plan assets, together with adjustments for unrecognisedactuarial gains or losses and past service cost. The defined benefit obligationis calculated annually by independent actuaries using the projected unit creditmethod. The present value of the defined benefit obligation is determined by theestimated future cash outflows using interest rates of government securitieswhich have terms to maturity approximating the terms of the related liability.The resulting pension scheme surplus or deficit appears as an asset or liabilityin the consolidated balance sheet. Pension contributions to schemes that are accounted for as defined contributionplans are charged to the profit and loss account when due. After payment of thecontributions for the defined contribution scheme, the company has no furtherpayment obligations under these schemes. ii. Equity compensation plans The Group operates a number of executive and employee share schemes. These areaccounted for using the fair value method where the cost for providing equitycompensation is based on the fair value of the share option or award at the dateof the grant. The fair value is calculated using an option pricing model and thecorresponding expense is recognised in the income statement over the vestingperiod. The accrual for this charge is recognised in equity shareholders' funds. When the options are exercised, the proceeds received net of any transactioncosts are credited to share capital (par value) and the surplus to sharepremium. iii. Other benefits Other employee incentive schemes, long-term service awards, including sabbaticalleave, are recognised when they accrue to employees. A provision is made for theestimated liability for long-service leave as a result of services rendered byemployees up to the balance sheet date. Taxation Provision is made for deferred tax liabilities, or credit taken for deferred taxassets, using the liability method, on all material temporary differencesbetween tax bases of assets and liabilities and their carrying amounts in theconsolidated financial statements. The principal temporary differences arisefrom a delay between the recognition of underwriting profits and theirassessment for tax, depreciation of property and equipment, provisions forpensions and other post retirement benefits and the revaluation of certainfinancial assets and liabilities. The rates of taxation enacted at the balancesheet date are used to determine the deferred tax. Deferred tax assets are recognised to the extent that it is probable that futuretaxable profit will be available against which the temporary differences can beutilised. Deferred tax is credited or charged in the profit and loss account and isrecognised in the balance sheet as a deferred tax asset or liability. Incometax is recognised in the income statement, except to the extent that it relatesto items directly taken to equity, in which case it is recognised in equity. Current taxes are based on the results of the Group companies and are calculatedusing currently enacted tax rates. This information is provided by RNS The company news service from the London Stock Exchange

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