FINANCIAL STATEMENTS
STRATEGIC REPORT
GOVERNANCE
1 SIGNIFICANT ACCOUNTING POLICIES continued 1.1 Basis of preparation continued • IAS 1, Presentation of financial statements – Amendments in respect of the classification of liabilities as current or non-current and in respect of disclosures of accounting policies (effective 1 January 2023, not yet endorsed); • IAS 8, Accounting policies – Amendments in respect of the definition of accounting estimates (effective 1 January 2023, not yet endorsed); • IAS 12, Income taxes – Amendments in respect of deferred tax related to assets and liabilities arising from a single transaction (effective 1 January 2023, not yet endorsed). 1.2 Significant accounting policies and the use of judgements, estimates and assumptions The preparation of financial statements requires the Group to select accounting policies and make estimates and assumptions that affect items reported in the Consolidated statement of comprehensive income, Consolidated statement of financial position, other primary statements and Notes to the consolidated financial statements. The major areas of judgement used as part of accounting policy application are summarised below.
Accounting policy
Item involving judgement
Critical accounting judgement
1.6
Classification of insurance and investment contracts
Assessment of significance of insurance risk transferred. A contract is classified as an insurance contract if it transfers significant insurance risk from the policyholder to the insurer, or from the cedent to the reinsurer in the case of a reinsurance contract. Insurance risk is significant if an insured event could cause an insurer to pay significant additional benefits to those payable if no insured event occurred. Any contracts that do not include the transfer of significant insurance risk are classified as investment contracts. Classification of financial investments and determining whether an active market exists for a financial investment. Financial investments classified at fair value through profit or loss include those that are designated as such by management at initial recognition as they are managed on a fair value basis. Management’s assessment of the market activity of a financial investment determines the fair value hierarchy of the valuation method used to determine the fair value of the financial investment. The use of a variant of the Black-Scholes option pricing formula with real world assumptions. The measurement of the no-negative equity guarantee underlying the fair value of loans secured by mortgages uses a variant of the Black-Scholes option pricing formula, which has been adapted to use real world assumptions instead of risk neutral assumptions due to the lack of relevant observable market inputs to support a risk neutral valuation approach. This approach is in line with common industry practice and there does not appear to be an alternative approach that is widely supported in the industry. We acknowledge that there has been significant recent academic and market debate concerning the valuation of no-negative equity guarantees and we intend to continue to actively monitor this debate.
1.17
Financial investments
1.17
Measurement of fair value of loans secured by residential mortgages, including measurement of the no-negative equity guarantees
All estimates are based on management’s knowledge of current facts and circumstances, assumptions based on that knowledge and predictions of future events and actions. Actual results may differ significantly from those estimates. Where relevant the impact of COVID-19 has been considered and detail included in the relevant note disclosures.
129
Powered by FlippingBook